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FORM 10-K
U.S. Securities and Exchange Commission
Washington, D.C. 20549
(Mark One)
[x]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number: 0-21352
APPLIED INNOVATION INC.
(Name of registrant as specified in its charter)
DELAWARE 31-1177192
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5800 INNOVATION DRIVE, DUBLIN, OHIO 43016
(Address of principal executive offices)(Zip Code)
Issuer's telephone number: 614-798-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(Title of class)
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, and (2) has been subject to the filing requirements for
at least the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant,
9,208,500 shares, based on the $11.25 closing sale price on March 9, 2001, was
$103,595,625.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 15,911,879 shares of Common
Stock were outstanding at March 9, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to the Stockholders for the fiscal
year ended December 31, 2000, are incorporated by reference in Part II.
Part III - Proxy Statement for the Annual Meeting of Stockholders to be held
April 26, 2001, in part, as indicated.
2
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 26A of the Securities Act of 1933, as amended. The words
"anticipate," "believe," "expect," "estimate," and "project" and similar words
and expressions identify forward-looking statements which speak only as of the
date hereof. Investors are cautioned that such statements involve risks and
uncertainties that could cause actual results to differ materially from
historical or anticipated results due to many factors, including, but not
limited to, the factors discussed in "Business - Business Risks." The Company
undertakes no obligation to publicly update or revise any forward-looking
statements.
PART I
ITEM 1. BUSINESS.
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GENERAL
Applied Innovation Inc. ("Applied Innovation", "AI", or the "Company")
develops, manufactures and markets network mediation and network bridging
products and associated services to support the operation, maintenance,
administration and provisioning of the internal data network that is used by
telecommunications service providers to manage elements in their customer
service network systems. Applied Innovation's customers include all of the
Regional Bell Operating Companies, along with leading telecommunications,
Internet, cable and other high technology companies. Applied Innovation's
equipment is installed in over 20,000 locations ranging from remote facilities
to Central Offices. Applied Innovation is an ISO 9001 certified organization and
its products are compliant with the stringent Telcordia Network Element Building
Standards ("NEBS") Level 3 requirements. The Company's LuxPath Networks division
develops, manufactures and markets optical Ethernet access switching and
transmission products for the Ethernet service delivery market.
The Company's predecessor was incorporated in 1983 and engaged
primarily in development and preliminary testing activities until September
1984. In June 1986, the Company was formed as a Delaware corporation and the
Company's predecessor, an Ohio corporation, was merged into the Company solely
for the purpose of effecting a change in domicile. In 1995, the Company formed
its wholly owned subsidiary, Applied Innovation International Inc., a U.S.
Virgin Islands corporation, to act as a foreign sales corporation to market the
Company's products outside of the United States.
The Company's executive offices and manufacturing facilities are
located at 5800 Innovation Drive, Dublin, Ohio, 43016, telephone (614) 798-2000.
THE COMPANY'S MARKETS
The Company's products are designed to simplify telecommunications
networks and accelerate time to market of new products and services. This
provides improvements in
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operational efficiency for existing network deployments, while simultaneously
decreasing the cost of deploying the next generation network infrastructures
required to meet the rapid acceleration in demand for broadband services.
Applied Innovation offers a wide variety of solutions including
Telecommunication's Data Communications Networking ("DCN"), Enhanced Services
and Optical Broadband.
The Company's DCN product line provides the data communications
infrastructure for the network management systems which enable remote access,
fault management, security management, inventory, billing collection,
provisioning and performance management. Telecommunications networks include a
wide variety of Network Elements ("NE"), from a wide variety of vendors, using a
wide variety of technologies and include both modem, state-of-the-art devices,
and legacy equipment which has been installed for decades. Applied Innovation's
DCN products enable modern Operation Support Systems ("OSSs") to interoperate
with legacy network equipment, as well as allowing legacy OSSs to interoperate
with modern, state-of-the-art network equipment. This is achieved by unifying
the network interfaces presented to the OSS from the network elements using
protocol mediation, physical interface translations, port and logical circuit
concentration, application message translation and a variety of customized
mediation functions designed to meet specific vendor requirements. This enables
Applied Innovation to achieve the greatest amount of OSS and NE interoperability
in the industry. This simplification of the network infrastructure extends the
life of the existing capital equipment, reducing the need to "forklift" upgrades
of the network as new services and equipment are deployed. The unified OSS
interfaces also simplify the design of the DCN, eliminating the need for
multiple OSS systems and parallel networks. This reduces overall cost, improves
administration and management of the network, and allows for accelerated growth
of the network to meet the ever increasing demand for bandwidth. The merger and
acquisition trend in the telecommunications market increases the demand for
network integration solutions as service providers struggle to consolidate OSS
and management functions across the combined networks.
Applied Innovation's LuxPath Networks division delivers ideal solutions
for deploying high-speed broadband to both metro edge and campus fiber networks
addressing the rapidly growing demand for bandwidth to multi-dwelling units
("MDU"), multi-tenant units ("MTU"), corporate campuses and office parks. Using
LuxConnect(TM), native Ethernet service providers can rapidly accelerate
deployment of Gigabit Ethernet to remote sites, while lowering their maintenance
and administration costs. This technology simplifies the delivery of high-speed
optical broadband technology. LuxPath Network's targeted customer base is
comprised of both emerging service providers, such as Building Local Exchange
Carriers ("BLECs"), Ether Local Exchange Carriers ("ELECs"), Optical Local
Exchange Carriers ("OLECs"), Data Local Exchange Carriers ("DLECs") and
Competitive Local Exchange Carriers ("CLECs"), as well as established service
providers, such as Inter eXchange Carriers ("IXCs") and Incumbant Local Exchange
Carriers ("ILECs"), who wish to deploy higher bandwidth services to their
existing customers.
