<PAGE>
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, 1998
[ ] 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)
DELAWARE 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 12,674,294 shares of the registrant's Common Stock, $0.001 par value,
outstanding on April 30, 1998.
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APPLIED DIGITAL ACCESS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statement of Operations for the
three months ended March 31, 1998 and March 31, 1997 . . . . . . . . . . . . . . 4
Condensed Consolidated Statement of Cash Flows for the three
months ended March 31, 1998 and March 31, 1997 . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 -10
Risks and Uncertainties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . 17
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,291 $ 4,400
Investments - current 9,320 8,779
Accounts receivable, net 9,132 12,981
Inventory, net 5,345 5,859
Deferred income taxes 130 130
Prepaid expenses and other current assets 3,611 3,775
--------- --------
Total current assets 30,829 35,924
Property and equipment, net 6,216 6,165
Deferred income taxes 2,538 1,372
Other, net 1,372 2,822
--------- --------
$40,955 $46,283
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,334 $ 3,478
Accrued expenses 1,281 2,864
Accrued warranty 1,318 1,323
Deferred revenue 1,695 1,471
--------- --------
Total current liabilities 8,628 9,136
Obligations under capital leases, net
of current portion 10 15
--------- --------
Total liabilities 8,638 9,151
Shareholders' equity:
Preferred stock, $0.001 par value, 7,500,000
shares authorized, no shares issued - -
Common stock, $0.001 par value,
30,000,000 shares authorized, 12,671,267
and 12,605,082 shares issued and outstanding
at March 31, 1998 and December 31, 1997,
respectively 51,894 51,610
Additional paid-in capital 2,519 2,492
Unrealized gain on investments 166 84
Accumulated deficit (22,262) (17,054)
--------- --------
Total shareholders' equity 32,317 37,132
--------- --------
$40,955 $46,283
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------------
1997 1998
------------ ------------
(AMOUNTS IN THOUSANDS EXCEPT
PER SHARE AMOUNT)
<TABLE>
<CAPTION>
<S> <C> <C>
Revenue $5,272 $6,388
Cost of revenue 3,664 3,211
--------- ---------
Gross profit 1,608 3,177
Operating expenses:
Research and development 3,544 2,001
Sales and marketing 2,280 1,458
General and administrative 1,119 1,355
--------- ---------
Total operating expenses 6,943 4,814
--------- ---------
Operating loss (5,335) (1,637)
Interest income 175 243
Other income (expense), net (11) (4)
--------- ---------
Loss before income taxes (5,171) (1,398)
Provision for income taxes 37 51
--------- ---------
Net loss ($5,208) ($1,449)
--------- ---------
Net loss per basic and diluted share ($0.41) ($0.12)
--------- ---------
--------- ---------
Number of shares used in per share
computations 12,624 12,310
Comprehensive Loss ($5,127) ($1,465)
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------------
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net loss ($5,208) ($1,449)
Adjustments to reconcile net loss to net
cash provided (used) by operating
activities:
Depreciation and amortization 918 661
Other 17 51
Changes in assets and liabilities:
Accounts receivable 3,849 645
Inventory 514 240
Prepaid expenses and other current 164 80
assets
Accounts payable 856 145
Accrued expenses (1,584) (251)
Accrued warranty (5) (5)
Deferred revenue 224 (91)
-------- --------
Net cash provided (used) by operating
activities: (255) 26
-------- --------
Cash flows from investing activities:
Purchases of investments (3,413) (6,789)
Maturities of investments 2,935 6,944
Purchases of property and equipment (684) (249)
-------- --------
Net cash used by investing activities (1,162) (94)
Cash flows from financing activities:
Principal payments on capital leases (4) (3)
Proceeds from the issuance of common
stock under stock option plans 312 298
-------- --------
Net cash provided by financing activities 308 295
-------- --------
Net increase (decrease) in cash and (1,109) 227
cash equivalents
Cash and cash equivalents, beginning of 4,400 1,504
period
-------- --------
Cash and cash equivalents, end of period $3,291 $1,731
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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APPLIED DIGITAL ACCESS, INC.
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Applied Digital Access, Inc. (the "Company" or
"ADA") and its wholly owned subsidiary: Applied Digital Access - Canada,
Inc. All significant intercompany balances and transactions have been
eliminated in consolidation. These 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,
1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. 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, and Risks and Uncertainties,
contained in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 filed with the SEC.
2. New Accounting Pronouncements
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting of Comprehensive Income," effective January
1, 1998. This statement requires the disclosure of comprehensive income
and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as net income plus revenues, expenses,
gains and losses that, under generally accepted accounting principles, are
excluded from net income. The components of comprehensive income, which
are excluded from net income are foreign currency gains/losses and
unrealized gains/losses on securities and have been included in the
calculation of comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which supersedes
Statement of Financial Accounting Standards, "Financial Reporting of
Segments of a Business Enterprise" ("SFAS 14"). SFAS 131 changes current
practice under SFAS 14 by establishing a new framework on which to base
segment reporting and also requires interim reporting of segments
information. This statement is effective for fiscal years beginning after
December 15, 1997. This statement's interim reporting disclosures are not
required until the first quarter immediately subsequent to the fiscal year
in which SFAS 131 is effective.
