<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 JUNE 30, 1999
[ ] 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 13,147,507 shares of the Registrant's Common Stock, $0.001 par
value, outstanding as of July 31, 1999.
<PAGE>
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
June 30, 1999 and December 31, 1998..................................................3
Condensed Consolidated Statements of Operations and Comprehensive Loss for the
three and six months ended June 30, 1999 and June 30, 1998...........................4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and June 30, 1998.........................................5
Notes to Condensed Consolidated Financial Statements.................................6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................10-14
Risks and Uncertainties..............................................................14-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................22
Item 2. Changes in Securities and Use of Proceeds............................................22
Item 3. Defaults Upon Senior Securities......................................................22
Item 4. Submission of Matters to a Vote of Security Holders..................................22
Item 5. Other Information....................................................................23
Item 6. Exhibits and Reports on Form 8-K.....................................................23
SIGNATURES........................................................................................24
</TABLE>
2
<PAGE>
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements
APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ --------------
Unaudited
(Dollars in Thousands,
except per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,465 $ 12,513
Investments 4,867 -
Trade accounts receivable, net 5,161 6,111
Inventory, net 4,227 5,679
Deferred income taxes 130 130
Prepaid expenses and other current assets 1,365 1,700
------------ --------------
Total current assets 25,215 26,133
Property and equipment, net 3,472 5,466
Intangible assets, net 681 1,247
Deferred income taxes 1,510 1,426
------------ --------------
Total assets $ 30,878 $ 34,272
------------ --------------
------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,089 $ 2,922
Accrued expenses 1,491 2,374
Accrued warranty expense 1,149 1,264
Deferred revenue 3,003 2,817
------------ --------------
Total current liabilities 8,732 9,377
------------ --------------
------------ --------------
Shareholders' equity:
Preferred stock, no par value; 7,500,000 shares authorized;
no shares issued - -
Common stock, $.001 par value; 30,000,000 shares authorized;
13,118,571 and 12,909,315 shares issued and outstanding at
June 30, 1999 and December 31,1998 respectively 13 13
Additional paid-in capital 55,289 54,897
Accumulated other comprehensive income 191 163
Accumulated deficit (33,347) (30,178)
------------ --------------
Total shareholders' equity 22,146 24,895
------------ --------------
Total liabilities and shareholders' equity $ 30,878 $ 34,272
------------ --------------
------------ --------------
</TABLE>
The accompanying notes
are an integral part of the financial statements.
3
<PAGE>
APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
(Dollars in thousands, (Dollars in thousands,
except per share data) except per share data)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 8,863 $ 8,580 $ 16,065 $ 13,852
Cost of revenue 3,531 3,741 6,425 7,405
------------ ------------- -------------- --------------
Gross profit 5,332 4,839 9,640 6,447
------------ ------------- -------------- --------------
Operating expenses:
Research and development 2,761 3,777 5,946 7,320
Restructuring charge - - 1,335 -
Engineering Reimbursement - - (1,361) -
Sales and marketing 2,147 2,551 4,426 4,831
General and administrative 1,353 1,295 2,614 2,414
------------ ------------- -------------- --------------
Total operating expenses 6,261 7,623 12,960 14,565
------------ ------------- -------------- --------------
Operating loss (929) (2,784) (3,320) (8,118)
Interest income 134 168 254 342
Other expense, net (7) (6) (8) (16)
------------ ------------- -------------- --------------
Loss before income taxes (802) (2,622) (3,074) (7,792)
Provision for income taxes 41 36 95 73
------------ ------------- -------------- --------------
Net loss $ (843) $ (2,658) $ (3,169) $ (7,865)
------------ ------------- -------------- --------------
------------ ------------- -------------- --------------
Other comprehensive income (loss):
Foreign currency translation adjustments 67 (93) 28 (12)
------------ ------------- -------------- --------------
Comprehensive loss $ (776) $ (2,751) $ (3,141) $ (7,877)
------------ ------------- -------------- --------------
Net loss per share, basic and diluted (.06) $ (.21) $ (.24) $ (.62)
------------ ------------- ------------------------------
Shares used in per share computations 13,037,132 12,675,219 12,977,203 12,649,983
------------ ------------- -------------- --------------
</TABLE>
The accompanying notes
are an integral part of the financial statements.