Our Enhanced Services division provides turn-key solutions which
include network planning and design, installation, systems integration and
project management. The competitive
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landscape of the telecommunications industry has created a shortage of the
trained and skilled personnel required for rapid growth and deployment of new
services. Utilizing Applied Innovation's expert staff, our existing customers
can leverage their existing work force in order to facilitate rapid growth with
lowered costs. New service providers can utilize Enhanced Services to provide
the critical skills required to design and initiate their initial deployment,
leveraging Applied Innovation's staff, capabilities and telecommunications
experience to lower their cost, investment and risk in permanent staff, as well
as improving their profitability.
The Company is expanding distribution for its products outside the
United States. The Company has taken steps to establish a presence, through
distributors, Original Equipment Manufacturer ("OEM") agreements, or otherwise,
in Western Europe, Australia, Mexico, the Philippines, Taiwan, South Korea,
South America and South Africa. The Company believes that countries currently
building telecommunications infrastructures will require centralized network
management and the supporting data communications capability supplied by its
products as well as support for rapid deployment of Gigabit Ethernet
Metropolitan Area Networks ("MANs").
The Company estimates that the Regional Bell Operating Companies
("RBOCs") control approximately half of the estimated 20,000 telecommunications
Central Office locations and the estimated 200,000 Controlled Environment Vault
("CEVs") and huts in the United States. The remaining locations are controlled
by a few large firms like GTE, Sprint, AT&T, MCIWorldcom, and over 1,000 smaller
independent firms, CLECs and long distance companies. Because of their relative
size, demand for product, and importance, the Company has concentrated its
marketing efforts on the larger telecommunications service providers. The
Company has historically received a large percentage of its annual net sales
from RBOCs. However, in the most recent calendar year, the Company experienced
rapid revenue growth in emerging service provider markets such as the IXC, CLEC
and utilities markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Each telecommunications service provider has a finite number of Central
Office facilities which limit their total capacity for the Company's products.
To the extent that the Company achieves significant penetration with the
Company's products into any single customer's Central Office facilities, it
cannot anticipate substantial additional sales of those existing products to the
customer. Future domestic sales growth to these customers depends on the
development and acceptance of new products and new releases of existing
products. Additional sales growth may be derived from additional sales to other
RBOCs, CLECs and long distance phone companies. See "Business - Business Risks -
Risks Associated with Customer Concentration; Dependence on Telecommunications
Industry."
PRODUCTS
HARDWARE SOLUTIONS
AISWITCH(TM)
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The AIswitch connects multiple generations of telecommunications
network equipment to computers that monitor, control and analyze field
conditions. The AIswitch incorporates the latest high speed microprocessor and
programmable gate array technology to bridge the hardware and software gaps
between old and new equipment, providing productivity gains and cost savings at
both the customer's Central Office and the Operations Centers. Practically all
vintages of telecommunications network equipment can be integrated with support
systems through the use of the AIswitch.
The AIswitch provides connectivity and visibility among the diverse
communication protocols and vendor equipment found in every telecommunications
network. Within a typical telecommunications service region, there may be as
many as 10,000 Network Elements to interface with a variety of equipment using
various communications protocols. Communications protocols are standards which
describe the way in which data is transmitted between computer systems.
Replacing existing equipment and updating it to conform to newer standards takes
place on extended schedules of up to twenty years, with successive introductions
of new technologies. For this reason, many of the Central Office and local site
locations utilize multiple generations of equipment from different vendors, each
with unique operating conditions.
A unique capability of the AIswitch and the Company's technical
organization is the ability to engineer custom interfaces for telecommunications
equipment produced by a variety of different manufacturers for
telecommunications service providers. Each AIswitch includes a wide variety of
functions and options that are configured to fit client needs.
The key to the AIswitch integration capability is its flexible
microprocessor controlled digital switching and protocol processing
capabilities. The AIswitch permits the use of industry-standard, open
architecture network building blocks to more easily connect different computers,
Network Elements and other intelligent Central Office equipment with one or more
network destinations. The Company transforms a complex multi-vendor environment
into an easily managed seamless network to increase the total efficiency of
Operations, Administration, Maintenance and Provisioning ("OAM&P") systems.
The AIswitch features NEBS Level 3 compliance, Hot Swap capability,
software download and is Simple Network Management Protocol ("SNMP") manageable.
It is a valuable tool to help enable service providers ensure 100% connectivity,
100% reliability and 100% availability from OS systems to Network Elements
across any data communication network.
The Company has licensed technology from Cisco Systems, Inc. ("Cisco")
which allows the Company to integrate a Cisco router into the AIswitch. Cisco's
routing technology is the most widely used and allows the AIswitch to work
smoothly with the routing technology already in use by most of the Company's
customers. See "Business - Business Risks - Reliance on Suppliers."
AISCOUT(TM)
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The AIscout is a self-contained, economical, mediation and
concentration device providing versatile functionality and hardware connectivity
for data communications networks. While designed for smaller Central Offices
("COs"), Controlled Environmental Vaults ("CEVS") and collocation sites, the
AIscout offers many features to meet a broad range of network needs. It is ideal
for protocol mediation and port concentration for transporting OAM&P data
between Network Elements and Operational Support Systems. The AIscout offers
remote software download capabilities, remote configuration, SNMP manageability,
configuration backup, download and restore and local craft access. These
management features contribute to more efficient allocation of customers'
manpower. By integrating the AIflex (Fiber Local Area Network Extender - a Wave
Division Multiplexer technology) within the AIscout, the OAM&P traffic may use
the same fiber as the payload traffic. This eliminates the need for routers and
channel service unit/data service unit ("CSU/DSUs"), which in turn flattens out
the network and eliminates both the need for installing a dedicated circuit and
the recurring monthly dedicated circuit costs.