3. 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, 1998 DECEMBER 31, 1997
-------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Raw materials $2,855 $3,419
Work-in-process 2,220 2,223
Finished goods 716 787
------- -------
5,791 6,429
Less inventory reserve (446) (570)
------- -------
$5,345 $5,859
------- -------
------- -------
</TABLE>
6
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4. Per Share Information
The Company has adopted the provisions of SFAS No. 128, EARNINGS PER SHARE,
effective December 31, 1997. SFAS No. 128 requires the presentation of
basic and diluted earnings per share. Basic EPS is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS is computed giving
effect to all dilutive potential common shares that were outstanding
during the period. Dilutive potential common shares consist of the
incremental common shares issuable upon the conversion of convertible
preferred stock (using the "if converted") method and exercise of stock
options and warrants for all periods. All prior period earnings per share
amounts have been restated to comply with SFAS No. 128.
In accordance with the disclosure requirements of SFAS No. 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (dollars in thousands, except per share amounts).
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
-------- --------
<S> <C> <C>
Numerator - basic and diluted EPS:
Net loss $(5,208) $(1,449)
Denominator - basis and diluted EPS:
Weighted average common stock outstanding 12,624 12,310
Basic and diluted earnings per share $ (0.41) $ (0.12)
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE STATEMENTS CONTAINED IN THIS FORM 10-Q THAT ARE NOT PURELY HISTORICAL ARE
FORWARD LOOKING STATEMENTS. STATEMENTS WHICH USE THE WORDS "OBJECTIVE,"
"SEEK," "INTEND," "WILL," "ANTICIPATE," "CAN," "CONTINUE," AND "EXPECT" ARE
FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS, INCLUDING
STATEMENTS REGARDING (I) PLANS FOR DEVELOPMENT OR ACQUISITION OF NEW PRODUCTS
OR ENHANCEMENT OF EXISTING PRODUCTS, (II) STRATEGY AND (III) EXPANDED SALES
AND MARKETING EFFORTS, ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY AS
OF THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD LOOKING STATEMENT. IT IS IMPORTANT TO NOTE THAT THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD LOOKING
STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY ARE THE FACTORS SET FORTH BELOW UNDER THE HEADING "RISKS AND
UNCERTAINTIES."
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, 1997 filed with the Securities and Exchange
Commission.
OVERVIEW
ADA is a leading provider of network performance management products that
include systems, software, and services used to manage the quality,
performance, availability and reliability of telecommunications service
providers' ("TSP") networks. ADA's products are designed to enable TSPs to
improve their quality of service, to increase productivity, to lower
operating expenses and to effectively deploy new services. ADA has
positioned its business to assist TSPs in addressing the rapidly increasing
demand for new services, higher bandwidth and access to the Internet. ADA's
systems and software provide network management functions such as circuit
provisioning, network configuration management, network performance
management, circuit testing, and traffic management of the public switched
network. ADA has addressed the industry demand for network management
products with a three-faceted approach: (1) network systems that provide
testing and performance monitoring functions as well as selected transport
functions; (2) network management software that enables TSPs to manage their
network operations; and (3) services that are customized to meet the evolving
needs of our TSP market. The Company has two business units: the Network
Systems business unit and the Network Management business unit. The business
units are the result of the evolution of the Company from a single product
line to multiple product lines. The Network Systems business unit is built
around the Company's test and performance management products and services,
including its T3AS Test and Performance Monitoring System ("T3AS"),
Centralized Test System ("CTS"), Remote Module, a DS1 network interface unit
("NIU"), and Protocol Analysis Access System ("PAAS"). The Network
Management business unit focuses on Operations Systems ("OS") software
products, including .Provisioner, Test OS, Graphical Test Assistant ("GTA"),
Sectionalizer, Fault Management System ("FMS"), Traffic Data Collection and
Engineering System ("TDC&E"), and OS design services.
RESULTS OF OPERATIONS
Revenue totaled $5,272,000 for the three months ended March 31, 1998, a 17%
decrease from revenue of $6,388,000 for the three months ended March 31,
1997. The decrease was primarily due to decreased revenue from the Company's
network management OS design services. Revenue from network management OS
software products and services totaled $2,155,000 for the quarter ended March
31, 1998, a 41% decrease from $3,629,000 in the same prior year period. The
decrease resulted from decreased sales of the Company's OS design services to
Northern Telecom, Ltd. ("Northern Telecom") partially offset by increased
sales of the Company's . Provisioner and Test OS software products. The
Company acquired an exclusive license to Northern Telecom's DSS II software
product in June 1997. The Company markets and supports the DSS II product and
technology under the new name . Provisioner. Prior to the acquisition, the
Company provided OS design services to Northern Telecom that supported the
DSS II product. As a result of the acquisition, the Company's OS design
services business supporting DSS II shifted to a product based business.