4
<PAGE>
APPLIED DIGITAL ACCESS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1999 1998
---------- -----------
Dollars in Thousands
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,169) $(7,865)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation and amortization 1,783 1,853
Writeoff of assets associated with restructuring 866 -
Other 108 (101)
Changes in operating assets and liabilities:
Trade accounts receivable 950 3,978
Inventory 1,452 (65)
Prepaid expenses and other current assets 251 1,340
Accounts payable 167 1,647
Acquistion payments due licensor - (867)
Accrued expenses (851) (743)
Accrued warranty expense (115) (8)
Deferred revenue 186 1,047
---------- -----------
Net cash provided by operating activities 1,628 216
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (4,867) (7,854)
Maturities of investments - 6,835
Purchases of property and equipment (169) (1,370)
Purchase costs related to asset acquistion - 500
-----------------------
Net cash used by investing activities (5,036) (1,889)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (32) (9)
Proceeds from issuance of common stock 392 416
---------- -----------
Net cash provided by financing activities 360 407
---------- -----------
Net decrease in cash and cash equivalents (3,048) (1,266)
Cash and cash equivalents at beginning of period 12,513 4,400
---------- -----------
Cash and cash equivalents at end of period $ 9,465 $ 3,134
---------- -----------
</TABLE>
The accompanying notes
are an integral part of the financial statements.
5
<PAGE>
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
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 and six month period ended June 30,
1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. 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, 1998 filed with the SEC.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 establishes accounting and reporting standards for derivative
and hedging activities. In accordance with SFAS No. 133 all derivatives must
be recognized as assets or liabilities and measured at fair value. This
Statement will be effective for the Company's fiscal year 2001. The Company
has not yet determined the impact of the adoption of this new accounting
pronouncement on its consolidated financial position or results of
operations.
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>
JUNE 30, DECEMBER 31,
1999 1998
----------- --------------
<S> <C> <C>
Inventories:
Raw materials $2,649 $3,266
Work-in-process 1,641 2,389
Finished goods 667 698
----------- --------------
4,957 6,353
Less reserves (730) (674)
----------- --------------
$4,227 $5,679
----------- --------------
----------- --------------
</TABLE>
4. RESTRUCTURING CHARGE FOR TERMINATION OF JOINT DEVELOPMENT AGREEMENT
On March 3, 1999, the Company announced the termination of its joint
development agreement ("JDA") with Northern Telecom, Inc. ("Nortel"). The
Company and Nortel entered into the JDA in September 1997 to develop
Synchronous Optical Network ("SONET") network element products for the
telecommunications industry. The intellectual property rights associated with
the jointly developed technology will become the property of the
6
<PAGE>
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
Company. Under the JDA, the Company and Nortel each contributed technology
and development resources to the project and shared the development costs.
The Company's development costs associated with the JDA have been expensed as
incurred.
For the six months ended June 30, 1999, the Company incurred a one-time
restructuring charge of $1,435, of which $1,335 is included as a separate
component of operating expenses and $100 is included in costs of revenue.
Cash expenditures are estimated to be $469 which consists of employee
severance costs, a facility closure in Richardson, Texas and other costs.
The significant components of the restructuring charge are:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
COMPONENT Amount Amounts incurred as of Estimated amounts to be
June 30, 1999 paid in the future
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Severance and related personnel costs $ 264 $ 264 $ 0
Capital asset writeoffs 866 866 0
Facility Closure 152 72 80
Excess inventory writedown 100 100 0
Other costs 53 10 43
--------- ------ ----
Total restructuring costs $ 1,435 $1,312 $123
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Severance costs related to the termination of approximately 65 people, the
majority of which were engineers focused on the JDA. The capital asset
writeoffs related to software development tool kits acquired specifically for
the JDA that had no on-going business use. The facility in Richardson, Texas
is a leased facility which the Company has the ability to sub-lease. The
Company has estimated the costs associated with leasing the facility until a
sub-lessee can be found. The inventory write down related to excess
quantities of components used in the JDA product design that were purchased
in advance. Other costs are associated with legal services and other
professional services required to complete the termination of the JDA. The
majority of the expenditures have been concluded however, there may be costs
associated with the closure of the leased facility in Richardson, Texas that
could continue in to the future.
5. PER SHARE INFORMATION
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 exercise of stock
options and warrants for all periods. There are no reconciling items in the
numerator and denominator for basic and diluted EPS.
6. SEGMENTS
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", information regarding the Company's business
segments is reported for financial statement purposes consistently with the
manner in which these segments are evaluated for internal reporting and
management's assessment of performance. The Company evaluates the performance
of its segment and allocates resources to them based on segment earnings
before allocation of corporate costs.
The Company has two business units, Network Systems and Network Management,
that are organized around the Company's product lines. The Network Systems
business unit is formed around the Company's network test and performance
monitoring products and services, including its T3AS Test and Performance
Monitoring System ("T3AS"), Centralized Test System ("CTS"), Remote Module, a
network interface unit ("NIU"), OPTIS (previously named Test OS), , Network
Embedded Protocol Access System ("NEPA"), and Sectionalizer. The Network
Management business unit focuses on the Company's Operations Support System
("OSS") software products
7
<PAGE>
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
including .Provisioner, Traffic Data Collection and Engineering System
("TDC&E"), Fault Management System ("FMS"), and OS design services.