AIFLEX(TM)
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The AIflex enables telecom companies to use existing fiber connections
from the Central Office to monitor and manage Controlled Environmental Vaults,
huts and shelters. The AIflex uses Wave Division Multiplexer ("WDM") technology
to enable telecommunication providers to manage remote locations as nodes on a
Central Office-based local area network ("LAN"). Connecting directly to existing
fiber without interfering with existing payload, AIflex transmits management
data between remote sites and the central office without additional cost and
delays associated with extra lines or routers. Utilizing existing fiber saves
money, saves recurring circuit costs, frees a resource generating circuit and
speeds deployment time.
AISPY(TM)
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AIspy is a comprehensive system for managing small telecom sites such
as Controlled Environmental Vaults, cell sites, huts, collocation sites, small
central offices and remote and unmanned facilities. AIspy provides monitoring
capabilities for the entire facility through a multitude of alarms and sensors.
AIspy is built to telephone company standards and provides the customer with
multiple management and communication path options. It has the capability to
control and record access into the monitored site through either keypad or
cellular phone ("DTMF") input.
NETWORK MANAGEMENT SYSTEMS
APPLIEDVIEW(TM)
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AppliedView is an element management system which allows the people and
operations systems in a Network Operations Center to monitor the status of
AIswitch units in remote locations such as Central Offices and Controlled
Environmental Vaults. The program includes
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software download and configuration backup for remote AIswitch units.
AppliedView gives Network Operations Center technicians the same view as a
technician standing in front of the switch. It provides centralized, constant
and continuous surveillance and provisioning of the AIswitch network. Through a
graphical user interface, this network manager reduces the cost and time
required for upgrades and remote site maintenance.
NEWEB(TM)
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NEWEB combines the AIswitch and Web technology for simple, secure
access to Network Elements from anywhere, anytime. NEWEB simplifies the job of
network management staff by providing a point-and-click interface, with
configurable drop-down menus for provisioning, troubleshooting and secure remote
access of Network Elements. By providing a wide variety of vendor specific
network element databases, which incorporates the specific command sets for each
element, it reduces training time for new staff and decreases the impact of
personnel turnover greatly. Improved productivity translates into lower costs,
greater flexibility and responsiveness, improved service quality and
time-to-market. NEWEB provides users with a simple intuitive means to locate
inventory and connect to specific network elements while providing a robust, yet
flexible security model. NEWEB gives technicians direct access, with personal
computers or workstations, to remote Network Elements. Users increase their
productivity by eliminating unnecessary field service calls. NEWEB also enables
users to diagnose and repair faults in less time while shortening their learning
curve for Network Element provisioning and troubleshooting.
LUXPATH NETWORKS DIVISION
LUXCONNECT(TM)
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The LuxConnect is a Gigabit Ethernet multiplexer that aggregates up to
eight channels of Gigabit Ethernet into a single protected 10-Gbps optical
signal. The LuxConnect is marketed through Applied Innovation's LuxPath Networks
division. Aggregation into a 10-Gbps signal significantly improves fiber
utilization and extends the reach for common Gigabit Ethernet optical
interfaces. The LuxConnect is more economical than SONET-based solutions in
terms of both equipment costs and operating expenses. While maintaining a lower
total cost of ownership, the LuxConnect provides significant performance
advantages as a native Ethernet transmission platform. By providing eight
virtual pipes for Gigabit Ethernet services, the LuxConnect flattens data
transport architectures, improving network administration and maintainability
while enhancing total network scalability, and provides distinct time-to-market
advantages in turning up new revenue-bearing services. Gigabit Ethernet
interfaces utilize hot-swappable Giga-bit Integrated Circuit ("GBIC") modules
which allow the user the flexibility to meet both existing and future optical
and copper connectivity requirements.
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Management options include SNMP Management, an embedded web server for
monitoring, provisioning and performance management, as well as the standard
async and Telnet based craft interfaces. An embedded web server utilizes
internal exstensible markup language ("XML") databases to ensure future
extensibility. Element management is provided using Applied Innovation's
AppliedView(TM) system.
Ethernet is ubiquitous; it is estimated that there are over 300 million
Ethernet ports in the US alone. LuxConnect is Ethernet-centric, leveraging the
client's current knowledge base. As an Ethernet platform, the LuxConnect does
not require the client to add or consume SONET and ATM expertise within their
organization. This improves network maintainability, easing many of the data
transport network's scalability issues and lowering the learning curve. This
brings dramatic advances in time-to-market for new services. The LuxConnect
makes it easier to deploy a data transport network.
ENHANCED SERVICES DIVISION
ENHANCED SERVICES
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Applied Innovation Services enable AI to provide value to our
customers. Leveraging the knowledge AI possesses regarding Telecommunications,
Enterprise Networking and Operational Support/Network Management Systems, AI
provides a unique and fresh perspective to innovating the way today's service
providers fulfill their business requirements. These services include project
planning, project management, network engineering, installation, system
integration and supplemental staffing.
MANUFACTURING AND OPERATIONS
All of the printed circuit boards used within the Company's products
are proprietary designs of the Company. Printed circuit boards and power
supplies used in each of the Company's products are contracted out to third
party manufacturing firms for assembly. These subassemblies are then shipped to
the Company for testing and final assembly. Procurement of materials is driven
through an enterprise resource planning ("ERP") system with production forecasts
supplied to contract firms for component ordering from sources supplied and
approved by the Company. The Company maintains and controls all documentation
and process requirements for products manufactured by the contract assembly
firms. The Company utilizes multiple assembly firms and is, therefore, not
dependent on any single third party manufacturer.