Unlike revenue from OS design services which is recognized as the service is
performed, revenue from OS software product sales requires the satisfaction
of specific delivery and acceptance criteria prior to revenue recognition.
As a result, the Company has experienced and may in the future continue to
experience increased quarterly revenue fluctuations that could have a
material adverse affect on the Company's business, operating results and
financial condition. The decrease in network management OS software products
and services revenue was partially offset by an increase in network systems
test and performance management products and services revenue. Revenue from
the Company's network systems test and performance management products
totaled $3,117,000 for the quarter ended March 31, 1998, a 13% increase from
$2,759,000 in the same quarter a year ago. The net increase was primarily the
result of increased sales of the Company's Remote Module product largely
offset by decreased sales of the Company's T3AS systems. The Company
believes that revenue in the first quarter of 1998 was also negatively
impacted by customer order delays resulting from prolonged contract
negotiations with a current RBOC customer and seasonality of booking patterns
in the telecommunications industry that typically result in decreased orders
in calendar first quarter. There can be no assurance that customer order
delays and seasonal factors will not continue in the future, each of which
<PAGE>
could have a material adverse effect on the Company's business, operating
results and financial condition. SEE "RISKS AND UNCERTAINTIES --
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; HISTORY OF LOSSES" AND "--
CONCENTRATION OF MAJOR CUSTOMERS; TELEPHONE COMPANY QUALIFICATION
REQUIREMENTS."
Gross profit totaled $1,608,000 for the three months ended March 31, 1998, a
decrease of 49% from $3,177,000 in the first quarter of 1997. Gross profit as a
percent of revenue was 31% for the three months ended March 31, 1998 compared to
50% for the three months ended March 31, 1997. The decrease in gross profit was
the result of decreased revenue, a product mix weighted toward the Company's
Remote Module NIU and CTS products which carry lower gross profit margins than
T3AS systems, and the impact of a $378,000 one-time inventory obsolescence
charge in the first quarter of 1998. The highly competitive NIU and CTS markets
are subject to severe pricing pressures which have contributed to significantly
lower overall gross profits on these products. In addition, the Company's
relatively fixed manufacturing overhead costs allocated over lower revenue
levels in the first quarter of 1998 resulted in lower overall gross profit
levels. The decrease in gross profit as a percent of revenue resulted from the
factors discussed above partially offset by an increase in gross profit as a
percent of revenue due to a shift in the majority of the Company's OS design
services business to an OS software product-based business. As a result of the
.Provisioner (formerly DSS II) license acquisition from Northern Telecom, a
majority of engineering labor previously associated with OS design services
revenue shifted from the cost of revenue line to research and development
operating expenses supporting OS software product development. 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. Factors which may materially and
adversely affect the Company's gross profit in the future include its level of
revenue, competitive pricing pressure in the telecommunication network
management market, fluctuations in quarterly order bookings and revenue, new
product introductions by the Company or its competitors, potential inventory
obsolesce and scrap, possible recalls, production or quality problems, timing of
development expenditures, changes in material cost, disruptions in sources of
supply, regulatory changes, capital spending, and changes in general economic
conditions.
Research and development expenses totaled $3,544,000 for the three months ended
March 31, 1998, a 77% increase from $2,001,000 for the three months ended March
31, 1997. The majority of the increase was due to the shift in engineering
labor from cost of revenue to research and development operating expenses as a
result of the .Provisioner license acquisition discussed above in the gross
profit analysis and the addition of research and development personnel to
support the Joint Development Agreement ("JDA") with Northern Telecom, Inc.
("Nortel"). In September 1997, the Company entered into the JDA with Nortel to
develop unique synchronous optical network ("SONET") products for the
telecommunications industry. Nortel and ADA both contribute technology and
development resources to projects conducted under the JDA and equally share the
development costs. For the quarter ended March 31, 1998, the Company's research
and development expenses include a $700,000 reduction representing Nortel's
proportionate share of first quarter 1998 development costs incurred under the
initial project being conducted under the JDA. 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.
Sales and marketing expenses totaled $2,280,000 for the three months ended March
31, 1998, a 56% increase from $1,458,000 for the three months ended March 31,
1997. The majority of the increase is the result of increased staff in sales
and marketing to support increased sales and marketing efforts and new customer
accounts and increased personnel costs in technical support and marketing to
support the shift of a majority of the Company's OS design services business to
an OS software product based business. 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 both current products and planned product introductions.
General and administrative expenses totaled $1,119,000 for the three months
ended March 31, 1998, a 17% decrease from $1,355,000 for the three months ended
March 31, 1997. The decrease is due to lower recruiting and consulting costs
and a general decrease in administrative expenditures in the first quarter of
1998. The Company expects that general and administrative expenses will
increase in absolute dollars in the future as the Company expands its internal
networking capabilities to support the integration of its geographically
distributed organization.