The table below presents information about revenues and operating loss for
reportable segments for the three and six months ended June 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Network Systems $5,821 $5,437 $10,616 $8,929
Network Management 3,042 3,143 5,449 4,923
------------ -------------- ------------- --------------
Consolidated totals $8,863 $8,580 $16,065 $13,852
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
OPERATING LOSS:
Network Systems $(36) $(2,342) $(1,265) $(5,934)
Network Management 354 861 373 164
------------ -------------- ------------- --------------
Total for reportable segments 318 (1,481) (892) (5,770)
Reconciling items (1,247) (1,303) (2,428) (2,348)
------------ -------------- ------------- --------------
Consolidated totals $(929) $(2,784) $(3,320) $(8,118)
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
</TABLE>
The table below presents the reconciliation of operating loss for reportable
segments to consolidated loss before income taxes for the three and six
months ended June 30:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
Operating loss for reportable segments $318 $(1,481) $ (892) $(5,770)
Other unallocated segment expenses (1,254) (1,309) (2,436) (2,364)
Other unallocated income 134 168 254 342
------------ -------------- ------------- --------------
Consolidated loss before income taxes $(802) $(2,622) $(3,074) $(7,792)
------------ -------------- ------------- --------------
------------ -------------- ------------- --------------
</TABLE>
Operating loss for reportable segments includes segment revenues with
deductions made for related development and selling costs and certain
expenses controllable by segment managers. Other unallocated segment
expenses consist of corporate selling, general and administrative expenses
allocated to each segment based on segment revenues. Other unallocated
income consists of interest income on investments held at the corporate level.
8
<PAGE>
APPLIED DIGITAL ACCESS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
The table below presents the reconciliation of total assets for reportable
segments to consolidated total assets at:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------------- -----------------
<S> <C> <C>
Total assets for reportable
Segments $12,859 $17,256
Other unallocated assets:
Cash and investments 14,332 12,513
Other 3,687 4,503
--------------- -----------------
Consolidated total assets $30,878 $34,272
--------------- -----------------
--------------- -----------------
</TABLE>
Total assets for reportable segments includes amounts attributable to trade
accounts receivable, inventory and property and equipment. Other unallocated
assets principally consists of deferred taxes, intangible assets obtained in
conjunction with certain acquisitions and prepaid expenses.
9
<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," "PLAN," AND
"EXPECT," ARE FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS,
INCLUDING STATEMENTS REGARDING THE COMPANY'S (I) PLANS FOR DEVELOPMENT OR
ACQUISITION AND INTRODUCTION OF NEW PRODUCTS OR ENHANCEMENT OF EXISTING
PRODUCTS, (II) STRATEGY, INCLUDING ITS FOCUS ON ITS CORE BUSINESS,(III)
EXPANDED MARKETING EFFORTS, (IV) EXPECTED LEVELS OF EXPENDITURES, (V) GOAL OF
MAXIMIZING THE VALUE OF TECHNOLOGY AND (VI) THE COMPANY'S TIMING OF YEAR 2000
COMPLIANCE, ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON 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."
RECENT DEVELOPMENTS
On March 3, 1999, the Company announced the termination of its JDA
with Nortel. The Company and Nortel entered into the JDA in September 1997
to develop SONET network element products for the telecommunications
industry. The intellectual property rights associated with the jointly
developed technology became the property of the Company. Under the JDA, the
Company and Nortel each contributed technology and development resources to
the project and shared the development costs. The Company's development
costs associated with the JDA were expensed as incurred. The Company has
reduced expenses associated with the development conducted under the JDA and
continues to explore alternatives for maximizing the value of the jointly
developed technology. There can be no assurance that the Company will be
successful in it efforts to maximize the value of the technology developed
under the JDA or that the jointly developed technology will provide future
value to the Company.
On March 31, 1999, the Company announced a workforce reduction of
approximately 65 people. The Company determined the reduction was necessary
in order to align its current operations with the Company's objectives of
focusing on market opportunities in its core business, reducing expenses
including expenses related to its recently terminated JDA with Nortel and
improving operating results. The majority of the reduction in workforce were
engineers focused on development conducted under the JDA. As a result of the
reduction in workforce, the Company has closed its office in Richardson,
Texas. In the quarter ended March 31,1999 the Company incurred a
restructuring charge of $1,435,000 related to the reduction in workforce, the
closure of the Texas facility, and the write-down of certain capital assets
and inventory.
RESULTS OF OPERATIONS
Revenue totaled $8,863,000 for the three months ended June 30,
1999, a 3% increase from $8,580,000 for the three months ended June 30, 1998.
The increase is primarily the result of increased revenue from the sale of
network systems products partially offset by decreased revenue from the sale
of network management OSS products. Revenue generated from the sale of the
Company's network systems products and services totaled $5,821,000 for the
three months ended June 30,1999, a 7% increase from $5,437,000 for the three
months ended June 30, 1998. The increase was primarily the result of
increased licensing revenues related to the Remote Module product line.