The Company performs multiple inspections on its products as well as
various test procedures prior to shipment to customers. These processes are
designed to assure product performance and reliability in the environments in
which the products will be used. The Company has made and continues to make
significant investments to attain quality assurance consistent with stringent
industry standards. The Company develops and manufactures its products in
accordance with NEBS and Generic Equipment Requirements guidelines. The Company
is International Standards Organization 9001 ("ISO 9001") certified.
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MARKETING, BUSINESS DEVELOPMENT, SALES AND SERVICES
The Company's products and services are sold primarily through its own
sales force, except for independent sales agents in Western Europe, South
Africa, Mexico, Australia, and South Korea. The Company is exploring alternative
distribution channels to allow sales of the Company's products to markets that
are not easily accessible nor cost effective for its own sales force. In
addition to the Dublin, Ohio headquarters, the Company maintains sales offices
in Atlanta, Chicago, Dallas, Denver, New York and Ontario, Canada.
The Company's marketing and business development staff consists of a
Vice President of Marketing and Business Development, a Director of Product Line
Management, a Director of Advanced Technology, a Director of Business
Development, Product Line Managers and an administrative staff. The Company's
sales department consists of a Senior Vice President, International Sales, a
Vice President of Sales, a Director of Enhanced Services Sales, a Director of
Sales Engineering, a Director of Emerging Markets (Sales), Regional Account
Managers, Account Managers, Sales Engineers and an administrative staff. The
Company's services division consists of a Vice President, Services Division, a
Director of Services Operations, Installation, Detail Engineering, Project
Management, Technical Support, Technical Training, and an administrative staff.
Sales leads are currently generated through target marketing to
telecommunications service providers, direct mail and trade shows. Sales leads
are followed up by personal contact from the Company's sales and marketing
staff. If sufficient interest exists, an on-site visit may be scheduled for the
purpose of making a sales presentation, which may include a product
demonstration.
The technical complexity of the Company's products and the relative
large size of customers create a long sales cycle for the Company's products.
The technical nature of the products and Central Office environment also
mandates a very technical sales force. The Company's sales force receives
incentive compensation based on increased levels of sales.
RESEARCH AND DEVELOPMENT
The Company's research and development ("R&D") activity is coordinated with
product management and business development to create product development teams
that focus on customer requirements. Enhancements to the AIswitch are focused on
increasing its capacity and adapting to the wide variety of existing and
emerging network element management interfaces. Investment is continuing in the
area of leveraging the AIswitch technology in creating smaller, more highly
integrated products, such as the AIscout and AIspy, which are appropriate for
the smaller central office ("CO"), controlled environment vault ("CEV"), or
Cabinet environment. Network Management/OSS products and services, such as NEWEB
and future enhancements and Optical networking technology, such as the
LuxConnect will continue to play a key position in the Company's R&D spending as
we expand our presence into these emerging markets.
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The Company spent $8,176,622, $7,479,496, and $11,979,875, on
Company-sponsored R&D during the fiscal years ended December 31, 2000, 1999, and
1998, respectively. R&D expenditures represented approximately 7.0%, 15.1%, and
22.3%, of annual sales in fiscal 2000, 1999, and 1998, respectively. During
1998, the Company incurred $6,263,000 in R&D related to the terminated Access
Products Group development activity. The Company expects to commit a substantial
amount of resources and cash to its research and development efforts during
2001. See "Business - Business Risks - New Products and Rapid Technological
Change; Need to Manage Product Transitions."
CUSTOMER SERVICE AND WARRANTY
The Company offers its customers a variety of services such as
technical support, project management, training, detail engineering,
installation and test and turn-up. Project managers interface between the
Company and customers for installation of new products and services and upgrades
of existing products. The project manager is also responsible for assuring that
all possible circumstances are anticipated prior to certifying the system for
full operation. Following installation, the project manager continues to monitor
the customer's system to ensure proper satisfaction.
The Company designs training programs to educate the customer's system
administration, operations and maintenance personnel to operate the system.
Classes are available on line and at the customer's site or at the Company's
headquarters. Additional training is also offered to the customer during system
upgrades and for new operations personnel.
The Company's field service department provides custom design and
installation services for telecommunications network equipment and software. The
Company believes that its field service department complements and enhances the
sale of its products.
The Company warrants its products for a minimum of one year and up to
five years, as negotiated under contract. Customers may also purchase extended
warranty contracts with guaranteed overnight factory replacement service for
circuit boards or system modules in the event of equipment failure. Software
revisions to the Company's products are also available as part of the extended
warranty contracts, or may be purchased by the customer. In addition, for an
additional charge, on-site spares are available for those customers who require
immediate replacement. The Company also provides a 24-hour Service Hotline for
instant access to its field service and support departments. A toll-free 800
number is also offered.
Warranty expense represented approximately 1.5%, 2.4%, and 4.5% of
annual net sales in 2000, 1999, and 1998, respectively. See "Business - Business
Risks - Risk of Product Defects."
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COMPETITION
There are numerous manufacturers of data communications equipment.
Manufacturers of these products frequently specialize their products for
specific applications and could enter the Company's target markets. Significant
competition exists from several well-established companies having resources
superior to those of the Company and from relatively new but aggressive
companies.
Competition for the Company's DCN products arises primarily from
suppliers of telecommunications switching and transmission equipment.
Competition comes from other data communications suppliers, such as Cisco
Systems, Dantel, ACT Networks, Badger Technology, and IMCI Technologies. In some
cases, newer products or redesigned older products from these suppliers compete
with the Company's products. See "Business - Business Risks - Competition."
Competition for the Company's LuxPath division includes Nbase/Xyplex,
Hitachi, Riverstone, Lucent, Nortel and Cisco Systems.