Interest income totaled $175,000 for the first quarter of 1998, a 28% decrease
from $243,000 in the same quarter a year ago. The decrease was the result of a
decreased level of cash investments compared to the same period last year.
For the three months ended March 31, 1998 and March 31, 1997, the Company
provided for income taxes related to the operations of the Company's Canadian
subsidiary, based on an annual effective Canadian tax rate of 46%. The Company
did not provide for U.S. income taxes for the three months ended March 31, 1998
or March 31, 1997 due to a net loss in both quarters. The Company expects
9
<PAGE>
to provide for foreign, federal and state income taxes for 1998 at applicable
statutory rates, after giving effect to net operating losses, 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
$5,208,000, or $.41 per basic and diluted share, for the three months ended
March 31, 1998 compared to a net loss of $1,449,000, or $.12 per basic and
diluted share, for the three months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company had approximately $12,611,000 in cash and
investments, compared to $13,179,000 at December 31, 1997, a decrease of
$568,000. The decrease in cash and investments was primarily due to net
operating losses, an $867,000 payment for the final installment of the DSS II
license acquisition from Northern Telecom, and capital equipment purchases.
Working capital decreased approximately 17% or $4,587,000 from $26,788,000 at
December 31, 1997 to $22,201,000 at March 31, 1998. The decrease in working
capital was primarily the result of net operating losses, the license payment
and decreased accounts receivable.
For the three months ended March 31, 1998 the Company's operating activities
used $255,000 in cash, primarily the result of a net operating loss in the
quarter and the license payment significantly offset by decreases in accounts
receivable and inventory, compared to $26,000 provided by operating activities
for the three months ended March 31, 1997.
For the three months ended March 31, 1998 cash used for capital expenditures
totaled approximately $684,000 compared to $249,000 for the three months ended
March 31, 1997. Most of the capital equipment additions were for software tool
kits, computer workstations and lab equipment related to the Company's expanded
research and development efforts and the Richardson, Texas office moving to a
new location. The Company expects the level of capital expenditures will
increase in 1998 as a result of investments in research and development
projects.
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. Thereafter, the
Company may seek additional capital resources to meet working capital and
capital expenditure requirements. Additionally, significant additional capital
resources may be required to fund acquisitions of complementary businesses,
products or technologies. The Company may need to issue additional shares of
its capital stock or incur indebtedness in connection with any such acquisitions
or future operations. At present, the Company does not have any agreements or
commitments with respect to any such acquisitions.
The Company believes the impact of inflation on its business activities has not
been significant to date.
RISKS AND UNCERTAINTIES
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; HISTORY OF LOSSES. The
Company has experienced significant fluctuations in bookings, revenue and
operating results from quarter to quarter due to a combination of factors and
expects such fluctuations to continue in future periods. Factors that may
cause the Company's results of operations to vary significantly from quarter
to quarter include but are not limited to the size and timing of customer
orders and subsequent shipment of systems products and implementation of OS
software products to major customers, timing and market acceptance of product
introductions or enhancements by the Company or its competitors, customer
order deferrals in anticipation of new products, technological changes in the
telecommunications industry, competitive pricing pressures, changes in the
Company's operating expenses, personnel changes, management of a changing
business, changes in the mix of products sold and licensed, disruption in
sources of supply, changes in pricing policies by the Company's suppliers,
regulatory changes, capital spending, delays of payments by customers and
general economic conditions. The Company believes that in late 1997 it began
experiencing seasonality in its product shipments and OS software licensing.
Generally, TSPs place more orders for products and licenses in the second and
fourth quarters, with the orders significantly down in the first quarter and
relatively flat in the third quarter of each year. The Company expects that
revenue may begin to reflect these seasonal order cycles more closely, which
could result in quarterly fluctuations. There can be no assurance that the
TSPs will not defer or delay orders contrary to the historical seasonal
pattern or that they will not change their ordering patterns. Because of the
relatively fixed nature of most of the Company's costs, including personnel
and facilities costs, any unanticipated shortfall in revenue in any fiscal
quarter would
10
<PAGE>
have a proportionately greater impact on the Company's operating income in
that quarter and may result in fluctuations in the price of the Company's
Common Stock.
As the impact of the Company's Network Management business unit on the
Company's revenue increases, the Company may be faced with greater
fluctuations in operating income. The licensing and implementation of the
Company's OS products generally involves a significant capital expenditure
and a commitment of resources by prospective customers. Accordingly, the
Company is dependent on its customers' decisions as to the timing and level
of commitment and expenditures. In addition, the Company typically realizes a
significant portion of license revenues in the last weeks or even days of a
quarter. As a result, the magnitude of quarterly fluctuations in the Network
Management business unit may not become evident until late in, or after the
close of, a particular quarter. In addition, the Company does not recognize
service revenues until the services are rendered. The time required to
implement the Company's OS products can vary significantly with the needs of
its customers and is generally a process that extends for several months.