Revenue generated from the sale of the Company's network management OS
products and services totaled $3,042,000 for the three months ended June 30,
1999, a 3% decrease from $3,143,000 for the three months ended June 30, 1998.
The decrease was the result of decreased sales of the Company's design
services and TDC&E products largely offset by increased revenues from the
Company's FMS software product. For the three months ended June 30, 1999,
BellSouth, MCI WorldCom and Bell Atlantic accounted for 33%, 12%, and 10% of
the Company's total revenue, respectively. For the three months ended June
30, 1998, MCI WorldCom and BellSouth accounted for 36% and 32% of the
Company's total revenue, respectively.
Revenue totaled $16,065,000 for the six months ended June 30, 1999,
a 16% increase from $13,852,000 for the six months ended June 30, 1998. The
increase is primarily the result of increased revenue from the sale of
network systems products as well as increased revenue related to network
management OSS products. Revenue
10
<PAGE>
generated from the sale of the Company's network systems products and
services totaled $10,616,000 for the six months ended June 30,1999, a 19%
increase from $8,929,000 for the six months ended June 30, 1998. The increase
was primarily the result of increased sales of the Company's T3AS and CTS
products and increased licensing revenues related to the Remote Module
product line. Revenue generated from the sale of the Company's network
management OSS products and services totaled $5,449,000 for the six months
ended June 30, 1999, an 11% increase from $4,923,000 for the six months ended
June 30, 1998. The increase was the result of increased revenue related to
the Company's .Provisioner and FMS OSS products partially offset by decreased
sales of the Company's design services.. For the six months ended June 30,
1999, BellSouth, Bell Atlantic and MCI WorldCom accounted for 32%, 12%, and
8% of the Company's total revenue, respectively. For the six months ended
June 30, 1998, BellSouth and MCI WorldCom accounted for 33% and 31% of the
Company's total revenue, respectively.
Gross profit totaled $5,332,000 for the three months ended June 30,
1999, a 10% increase from $4,839,000 for the three months ended June 30,
1998. Gross profit as a percent of revenue was 60% for the three months ended
June 30, 1999 compared to 56% for the same period in 1998. The increase in
gross profit levels was primarily the result of improved gross profit margins
on the Remote Module product resulting from manufacturing cost reductions.
Gross profit totaled $9,640,000 for the six months ended June 30, 1999, a 50%
increase from $6,447,000 for the six months ended June 30, 1998. Gross profit
as a percent of revenue was 60% for the six months ended June 30, 1999
compared to 47% for the same period in 1998. The increase in gross profit
levels was primarily the result of a network systems product mix weighted
toward T3AS products, which carry higher gross margins than the CTS and
Remote Module product and improved gross profit margins on the Remote Module
product resulting from manufacturing cost reductions. Additionally, the
allocation of the Company's relatively fixed manufacturing overhead costs
over higher revenue levels and lower inventory write-downs resulted in higher
overall gross profit levels in the first half of 1999. There can be no
assurance that the Company will be able to maintain the current gross profit
margins 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 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 totaled $2,761,000 for the three
months ended June 30, 1999, a 27% decrease from $3,777,000 for the three
months ended June 30, 1998. The decrease is primarily the result of lower
personnel expenses as a result of the termination of the JDA with Nortel and
the subsequent reduction in engineering staff. For the three months ended
June 30, 1999 and June 30, 1998, the Company's net research and development
expenses include $300,000 and $1,006,000 offsets, respectively, representing
Nortel's proportionate share of development costs incurred for the project
conducted under the JDA. Research and development expenses totaled
$5,946,000 for the six months ended June 30, 1999, a 19% decrease from
$7,320,000 for the six months ended June 30, 1998. The decrease is primarily
the result of lower personnel and non-recurring development expenses as a
result of the termination of the JDA with Nortel and subsequent reduction in
engineering staff. In addition, during the first quarter of 1999, Nortel
agreed to increase its proportionate share of total development costs
incurred under the JDA from 50% to 60%. As a result, a greater portion of
expenses incurred under the JDA during the first quarter of 1999 were
reimbursed by Nortel, resulting in a larger offset to research and
development expenses. For the six months ended June 30, 1999 and 1998, the
Company's net research and development expenses included $2,141,000 and
$1,704,000 offsets, respectively, representing Nortel's proportionate share
of development costs incurred for the project 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.
Included in the results of operations for the six months ended June
30, 1999 is a restructuring charge of $1,435,000, of which $1,335,000 is
included as a separate component of operating expenses and $100,000 that is
included as part of cost of revenue (see Note 4 of the Notes to the Condensed
Consolidated Financial Statements contained herein). The restructuring charge
is a result of the Company's plan to focus its efforts on market opportunities
in its core business and the termination of the JDA with Nortel.