Competition for the Company's Enhanced Services division include EF&I,
Lucent Netcare, Sprint North Supply and Marconi.
PERSONNEL
As of March 16, 2001, the Company had 310 full-time and part-time
employees. The Company's employees are distributed among the following
departments: Sales and Marketing (64); Research and Development (72); Customer
Service (81); Manufacturing (55); and Operations (38). The Company anticipates
that it will continue to increase the number of its employees as it grows.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. In addition to the
other information in this report, readers should carefully consider that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause the
Company's actual consolidated results of operations for the year ended December
31, 2000, and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Risks Associated with Customer Concentration; Dependence on
Telecommunications Industry. A significant portion of the Company's revenues in
each fiscal quarter since inception has been derived from substantial orders
placed by large organizations, such as the RBOCs. As
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a result, the Company's net sales often have been concentrated among a
relatively small number of customers. In fiscal 2000, 1999, and 1998, net sales
from the Company's two, two and five largest customers represented approximately
61%, 42%, and 75%, respectively, of the Company's total net sales. The Company
expects that it will continue to be dependent upon a limited number of customers
for a significant portion of its revenues in future periods. None of the
Company's customers are contractually obligated to license or purchase
additional products or services from the Company. As a result of this customer
concentration, the Company's business, operating results and financial condition
could be materially adversely affected by the failure of anticipated orders to
materialize or by deferrals or cancellations of orders. In addition, there can
be no assurance that revenue from customers that have accounted for significant
net sales in past periods, individually or as a group, will continue, or if
continued will reach or exceed historical levels in any future period.
Furthermore, such customers are concentrated in the telecommunications industry.
Accordingly, the Company's future success depends upon the capital spending
patterns of such customers and the continued demand by such customers for the
Company's products and services. Additionally, any future mergers and
acquisitions among our customers could impact future orders from such customers.
The Company's operating results may in the future be subject to substantial
period-to-period fluctuations as a consequence of such customer concentration
and factors affecting capital spending in the telecommunications industry.
Product Concentration. Revenue from the sale, service and support of
the Company's DCN family of products has accounted for a substantial portion of
the Company's net sales since inception. The Company believes that revenue from
the sale, service and support of the DCN products will continue to account for a
significant portion of the Company's net sales in fiscal 2001. Therefore, the
Company's future operating results, particularly in the near term, are
significantly dependent upon the continued market acceptance of the DCN
products, improvements to the DCN product framework and new and enhanced
development tools and network operations support. There can be no assurance that
the AIswitch will continue to achieve market acceptance or that the Company will
be successful in developing, introducing or marketing improvements to the
AIswitch framework or new or enhanced development tools and applications. The
life cycles of products, including development tools and applications, are
difficult to estimate due in large part to the recent emergence of many of the
Company's markets, the effect of future product enhancements and competition. A
decline in the demand for DCN products as a result of competition, technological
change or other factors would have a material adverse effect on the Company's
business, operating results and financial condition.
New Products, Research and Development, and Rapid Technological Change;
Need to Manage Product Transitions. The market for the Company's products is
characterized by rapidly changing technologies, evolving industry standards,
frequent new product introductions and rapid changes in customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. As a result, the life cycles of the Company's products are
difficult to estimate. The Company's future success will depend on its ability
to enhance its existing products and to develop and introduce, on a timely and
cost-effective basis, new
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products and product features that keep pace with technological developments and
emerging industry standards and address the increasingly sophisticated needs of
its customers. The Company is attempting to ensure future success by investing
heavily in its research and development effort. However, there can be no
assurance that the Company will be successful in developing and marketing new
products or product features that respond to technological change or evolving
industry standards, that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of these
new products and features, or that its new products or product features will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce enhancements of existing products or new products in a
timely manner, the Company's business, operating results and financial condition
will be materially adversely affected.
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
obsolete or 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
one or more of its competitors will not cause customers to defer purchasing
existing Company products. Such deferment of purchases could have a material
adverse effect on the Company's business, operating results and financial
condition.
Competition. Most of the Company's current and potential competitors
have longer operating histories and significantly greater financial, technical,
sales, customer support, marketing and other resources, as well as greater name
recognition and a larger installed base of their products and technologies than
the Company. There can be no assurance that the Company's current or potential
competitors will not develop products comparable or superior to those developed
by the Company or adapt more quickly than the Company to new technologies,
evolving industry trends or changing customer requirements. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not have a material adverse effect on its business, operating results and
financial condition.
Dependence Upon Proprietary Technology; Risk of Third Party Claims of
Infringement. The Company's success and ability to compete is dependent in part
upon its proprietary software technology. The Company relies on a combination of
trade secret, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect its proprietary rights. The Company
currently has no patents or patent applications pending. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary technology will prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or
-13-
14
features similar to the Company's products. In addition, effective copyright and
trade secret protection may be unavailable or limited in certain foreign
countries. While the Company believes that its products and trademarks do not
infringe upon the proprietary rights of third parties, there can be no assurance
that the Company will not receive future communications from third parties
asserting that the Company's products infringe, or may infringe, the proprietary
rights of third parties. The Company expects that software product developers
will be increasingly subject to infringement claims as a number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlap. Any such claims, with or
without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel, cause product shipment delays
or require the Company to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to develop non-infringing technology or
license the infringed or similar technology, the Company's business, operating
results and financial condition could be materially adversely affected.
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 at all. Although
the Company believes that alternative software is available from other
third-party suppliers, the loss of or inability to maintain any of these
software licenses or the inability of the third parties to timely and
cost-effectively enhance their products in response to changing customer needs,
industry standards or technological developments 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 would have
a material adverse effect on the Company's business, operating results and
financial condition.