Because of their complexity, larger implementations may take multiple
quarters to complete. Additionally, quarter-to-quarter product mix
variations, customer orders tending to be placed late in the quarter, and
competitive pressures on pricing could have a materially adverse effect on
the Company's operating results in any one quarter. The Company's expenses
are based in part on the Company's expectations as to future revenues and to
a large extent are fixed in the short term. If revenues do not meet
expectations, the Company's business, operations and financial condition are
likely to be materially adversely affected. The Company has experienced
losses in the past and there can be no assurance that the Company will not
experience losses in the future.
COMPETITION. Competition in the Company's markets is intense and is
characterized by rapidly changing technologies, conformance with evolving
industry standards, frequent new product introductions and enhancements,
rapid changes in customer requirements, and price-competitive bidding. To
maintain and improve its competitive position, the Company must continue to
develop and introduce, in a timely and cost-effective manner, new products
and features that keep pace with increasing customer requirements. The
Company expects competition in its markets to increase from existing
competitors and from other companies which may enter the Company's current or
future markets. The Company believes the principal competitive factors
affecting the market for its network systems test and performance monitoring
products are product features, price, conformance with BellCore and other
industry transmission standards and specifications, performance and
reliability, technical support, and the maintenance of close working
relationships with customers. The Company's network systems products,
especially CTS and Remote Module, are currently focused in highly competitive
market niches. The environment for CTS and Remote Module is fiercely
competitive with respect to price, product features, established
customer-supplier relationships and conformance with industry standards. The
Company believes the current competitors that provide partial solutions to
either performance monitoring or testing of the DS3, and the DS1 and DS0
circuits that make up the DS3 circuit, include Hekimian Laboratories, Inc.,
Telecommunications Techniques Corporation, Anritsu Wiltron Corporation and
some of the manufacturers of large transmission equipment and digital
cross-connect test and performance monitoring equipment such as Lucent
Technologies, Inc. ("Lucent"), Alcatel Data Networks, Ericsson Communication
Inc. ("Ericsson"), ADC Telecommunications, and Tellabs, Inc. The Company's
Remote Module product addresses the DS1 NIU market in which current
competitors include Westell Inc., Teltrend Inc., and Troncom, Inc. Many of
these competitors have significantly greater technical, financial,
manufacturing, and marketing resources than the Company. In addition, in
1997, ANSI adopted certain of the Company's technology as an industry
standard. As a result, the Company is obligated to grant licenses of this
technology to third parties, including competitors, on fair and equitable
terms and may also face competition from the licensees of its own technology.
The Company believes there are an increasing number of current
competitors in the network management OS market that provide network
management OS applications for circuit and services provisioning and services
management, testing and test management, fault and alarm management and
surveillance, network and circuit performance monitoring and traffic
management telecommunications functions. The OS market is characterized by a
wide range of companies that have varying degrees of market influence. The
nature of the network management OS market is such that improved technologies
and tool sets have made the barriers to entry in this market relatively small
resulting in fierce competition. The principal competitive factors affecting
the Company's network management OS products include product quality,
performance, price, customer support, corporate reputation, and product
features such as scalability, interoperability, functionality and ease of
use. The Company's existing and potential competitors offer a variety of
solutions to address network management needs. Competitors include suppliers
of standard off-the-shelf products, custom software developers, large
telecommunications equipment vendors that offer software applications to
manage their own and other suppliers' equipment, such as Lucent, Northern
Telecom, Inc., Fujitsu, and Ericsson, hardware and software vendors,
including IBM, Sun Microsystems and Hewlett Packard, and providers of
specific network management and OS applications, such as BellCore, Objective
Systems Integrators, Inc., TCSI Corporation, Architel Systems Corporation and
others. Additionally, many of the Company's existing and potential customers
continuously evaluate whether they should develop their own network
management and OS applications or license them from outside vendors. The
Company expects competition in the OS market to increase significantly in the
future. Additionally, several of the Company's competitors have
long-established relationships with the Company's current and prospective
11
<PAGE>
customers which may adversely affect the Company's ability to successfully
compete for business with these customers. 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.
CONCENTRATION OF MAJOR CUSTOMERS; TELEPHONE COMPANY QUALIFICATION
REQUIREMENTS. The market for the Company's products and services currently
consists of the five regional Bell operating companies ("RBOCs"), long distance
or "interexchange carriers" ("IXCs"), local exchange carriers ("LECs"),
competitive local exchange carriers ("CLECs"), competitive access providers
("CAPs"), Internet service providers ("ISPs"), enterprise networks and other
TSPs. Historically, the Company's marketing efforts focused primarily on the
RBOCs, which accounted for approximately 99%, 73%, 31%, and 50% of the Company's
total revenue in 1995, 1996, 1997, and the first quarter of 1998, respectively.