Also included in the results of operations for the six months ended
June 30, 1999 is a one-time credit adjustment of $1,361,000, which represents
11
<PAGE>
an increase from 50% to 60% in Nortel's proportionate share of total
development expenses incurred under the JDA through December 31, 1998.
Sales and marketing expenses totaled $2,147,000 for the three
months ended June 30, 1999, a 16% decrease from $2,551,000 for the three
months ended June 30, 1998. The decrease is primarily attributable to lower
travel and promotional expenses. Sales and marketing expenses totaled
$4,426,000 for the six months ended June 30, 1999, an 8% decrease from
$4,831,000 for the six months ended June 30, 1998. The decrease is primarily
due to lower travel and professional services expenses. The Company expects
sales and marketing expenses will increase during the second half of 1999 as
it adds additional sales, marketing and technical support personnel to
support increased focus on new customer markets and planned product
introductions.
General and administrative expenses totaled $1,353,000 for the
three months ended June 30, 1999, a 4% increase from $1,295,000 for the three
months ended June 30, 1998. The increase is attributable to increased
personnel costs associated with the business unit restructuring partially
offset by decreased legal and professional services. General and
administrative expenses totaled $2,614,000 for the six months ended June 30,
1999, an 8% increase from $2,414,000 for the six months ended June 30, 1998.
The increase is attributable to higher personnel costs associated with the
business unit restructuring partially offset by a decrease in professional
services. The Company expects that general and administrative expenses may
increase in 1999 as a result of expected administrative costs related to the
termination of the JDA with Nortel and potential increased expenses related
to the Company's focus on Year 2000 issues.
Interest income totaled $134,000 for the three months ended June
30, 1999, a 20% decrease from $168,000 for the three months ended June 30,
1998. Interest income totaled $254,000 for the six months ended June 30,
1999, a 26% decrease from $342,000 for the six months ended June 30, 1998.
The decrease for the three and six months ended June 30 is primarily due to
lower rates of return on invested balances in 1999 compared to 1998.
For the three and the six months ended June 30, 1999 and June 30,
1998, the Company provided for income taxes related to the operations of the
Company's Canadian subsidiary, based on an effective Canadian tax rate of 50%
and 46%, respectively. At December 31, 1998, the Company had federal income
tax-loss carry-forwards of approximately $27,642,000 and California State
income tax-loss carry-forwards of approximately $5,458,000. The Company's use
of approximately $1,166,000 of its federal tax-loss carry-forwards, and
$408,000 of its federal and $105,000 of its California tax credit
carry-forwards are significantly limited as a result of ownership changes
associated with equity financing in January 1989 and March 1991. See
footnote 9 to the Consolidated Financial Statements in the December 31, 1998
Form 10-K.
As a result of the factors discussed above, the Company incurred a
net loss of $843,000 or $.06 per basic and diluted share for the three months
ended June 30, 1999 compared to net loss of $2,658,000, or $.21 per basic and
diluted share for the three months ended June 30, 1998. The Company incurred
a net loss of $3,169,000 or $.24 per basic and diluted share for the six
months ended June 30, 1999 compared to net loss of $7,865,000, or $.62 per
basic and diluted share for the six months ended June 30, 1998. Excluding
the one time credit adjustment of $1,361,000 and the restructuring charge of
$1,435,000, the Company would have recorded a net loss of $3,095,000, or $.24
per basic and diluted share for the six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and investments totaled $14,332,000 at June 30, 1999 compared
to $12,513,000 at December 31, 1998. The increase in cash is primarily due
to reductions in trade receivables and inventory offset by a reduction in
accrued expenses and decreased operating losses for the period.
Net working capital totaled $16,483,000 at June 30, 1999 compared
to $16,756,000 at December 31, 1998. The decrease in working capital was
primarily the result of a decrease in inventory and trade receivables
significantly offset by an increase in cash and investments and a decrease in
accrued expenses.
Cash provided from the Company's operating activities totaled
$1,628,000 for the six months ended June 30, 1999 compared to $216,000 for
the six months ended June 30, 1998. The cash provided for the first six
month
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of 1999 was primarily the result of reductions in trade receivables and
inventory offset by a reduction in accrued expenses and lower operating
losses for the period.
Cash used for capital expenditures totaled approximately $169,000
for the six months ended June 30, 1999 compared to $1,370,000 for the six
months ended June 30, 1998. Most of the capital additions in the first six
months of 1999 were for the purchase of software development tool kits and
computer workstations. The Company expects that 1999 capital expenditures
will decrease substantially from 1998 levels due to the termination of the
JDA with Nortel. Planned expenditures will focus on upgrades to the Company's
network infrastructure and specific needs for ongoing 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. However, there can be no assurance that the Company will not need
to 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 that are focused on the Company's core business.