Reliance on Suppliers. The Company purchases raw material and licenses
technology from a number of domestic and foreign sources. The Company believes
that currently there are acceptable alternatives to the suppliers of raw
material and technology used in its products which could be substituted for over
time, with the exception of network routing products supplied by Cisco Systems,
Inc. The Company currently purchases network routing products and licenses
technology regarding the same from Cisco Systems, Inc. pursuant to a Technology
Agreement. The term of the Technology Agreement expires on December 31, 2001 and
automatically renews for one year periods, unless either party elects not to
renew. Additionally, the Technology Agreement may be terminated by either party
for any reason upon six months notice. The Company believes that some of its
customers place a high value on the incorporation of network routing products
and technology from Cisco Systems, Inc. into the Company's products. While the
Company believes that it could obtain similar quality network routing products
and technology from other vendors, the termination of the Technology Agreement
could materially adversely affect the acceptance of the Company's products,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
-14-
15
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its existing cash, cash equivalents, investments,
cash to be generated from future operations, and funds which may be obtained
from future financing activities will provide sufficient capital to meet the
business needs of the Company. See "Management's Discussion and Analysis of
Financial Condition and the Results of Operations - Liquidity and Capital
Resources." The Company may need to raise additional funds through public or
private debt or equity financings in order to take advantage of unanticipated
opportunities, including more rapid expansion or acquisitions of complementary
businesses or technologies, or to develop new or enhanced services and related
products or otherwise respond to unanticipated competitive pressures. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the then current stockholders of the Company may be
reduced and such equity securities may have rights, preferences or privileges
senior to those of the holders of the Company's common stock. There can be no
assurance that additional financing will be available on terms favorable to the
Company, or at all. If adequate funds are not available or are not available on
acceptable terms, the Company may not be able to take advantage of unanticipated
opportunities, develop new or enhanced services and related products or
otherwise respond to unanticipated competitive pressures and the Company's
business, operating results and financial condition could be materially
adversely affected.
Future Operating Results Uncertain. Although the Company has previously
experienced growth in revenues and net income, the Company expects that
historical growth rates are not sustainable and such growth rates should not be
considered indicative of future growth, if any. There can be no assurance that
the Company's revenues will grow or be sustained in future periods or that the
Company will be profitable in any future period.
Risk of Product Defects. Products as complex as those offered by the
Company may contain defects or failures when introduced or when new versions or
enhancements are released. The Company has in the past discovered defects in
certain of its products. Although the Company has remedied all known material
defects in its products, there can be no assurance that, despite testing by the
Company and its customers, errors will not be found in existing or new products
or releases, resulting in delay or loss of revenue, loss of market share or
failure to achieve market acceptance or substantial warranty expense. Any such
occurrence could have a material adverse effect upon the Company's business,
operating results and financial condition.
Potential Fluctuations in Quarterly Results; Seasonality. The Company's
quarterly operating results have in the past and will in the future vary
significantly depending on factors such as the timing of significant orders and
shipments, capital spending patterns of the Company's customers, changes in
pricing policies by the Company or its competitors, the lengthy sales cycle of
the Company's products, increased competition, changes in operating expenses,
mergers and acquisitions among customers, personnel changes, demand for the
Company's products, the number, timing and significance of new product and
product enhancement announcements by the Company and its competitors, the
ability of the Company to develop, introduce and market new and enhanced
versions of its products on a timely basis, the
-15-
16
mix of direct and indirect sales and general economic factors, among others. A
significant portion of the Company's revenues have been, and will continue to
be, derived from substantial orders placed by large organizations, such as the
RBOCs, and the timing of such orders and their fulfillment has caused and will
continue to cause material fluctuations in the Company's operating results,
particularly on a quarterly basis. Due to the foregoing factors, quarterly net
sales and operating results have been and will continue to be difficult to
forecast. Revenues are also difficult to forecast because the Company's sales
cycle, from initial evaluation to product shipment, varies substantially from
customer to customer. For these and other reasons, the sales cycle associated
with the purchase of the Company's products is typically lengthy and subject to
a number of significant risks, including customers' budgetary constraints and
internal acceptance reviews, over which the Company has little or no control.
The Company's expense levels are based, in part, on its expectations as to
future revenue levels. If revenue levels are below expectations, operating
results are likely to be materially adversely affected. In particular, because
only a small portion of the Company's expenses varies with net sales, net income
(loss) may be disproportionately affected by a reduction in net sales. The
Company's business has experienced and is expected to continue to experience
significant seasonality, in part due to an increase in capital expenditures by
customers in certain quarters. Based upon all of the foregoing, the Company
believes that quarterly net sales and operating results are likely to vary
significantly in the future and that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Further, it is likely that in some future
quarter, the Company's net sales or operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock could be materially adversely affected.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continuing contributions of its key management,
sales, professional services, customer support and product development
personnel. In particular, the Company would be materially adversely affected if
it were to lose the services of Gerard B. Moersdorf, Jr., Chairman of the Board,
who has provided significant leadership and direction to the Company since its
inception. The Company has obtained key man life insurance on the life of Mr.
Moersdorf in the amount of $10,000,000, payable to the Company. Additionally,
the Company could also be materially affected were it to lose the services of
Robert L. Smialek, Chief Executive Offcer and President. The loss of other key
management or technical personnel could adversely affect the Company. The
Company believes that its future success will depend in large part upon its
ability to attract and retain highly-skilled managerial, sales, professional
services, customer support and product development personnel. The Company has at
times experienced and continues to experience difficulty in recruiting qualified
personnel. Competition for qualified personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. In addition, there are only a limited number of qualified
professional services and customer support engineers, and competition for such
individuals is especially intense. Furthermore, competitors have in the past and
may in the future attempt to recruit the Company's employees. Failure to attract
and retain key personnel could have a material adverse effect on the Company's
business, operating results and financial condition.