However, the Company's strategy has been to focus its efforts on diversifying
its customer base. RBOCs, IXCs and enterprise customers accounted for 31%, 27%
and 20% of the Company's total revenue in 1997, and 50%, 29% and 0% of the
Company's total revenue for the first quarter in 1998. The increased customer
base is primarily a function of the Company's acquisitions in 1996 of Applied
Computing Devices, Inc. ("ACD") and the Special Services Network ("SSN")
division of MPR Teltech Inc. and the acquisition of the DSS II license from
Northern Telecom in 1997. As a result of these acquisitions, the Company added
OS related products and services that the Company has been able to market to a
wider group of customers. In addition, the Company added a number of TSPs that
were new customers to the Company. To date, the OS customers tend to be IXCs,
CAPs and enterprise vendors who have not invested in legacy systems from
BellCore. While the Company believes its customer base diversification is
beneficial to the Company, there can be no assurances that the Company will be
able to continue expanding the distribution of its OS and system products and
services to additional prospective customers. In addition, 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, a delay in deployment of the
Company's products or the cancellation, modification or non-renewal of license
or maintenance agreements could materially and adversely affect the Company's
business, operating results and financial condition. BellSouth, Ameritech,
Southwestern Bell and MCI have entered into purchase contracts with the Company.
MCI has also entered into license agreements with the Company. Other TSPs
purchase the Company's network system products and license OS products under
standard purchase orders. Since the RBOC and MCI contracts may be terminated at
either the customer's or the Company's convenience, the Company believes that
the purchase contracts and license agreements are not materially different than
purchasing or licensing under purchase orders. Prior to selling products to
RBOCs and certain other TSPs, a vendor must often first undergo a product
qualification process with the TSP for its products. 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,
the five RBOCs, MCI, Worldcomm and several other customers have qualified the
Company's products, when required. Any failure on the part of any of the
Company's customers to maintain their qualification of the Company's products,
failure of any of the TSPs to deploy the Company's products, or any attempt by
any of the TSPs to seek out alternative suppliers could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company's products will be qualified by new
customers, or that such qualification will not be significantly delayed.
Furthermore, work force reductions and staff reassignments by some of the
Company's customers 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 TWO PRODUCT LINES. Historically, the majority of the
Company's revenue has been derived from the sale of its network systems
products and services. However, as a result of acquisitions completed in 1996
and 1997, the Company added additional product lines and derived revenue from
a product mix of both network systems products and services and network
management OS software products and services. Revenue from network systems
products and services, including CTS, T3AS and Remote Module, generated 74%,
50% and 59% of the Company's total revenues in 1996 , 1997 and first quarter
of 1998, respectively. Revenue from network management OS products and
services, including software design services, .Provisioner, Test OS, TDC&E
and FMS, generated 26%, 50% and 41% of the Company's total revenue in 1996,
1997 and first quarter of 1998, respectively. However, there can be no
assurance that the Company's future revenues will not be heavily dependent on
sales from one of its primary product lines. The Company is investing in the
expansion of these two product lines through the enhancement, development and
marketing of its Remote Module, CTS, PAAS, T3AS and OS products. Failure by
the Company to enhance either its existing products and services or 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.
12
<PAGE>
MANAGEMENT OF CHANGING BUSINESS. As a result of acquisitions in 1996, the
Company obtained additional office space and hired additional personnel in both
Terre Haute, Indiana and British Columbia, Canada to support the business
operations of the new products, services and technologies acquired. The Company
continues to face significant management challenges related to the integration
of the business operations of the new organizations' personnel, products,
services and technologies acquired. In 1996, the Company formed two business
units: the Network Systems business unit and the Network Management business
unit. The business units are a result of the evolution of the Company from a
single product line to multiple product lines. The Network Management business
unit focuses on OS software products including .Provisioner, Test OS, GTA,
Sectionalizer, FMS, TDC&E, and OS design services. The Network Systems business
unit is built around the Company's test and performance management products,
including T3AS, CTS, Remote Module and PAAS products. There can be no assurance
that the Company will be successful in managing its new business unit structure.
In June 1997, the Company acquired a license from Northern Telecom to its DSS II
software product and technology. The Company markets and supports the DSS II
product and technology under the new name .Provisioner. The Company is
integrating the licensed technology into new product development. The
acquisition of the software license has generated a shift in the Company's
Canadian subsidiary's operations from a software design services business to a
product business and the transition will likely place a significant strain on
the Company's management, information systems and operations and there can be no
assurance that such a transition can be successfully managed. In addition, in
November 1997, the Company opened an office in Richardson, Texas to expand new
product development efforts. The acquisitions and resultant growth in the
Company's infrastructure have placed, and are 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 management of a
geographically distributed organization, and in hiring sufficient numbers of
qualified personnel to support the expansion of the business. The Company may
also make future acquisitions where it believes it can acquire new products or
otherwise rapidly enter new or emerging markets. Mergers and acquisitions of
high technology companies are inherently risky and can place significant strains
on the Company's management, information systems and operations. 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 recent or future
acquisitions or in the future. The Company's potential inability to manage its
changing business effectively could have a material adverse effect on the
Company's business, operating results, and financial condition.