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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Without
modification, these systems and software will be unable to appropriately
interpret or recognize dates beyond the calendar year 1999. The Year 2000
computer issue could result in system failures or miscalculations causing
disruptions in business operations worldwide (including, without limitation,
disruptions in order processing, invoicing, manufacturing and similar
functions).
The risk to ADA exists in four areas: systems used by the Company
to run its business, systems used by the Company's suppliers, potential
warranty or other claims from Company customers, and the potential reduced
spending by telecommunication service providers ("TSPs") on network
performance management products as a result of significant information
systems spending on Year 2000 remediation.
The Company is continuing to conduct an assessment and analysis of
its internal information technology ("IT") systems to determine the potential
costs and scope of any Year 2000 issues. Based on a preliminary assessment,
ADA has determined that certain of its IT systems need to be upgraded or
replaced to address Year 2000 issues. The Company believes that all
necessary upgrades or replacements of its IT systems will be completed by
September 30, 1999. Validation testing will be conducted as IT systems are
upgraded and replaced. All IT systems that have been purchased in 1999 or
1998 are Year 2000 compliant. The upgrades are generally covered by service
contracts previously entered into by the Company in the ordinary course of
business and the cost of the upgrades and remediation is not expected to be
material to the Company's operating results. If implementation of upgrades
or replacement systems is delayed, or if significant new non-compliance
issues are identified, the Company's results of operations or financial
condition could be materially adversely affected.
ADA has conducted a comprehensive evaluation of its non-IT systems
and equipment (e.g., facilities, and test equipment containing
microprocessors or other similar circuitry, etc.). Based on this evaluation,
ADA does not expect Year 2000 issues to have a material adverse effect on the
Company's non-IT systems and equipment. However, Year 2000 compliance for
some of the Company's non-IT systems and equipment is dependent upon upgrades
to be provided by third party vendors. The Company expects all upgrades
required from third party vendors to complete Year 2000 compliance for non-IT
systems and equipment to be completed by September 30, 1999. There can be no
assurance that third party vendor upgrades to non-IT systems and equipment
will be Year 2000 complaint or that the upgrades will be completed prior to
the end of 1999 which could negatively impact the functionality of non-IT
systems and equipment that could have a material adverse effect on the
Company's revenue, operating results and financial condition.
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In addition, the Company has made inquiries of its third party
suppliers to determine if they have any Year 2000 issues that will materially
and adversely impact the Company. To date, the Company has not been made
aware of any material Year 2000 issues which would adversely affect ADA.
The Company believes that current versions of its products are Year
2000 compliant. The Company does not expect additional efforts, if required,
to complete Year 2000 compliance for its products will be material. Internal
validation testing was conducted as products were upgraded. An independent
third party also performed validation testing on one of the Company's test
and performance management products. However, since all customer situations
cannot be anticipated, particularly those involving third party products,
the Company may see an increase in warranty and other claims as a result of
the Year 2000 transition. In addition, litigation regarding Year 2000
compliance issues is expected to escalate. For these reasons, the impact of
customer claims could have a material adverse impact on the Company's
operating results or financial condition.
Year 2000 compliance is an issue for virtually all businesses,
whose computer systems and applications may require significant hardware and
software upgrades or modifications. TSPs have devoted a substantial portion
of their information systems' spending to fund such upgrades and
modifications and have diverted spending away from network performance
management products. Such changes in customers' spending patterns have had
and could continue to have a material adverse impact on the Company's sales,
operating results or financial condition.
The Company intends to continue the review, remediation and testing
of its Year 2000 status and, to the extent necessary, it will develop Year
2000 contingency plans for critical business purposes. In addition, there
can be no assurance that Year 2000 issues will not have a material adverse
effect on the Company if ADA and/or those with whom it conducts business are
unsuccessful in identifying or implementing timely solutions to any Year 2000
problems.
RISKS AND UNCERTAINTIES
CUSTOMER MERGERS. Many of the major TSPs currently involved in or
that have recently completed merger transactions are customers of the
Company. Several of these mergers involved companies that purchase network
systems and software products and services from the Company's competitors.
Consequently, 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 has had and could continue to
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.
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 Operating System ("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 have a
proportionately greater
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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, TTC, Wiltron and
some of the manufacturers of large transmission equipment and digital
cross-connect test and performance monitoring equipment such as Lucent,
Alcatel, 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. In
addition, in 1997, ANSI adopted certain of the Company's Remote Module
signaling 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 which has resulted in competition
from the licensees of its own technology. Many of these competitors have
significantly greater technical, financial, manufacturing, and marketing
resources than the Company.