-16-
17
Limited Market; Volatility of Stock Price. Although the Company is
listed on the Nasdaq National Market, there can be no assurance that an active
or liquid trading market in the Company's common stock will continue. The market
price of the shares of the Company's common stock is likely to be highly
volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, developments with respect to copyrights or proprietary rights,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the common stocks of technology
companies. These types of broad market fluctuations may adversely affect the
market price of the Company's common stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been initiated against such company. Such litigation
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
Anti-Takeover Provisions; Certain Provisions of Delaware Law;
Certificate of Incorporation and By-Laws. Certain provisions of Delaware law and
the Company's Certificate of Incorporation and By-Laws could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. The Company's
By-Laws provide for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. Such classification of the Board
of Directors expands the time required to change the composition of a majority
of directors and may tend to discourage a proxy contest or other takeover bid
for the Company. Additionally, the directors, executive officers and existing
principal stockholders of the Company and their affiliates beneficially own
approximately 44.0% of the outstanding shares of the Company's Common Stock.
Such concentration of ownership may have the effect of delaying or preventing a
change in control of the Company.
Concentration of Stock Ownership. The present directors, executive
officers and principal stockholders of the Company and their affiliates
beneficially own approximately 44.0% of the outstanding shares of the Company's
Common Stock. In particular, Gerard B. Moersdorf, Jr. and his spouse own
approximately 41.1% of the outstanding shares of Common Stock. As a result,
these stockholders are able to exercise significant influence over matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company.
Revenue Fluctuations due to Reseller Pass-Through. One time systems
integration project opportunities may contribute to significant fluctuations in
top line revenues on a non-recurring basis. These contributions are generally at
lower margin than our core product line sales, and may affect quarterly margin
performance. However, these projects do make significant contributions to our
overall net profits, and do not affect long term profit growth for the Company.
-17-
18
ITEM 2. PROPERTIES.
----------
The Company headquarters is a 115,000 square foot modern corporate
office and manufacturing facility in Dublin, Ohio. All of the Company's
manufacturing, administrative and research and development activities and a
substantial portion of its marketing activities are conducted at this location.
The Company owns the building and the approximately 33 acres of land on which it
is situated.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
Not applicable.
-18-
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------------------
The Company's common stock has been traded in the over-the-counter
market since 1986. The common stock was traded on the NASDAQ OTC Bulletin Board
until May 18, 1993. From May 18, 1993 to November 26, 1993 the common stock was
traded on the NASDAQ Small Cap Market. On November 29, 1993 the common stock
began trading on the NASDAQ National Market. The following table sets forth, for
the periods indicated, the high and low bid prices for the Company's common
stock. The prices shown represent quotations between dealers, without adjustment
for retail markups, markdowns or commissions and may not represent actual
transactions.
2000 1999
---- ----
High Low High Low
Q1 $14.56 $ 7.75 $5.19 $3.13
Q2 $12.13 $ 7.00 $5.75 $2.81
Q3 $27.06 $10.25 $4.94 $3.50
Q4 $16.50 $ 7.50 $9.00 $3.40
-----------------------------------------------------------------
At March 9, 2001, the Company had 531 stockholders of record.
The Company has not paid any cash dividends and presently anticipates
that all of its future earnings will be retained for development of its
business. The Company does not anticipate paying cash dividends on its common
stock in the foreseeable future. The payment of any future dividends would be at
the discretion of the Company's Board of Directors and would depend upon, among
other things, future earnings, operations, capital requirements, the general
financial condition of the Company and general business conditions. Although the
Company's ability to pay dividends is not currently restricted by any of its
financing agreements, the Company may be subject to such restrictions in the
future.
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
The information required by this item is included under the caption
"Selected Consolidated Financial Data " in the Company's Annual Report to
Stockholders and is incorporated herein by reference.
-19-
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
--------------
The information required by this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report to Stockholders and is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
The Company does not have any material exposure to interest rate
changes, commodity price changes, foreign currency fluctuations, or similar
market risks. Furthermore, the Company has not entered into any derivative
contracts and the Company has no debt outstanding as of December 31, 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
The information required by this item is included under the caption
"Consolidated Financial Statements" in the Company's Annual Report to
Stockholders and is incorporated herein by reference, except that our Financial
Statement Schedule and Independent Auditors' Report on Financial Statement
Schedule are included in response to Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
-20-
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The information appearing under the caption "ELECTION OF DIRECTORS" on
pages 4 through 15 of the Company's Proxy Statement relating to the Company's
Annual Meeting of Stockholders to be held on April 26, 2001 (the "Proxy
Statement"), and the information appearing under the caption "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" on page 24 of the Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The information appearing in the Proxy Statement under the caption
"ELECTION OF DIRECTORS - Executive Compensation" on pages 8 through 15 of the
Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
The information appearing in the Proxy Statement under the caption
"OWNERSHIP OF COMMON STOCK BY PRINCIPAL STOCKHOLDERS" on page 2, and under the
caption "SECURITY OWNERSHIP OF MANAGEMENT" on page 3 of the Proxy Statement, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The information appearing in the Proxy Statement under the caption
"ELECTION OF DIRECTORS - Related Party Transactions" on page 12 is incorporated
herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
----------------------------------------------------------------
(a)(1) The following documents are filed as part of this report:
Consolidated Balance Sheets as of December 31, 2000 and 1999.
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999, and 1998.
Notes to Consolidated Financial Statements.
-21-
22
(a)(2) Schedule II (Valuation and Qualifying Accounts)
(a)(3) Exhibits: The following exhibits are filed as part of this report:
EXHIBIT NO. DESCRIPTION
3.1 Certificate of Incorporation of the Company. (Reference is
made to Exhibit 3.1 to the Company's Registration Statement on
Form 10-SB, filed with the Securities and Exchange Commission
on March 10, 1993, and incorporated herein by reference).