CUSTOMER MERGERS. Of the nine major TSPs currently involved in or that
have recently completed merger transactions, seven are customers of the Company.
Several of the mergers involve companies that purchase network systems and
software products and services from the Company's competitors. Consequently,
the completion of certain of these mergers may result in the loss of business
and customers for the Company. Additionally, the impact of capital spending
constraints during the merger transitions and thereafter could have a material
adverse effect on the Company's business, operating results and financial
condition. In addition, future merger transactions involving or contemplated by
the Company's current or prospective customers may cause increased concentration
among some of the Company's major customers or delays or decreases in their
capital spending decisions, any of which could have a material adverse effect on
the Company's business, operating results and financial condition.
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, changing regulatory environments,
price-competitive bidding, changes in customer requirements, and frequent new
product introductions and enhancements. The introduction of telecommunications
network performance management 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 its products, to develop and introduce new
products for the telecommunications network performance management market, to
address new industry 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 network circuit test
and performance monitoring systems do not address either the SONET or SDH
transmission standards. The Company intends to extend its current products and
develop new products to accommodate such new transmission standards and other
advances in technology, as they evolve. The widespread adoption of SONET and/or
SDH as industry transmission standards before the Company is able to
successfully develop products which address such transmission standards could in
the future adversely affect the sale and deployment of the Company's products.
The Company's OS products are designed to operate on a variety of
hardware and software platforms and with a variety of databases employed by
its customers in their networks. The Company must continually modify and
enhance its OS products to keep pace with changes in hardware and software
platforms and database technology. As a result, uncertainties related to the
timing and nature of new product announcements, introductions or
modifications by systems vendors, particularly, Sun Microsystems and Hewlett
Packard, and by vendors of relational database software, particularly, Oracle
Corporation, could materially adversely impact the
13
<PAGE>
Company's business, operating results and financial condition. In addition,
the failure of the Company's OS products to operate across the various
existing and evolving versions of hardware and software platforms and
database environments employed by customers would have a material adverse
effect on the Company's business, operating results and financial condition.
The introduction or announcement of products by the Company or one or more
of its competitors embodying new technologies, or changes in industry standards
or customer requirements, could render the Company's existing products and
solutions obsolete and unmarketable. The introduction of new or enhanced
versions of its products requires the Company to manage the transition from
older products in order to minimize disruption in customer ordering. There can
be no assurance that the introduction or announcement of new product offerings
by the Company or its competitors will not cause customers to defer licensing or
purchasing of existing Company products or engaging the Company's services. Any
deferral of revenues could have a material adverse effect on the Company's
business, operating results and financial condition.
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 meet customer requirements, 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.
DEPENDENCE ON SUPPLIERS AND SUBCONTRACTORS. Certain components used in the
Company's T3AS, CTS, PAAS and Remote Module products, including its VLSI ASICs,
are available from a single source and other components are available from only
a limited number of sources. The Company has few 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 sub-assemblies, some of which are located in Asia. 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. The Company
believes that the recent significant economic downturns in Asia may increase
these risks with respect to its Asian third-party subcontractors. 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.
HIGH INVENTORY LEVELS AND NEED TO MAKE ADVANCE PURCHASE COMMITMENTS. To
respond to anticipated customer demand, the Company maintains high inventory
levels. Maintaining high inventory levels substantially increases the risk
that the Company's profitability and results of operations may from time to
time be materially and adversely affected by inventory obsolescence. To
procure adequate supplies of certain products or components, the Company must
make advance commitments to purchase relatively large quantities of such
products or components in a number of circumstances. A large portion of the
Company's purchase commitments consists 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 sell such products or
incorporate such components in its other products could have a material
adverse effect on the Company's business, operating results and financial
condition.
YEAR 2000 COMPLIANCE. Many installed computer systems and software
products are coded to accept only two digit entries in the date code field.
As the year 2000 approaches, these code fields will need to accept four digit
entries to distinguish years beginning with "19" from those beginning with
"20" dates. As a result, in less than two years, computer systems and/or
software products used by many companies may need to be upgraded to comply
with such year 2000 requirements. The Company is assessing its products, as
well as its internal management information systems in order to identify and
modify those products and systems that are not year 2000 compliant. Based
upon a preliminary assessment, the Company expects such modifications will be
made on a timely basis and does not believe that the cost of such
modifications will have a material effect on the Company's operating results
or financial condition. There can be no assurance, however, that the
Company's preliminary assessment is accurate. If the Company encounters any
unanticipated
14
<PAGE>
delays in or costs associated with the implementation of such changes, in
particular with respect to the Company's products, the Company's business,
operating results and financial condition could be materially adversely
affected.