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
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vendors that offer software applications to manage their own and other
suppliers' equipment, such as Lucent, Nortel, 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, OSI, TCSI, Architel 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 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 RBOCs, IXCs, ILECs, CLECs, emerging carriers, ISPs,
enterprise networks and other TSPs. Historically, the Company's marketing
efforts focused primarily on the RBOCs, which accounted for approximately
31%, 47% and 52% of the Company's total revenue in 1997, 1998, and the six
months ended June 30, 1999, respectively. However, the Company's strategy
has been to focus its efforts on diversifying its customer base. RBOC and IXC
customers accounted for 52% and 9% of the Company's total revenue for the six
months ended June 30, 1999 and 47% and 23% for the year ended December 31,
1998, respectively. The increased customer base is primarily a function of
the Company's acquisitions in 1996 and 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 long distance telephone companies, CLECs,
emerging carriers 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 WorldCom
have entered into purchase contracts with the Company. MCI WorldCom 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 WorldCom 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 WorldCom 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.
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 56%
and 66% of the Company's total revenues for the year ended December 31, 1998
and the six months ended June 30, 1999, respectively. Revenue from network
management OS products and services, including software design services,
.Provisioner, Test OS, TDC&E and FMS, generated 44% and 34% of the Company's
total revenue for the year ended December 31, 1998 and six months ended June
30, 1999,
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respectively. However, there can be no assurance that the Company's future
revenues will not be heavily dependent on sales from only 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 NIU, CTS,
NEPA, T3AS, Test OS, .Provisioner, TDC&E and FMS 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.
MANAGEMENT OF CHANGING BUSINESS. As a result of acquisitions in
1996 and 1997, the Company formed two business units around the Company's
product lines: the Network Systems business unit and the Network Management
business unit. The Network Systems business unit is built around the
Company's test and performance management products, including T3AS, CTS,
Remote Module, Sectionalizer, NEPA and PAAS products. The Network Management
business unit focuses on OS software products including .Provisioner, TDC&E,
Test OS, GTA, FMS, and OS design services. These business units operate in
four separate geographic locations. The Company continues to face significant
management challenges related to the integration of the business operations
of these business units. 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. Additionally, as a result of the termination of the
JDA, the Company discontinued operations conducted at its Richardson, Texas
facility. There can be no assurance that the Company will not incur
significant expenses related to the closure of the Texas facility that could
have a material impact 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
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relational database software, particularly, Oracle Corporation, could
materially adversely impact the 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. 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.
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. In the first quarter of 1998, the Company
recorded a charge for inventory obsolescence totaling $378,000. 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 currently installed computer systems
and software products are coded to accept only two digit entries in the date
code field. Without modification, these systems and software will be
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unable to appropriately interpret or recognize dates beyond the calendar year
1999. The Year 2000 computer issue could result in system failures or
miscalculations causing disruptions in business operations worldwide
(including, without limitation, disruptions in order processing, invoicing,
manufacturing and similar functions).
The risk to ADA exists in four areas: systems used by the Company
to run its business, systems used by the Company's suppliers, potential
warranty or other claims from Company customers, and the potential reduced
spending by TSPs on network performance management products as a result of
significant information systems spending on Year 2000 remediation.
The Company is continuing to conduct an assessment and analysis of
its internal information technology ("IT") systems to determine the potential
costs and scope of any Year 2000 issues. Based on a preliminary assessment,
ADA has determined that certain of its IT systems need to be upgraded or
replaced to address Year 2000 issues. The Company believes that all
necessary upgrades or replacements of its IT systems will be completed by
September 30, 1999. Validation testing will be conducted as IT systems are
upgraded and replaced. All IT systems that have been purchased in 1999 or
1998 are Year 2000 compliant. The upgrades are generally covered by service
contracts previously entered into by the Company in the ordinary course of
business and the cost of the upgrades and remediation is not expected to be
material to the Company's operating results. If implementation of upgrades
or replacement systems is delayed, or if significant new non-compliance
issues are identified, the Company's results of operations or financial
condition could be materially adversely affected.
ADA has conducted a comprehensive evaluation of its non-IT systems
and equipment (e.g., facilities, and test equipment containing
microprocessors or other similar circuitry, etc.). Based on this evaluation,
ADA does not expect Year 2000 issues to have a material adverse effect on the
Company's non-IT systems and equipment. However, Year 2000 compliance for
some of the Company's non-IT systems and equipment is dependent upon upgrades
to be provided by third party vendors. The Company expects all upgrades
required from third party vendors to complete Year 2000 compliance for non-IT
systems and equipment to be completed by September 30, 1999. There can be no
assurance that third party vendor upgrades to non-IT systems and equipment
will be Year 2000 complaint or that the upgrades will be completed prior to
the end of 1999 which could negatively impact the functionality of non-IT
systems and equipment that could have a material adverse effect on the
Company's revenue, operating results and financial condition.
In addition, the Company has made inquiries of its third party
suppliers to determine if they have any Year 2000 issues that will materially
and adversely impact the Company. To date, the Company has not been made
aware of any material Year 2000 issues which would adversely affect ADA.