3.2 By-laws of the Company, as amended. (Reference is made to
Exhibit 3.2 to the Company's Registration Statement on Form
10-SB, filed with the Securities and Exchange Commission on
March 10, 1993, and incorporated herein by reference).
10.1 Company's Amended and Restated 1986 Incentive Stock Option
Plan, including form of Stock Option Agreement. (Reference is
made to Exhibit 10.1 to the Company's Registration Statement
on Form 10-SB, filed with the Securities and Exchange
Commission on March 10, 1993, and incorporated herein by
reference).
10.2 Company's 1986 Amended and Restated Non-Statutory Stock Option
Plan, including form of Stock Option Agreement. (Reference is
made to Exhibit 10.2 to the Company's Registration Statement
on Form 10-SB, filed with the Securities and Exchange
Commission on March 10, 1993, and incorporated herein by
reference).
10.3 Form of Confidentiality, Assignment and Non-Competition
Agreement between the Company and employee officers.
(Reference is made to Exhibit 10.3 to the Company's
Registration Statement on Form 10-SB, filed with the
Securities and Exchange Commission on March 10, 1993, and
incorporated herein by reference).
10.4 Technology Agreement, dated November 12, 1996, between the
Company and Cisco Systems, Inc. (Reference is made to Exhibit
10.4 to the Company's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission on March 31, 1998, and
incorporated herein by reference).
10.5 Employment Agreement between the Company and William J.
Mrukowski. (Reference is made to Exhibit 10.7 to the Company's
Annual Report on Form 10-K, filed with the Securities and
Exchange Commission on March 31, 1998, and incorporated herein
by reference).
-22-
23
10.6 Form of Indemnification Agreement between the Company and
officers and directors. (Reference is made to Exhibit 10.8 to
the Company's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on March 31, 1994, and
incorporated herein by reference).
10.7* Schedule of Indemnification Agreements.
10.8 Company's Amended and Restated 1996 Stock Option Plan.
(Reference is made to Exhibit 10.11 to the Company's Annual
Report on Form 10-K, filed with the Securities and Exchange
Commission on March 30, 2000, and incorporated herein by
reference).
10.9 Employment Agreement between the Company and Robert L. Smialek
(Reference is made to Exhibit 10.1 to the Company's Quarterly
Statement on Form 10-Q, filed with the Commission on November
14, 2000, and incorporated herein by reference).
10.10* Employment Agreement between the Company and Gerard B.
Moersdorf, Jr.
10.11* Employment Agreement between the Company and Michael P.
Keegan.
11* Statement re: computation of earnings per share
13* Portions of the Annual Report to Stockholders for year ended
December 31, 2000
23* Consent of KPMG LLP
24* Powers of Attorney
99* Independent Auditors' Report
------------------------
* Filed herewith.
(b) None
(c) Exhibits - The exhibits to this report follow the signature page.
(d) Financial Statement Schedules - The financial statement schedule to
this report follows the signature page and the independent auditors' report
thereon is included in Exhibit 99 to this Report on Form 10-K.
-23-
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
APPLIED INNOVATION INC.
Date: March 26, 2001 By: /s/ Robert L. Smialek
-------------------------------------
Robert L. Smialek,
President and Chief Executive Officer
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 and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Robert L. Smialek President and March 26, 2001
- ------------------------- Chief Executive Officer
Robert L. Smialek and Director
(Principal Executive Officer)
/s/ Michael P. Keegan Vice President, March 26, 2001
- ------------------------- Chief Financial Officer
Michael P. Keegan and Treasurer
(Principal Financial and
Principal Accounting Officer)
*Gerard B. Moersdorf, Jr. Director March 26, 2001
- -------------------------
Gerard B. Moersdorf, Jr.
*James H. Blough Director March 26, 2001
- -------------------------
James H. Blough
*Curtis A. Loveland Director March 26, 2001
- -------------------------
Curtis A. Loveland
*Gerard B. Moersdorf, Sr. Director March 26, 2001
- -------------------------
Gerard B. Moersdorf, Sr.
*Richard W. Oliver Director March 26, 2001
- -------------------------
Richard W. Oliver
-24-
25
*Thomas W. Huseby Director March 26, 2001
- -------------------------
Thomas W. Huseby
*Alexander B. Trevor Director March 26, 2001
- -------------------------
Alexander B. Trevor
*William H. Largent Director March 26, 2001
- -------------------------
William H. Largent
*By: /s/ Robert L. Smialek
-------------------------
Robert L. Smialek
(Attorney-in-Fact)
-25-
26
APPLIED INNOVATION INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
/---------Additions--------/
----------------------------
Balance at Charged to Charged to
beginning of costs and other Balance at
Description period expense accounts Deductions end of period
- ----------- ------ ------- -------- ---------- -------------
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts $ 228,284 $ 147,091 $-- $ 119,258 $ 256,117
Allowance for obsolete inventory 112,116 1,153,556 -- 1,105,672 160,000
Warranty provision 2,155,325 2,640,076 -- 2,150,663 2,644,738
YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful accounts $ 256,117 $ 162,103 $-- $ 100,673 $ 317,547
Allowance for obsolete inventory 160,000 -- -- -- 160,000
Warranty provision 2,644,738 1,602,570 -- 2,369,577 1,877,731
YEAR ENDED DECEMBER 31, 2000:
Allowance for doubtful accounts $ 317,547 $ 464,548 $-- $ 91,493 $ 690,602
Allowance for obsolete inventory 160,000 30,000 -- -- 190,000
Warranty provision 1,877,731 1,975,811 -- 2,518,756 1,334,786
-26-