PRODUCT RECALL AND DEFECTS. Producers of telecommunications network
performance management products 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 many of its customers. The
Company's products are also required to interface in a complex and changing
environment with telecommunication network equipment made by numerous other
suppliers. Since many of these suppliers are competitors of the Company,
there can be no assurance that they will cooperate with the Company. 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. In addition, the Company's development and enhancement of its
complex OS products entails substantial risks of product defects. There can
be no assurance that software errors will not be found in existing or new
products or releases after commencement of commercial licensing, which may
result in delay or loss of revenue, loss of market share, failure to achieve
market acceptance, or may otherwise adversely impact the Company's business,
operating results and financial condition.
GOVERNMENT REGULATION. The majority of the Company's customers operate
within the telecommunications industry which is subject to regulation in the
United States and other countries. Most of the Company's customers must
receive regulatory approvals in conducting their businesses. Although the
telecommunications industry has recently experienced government deregulation,
there is no assurance this trend will continue. Moreover, the federal and
state courts and the FCC continue to interpret and clarify the provisions of
the 1996 Telecommunications Act. In fact, recent regulatory rulings have
affected the ability of the Company's customers to enter new markets and
deliver new services which could impact their ability to make significant
capital expenditures. The effect of judicial or regulatory rulings by federal
and state agencies on the Company's customers may adversely impact the
Company's business, operating results and financial condition.
POTENTIAL COMPETITION FROM RBOCS. The 1996 Telecommunications Act has
generally eliminated the restrictions which had previously prohibited the
RBOCs from manufacturing telecommunications equipment (subject to first
satisfying certain conditions designed to facilitate local exchange
competition and receipt of prior approval by the FCC). These restrictions had
been imposed under the Modification of Final Judgment, which governed the
structure of the 1984 divestiture by AT&T of its local operating telephone
company subsidiaries. The passage of the 1996 Telecommunications Act may have
an adverse effect on the Company because the RBOCs, which are presently the
Company's principal customers, may now become manufacturers of some or all of
the products currently manufactured and sold by the Company and,
consequently, may no longer purchase telecommunications equipment produced by
the Company at the levels historically experienced.
PROPRIETARY TECHNOLOGY. The Company relies on a combination of
technical leadership, patent, 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 customers needs. Currently,
the Company has eleven U.S. patents granted and three U.S. patent
applications allowed. One of the granted patents relates to the Company's
Remote Module product. Additionally, the Company has six pending U.S. patent
applications and four international (Patent Cooperation Treaty and European
Patent Office) 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's products with significant protection or will not be
challenged. Additionally, should a third party challenge any of the Company's
current or future patents, there can be no assurance that the Company will be
successful in defending its patents or that any litigation, regardless of
outcome, will not result in substantial cost to and diversion of efforts by
the Company. As part of its confidentiality procedures, the Company generally
enters into non-disclosure agreements with its employees, consultants 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.
15
<PAGE>
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 currently not party to any litigation
regarding any patents or other intellectual property rights. However, 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 by or against the Company could materially and adversely
affect the Company's business, operating results 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.
The Company relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. There
can be no assurance that these third party software licenses will continue to
be available to the Company on commercially reasonable terms or that such
licenses will not be terminated. Although the Company believes that
alternative software is available from other third party suppliers, the loss
of or inability of the third parties to enhance their products in a timely
and cost-effective manner could result in delays or reductions in product
shipments by the Company until equivalent software could be developed
internally or identified, licensed, and integrated, which could have a
material adverse effect on the Company's business, operating results 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. Fluctuation in the Company's stock
price may also have an effect on customer decisions to purchase the Company's
products which could have a material adverse effect on the Company's business,
operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- ------------------------------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
None.
17
<PAGE>
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, 1998 /s/ PETER P. SAVAGE
----------------------------
Peter P. Savage
Director
President and Chief Executive Officer
Date: May 15, 1998 /s/ JAMES L. KEEFE
----------------------------
James L. Keefe
Vice President Finance and
Administration and Chief
Financial Officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS AND STATEMENT OF OPERATIONS AND CASH FLOWS AS OF
MARCH 31, 1998 AND MARCH 31, 1997 AND THE THREE MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,291
<SECURITIES> 9,320
<RECEIVABLES> 912
<ALLOWANCES> 60
<INVENTORY> 5,345
<CURRENT-ASSETS> 30,829
<PP&E> 13,403
<DEPRECIATION> (7,187)
<TOTAL-ASSETS> 40,955
<CURRENT-LIABILITIES> 8,628
<BONDS> 0
0
0
<COMMON> 51,894
<OTHER-SE> 2,685
<TOTAL-LIABILITY-AND-EQUITY> 32,317
<SALES> 5,272
<TOTAL-REVENUES> 5,272
<CGS> 3,664
<TOTAL-COSTS> 3,664
<OTHER-EXPENSES> 6,943
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,171)
<INCOME-TAX> 37
<INCOME-CONTINUING> (5,208)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,208)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