The Company believes that current versions of its products are Year
2000 compliant. The Company does not expect additional efforts, if required,
to complete Year 2000 compliance for its products will be material. Internal
validation testing was conducted as products were upgraded. An independent
third party also performed validation testing on one of the Company's test
and performance management products. However, since all customer situations
cannot be anticipated, particularly those involving third party products,
the Company may see an increase in warranty and other claims as a result of
the Year 2000 transition. In addition, litigation regarding Year 2000
compliance issues is expected to escalate. For these reasons, the impact of
customer claims could have a material adverse impact on the Company's
operating results or financial condition.
Year 2000 compliance is an issue for virtually all businesses,
whose computer systems and applications may require significant hardware and
software upgrades or modifications. TSPs have devoted a substantial portion
of their information systems' spending to fund such upgrades and
modifications and divert spending away from network performance management
products. Such changes in customers' spending patterns have had and could
continue to have a material adverse impact on the Company's sales, operating
results or financial condition.
The Company intends to continue the review, remediation and testing
of its Year 2000 status and, to the extent necessary, it will develop Year
2000 contingency plans for critical business purposes. In addition, there
can be no assurance that Year 2000 issues will not have a material adverse
effect on the Company if ADA and/or those with whom it conducts business are
unsuccessful in identifying or implementing timely solutions to any Year 2000
problems.
19
<PAGE>
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 fifteen U.S. patents granted. Additionally, the Company has
three pending U.S. patent 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.
20
<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 required.
21
<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 Report, the Company is not a party to any legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 12, 1999. At the
meeting, the stockholders elected Gary D. Cuccio, John F. Malone,
Kenneth E. Olson, Christopher B. Paisley, Peter P. Savage and Donald
L. Strohmeyer as directors of the Company for the ensuing year and
until their respective successors are elected. The following tables
sets forth the results of voting in this election:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD
------------- ---------- -----------
<S> <C> <C> <C>
Gary D. Cuccio 11,754,981 -- 100,263
John F. Malone 11,745,881 -- 109,363
Kenneth E. Olson 11,753,051 -- 102,193
Christopher B. Paisley 11,745,565 -- 109,679
Peter P. Savage 11,693,986 -- 161,258
Donald L. Strohmeyer 11,755,722 -- 99,522
</TABLE>
In addition, the stockholders voted on the following proposals:
(a) To amend the Company's 1998 Employee Stock Purchase Plan to
increase the maximum aggregate number of shares reserved for
issuance thereunder by 300,000:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD
------------- ---------- -----------
<S> <C> <C>
9,332,405 2,491,609 31,230
</TABLE>
This proposal was approved.
(b) To ratify the appointment of PricewaterhouseCoopers, LLP as the
Company's independent public accountants for the fiscal year
ending December 31, 1999:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD
------------- ---------- -----------
<S> <C> <C>
11,751,847 66,353 38,044
</TABLE>
This proposal was approved.
22
<PAGE>
ITEM 5. OTHER INFORMATION
Proposals of stockholders intended to be presented at the next
Annual Meeting of Stockholders of the Company must be received by the Company
at its offices at 9855 Scranton Road, San Diego, CA, 92121 not later than
December 13, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NUMBER
3.3 (1) Certificate of Incorporation of the Company
3.4 (2) Certificate of Agreement of Merger of the
Company and its California predecessor
3.5 (1) Bylaws of the Company
27.1 Financial Data Schedule
(1) Incorporated by reference to the Company's Current Report on Form 8-K
Dated December 23,1997 (File No. 0-23698)
(2) Incorporated by reference to the Company's Current Report on Form 8-K/A
Dated January 12, 1998 (File No. 0-23698)
(b) Reports on Form 8-K.
None.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ Donald L. Strohmeyer President, Chief Executive August 16, 1999
----------------------------
(Donald L. Strohmeyer) Officer and Director
(Principal Executive
Officer)
By: /s/ James L. Keefe Vice President, Finance and August 16, 1999
----------------------------
(James L. Keefe) Administration, Chief
Financial Officer, Secretary
(Principal Accounting
Officer)
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,465
<SECURITIES> 4,867
<RECEIVABLES> 5,306
<ALLOWANCES> (145)
<INVENTORY> 4,227
<CURRENT-ASSETS> 25,215
<PP&E> 13,271
<DEPRECIATION> (9,799)
<TOTAL-ASSETS> 30,878
<CURRENT-LIABILITIES> 8,732
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 22,133
<TOTAL-LIABILITY-AND-EQUITY> 30,878
<SALES> 16,065
<TOTAL-REVENUES> 16,065
<CGS> 6,425
<TOTAL-COSTS> 6,425
<OTHER-EXPENSES> 12,940
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> (1)
<INCOME-PRETAX> (3,074)
<INCOME-TAX> 95
<INCOME-CONTINUING> (3,169)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,169)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
