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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO 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.
(Exact name of registrant as specified in its charter)
DELAWARE 31-1177192
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
5800 INNOVATION DRIVE, DUBLIN, OHIO 43016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (614)798-2000
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 __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of May 9, 2003 there were 14,975,067 shares of common stock outstanding.
APPLIED INNOVATION INC.
Table of Contents
Page
----
Facing Page 1
Table of Contents 2
Part I. Financial Information
- ------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002 3
Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
Item 4. Controls and Procedures 14
Part II. Other Information
- --------------------------
Items 1 - 5. 14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 14
(b) Reports on Form 8-K - None 14
Signatures 15
Certifications 16 - 18
-2-
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
APPLIED INNOVATION INC.
Consolidated Balance Sheets
(Unaudited)
Assets March 31, 2003 December 31, 2002
- ------ -------------------- --------------------
Current assets:
Cash and cash equivalents $ 10,722,536 $ 8,986,292
Short term investments 6,877,943 8,028,510
Accounts receivable, net 4,104,602 5,240,248
Inventory, net 3,560,611 3,409,842
Income taxes receivable 3,577,999 3,079,534
Other current assets 545,837 668,975
Deferred income taxes 2,044,000 2,050,000
-------------------- --------------------
Total current assets 31,433,528 31,463,401
Property, plant and equipment, net 7,489,391 7,793,014
Investments 6,410,610 6,949,215
Intangible assets, net 288,750 341,250
Goodwill 3,507,201 3,477,001
Deferred income taxes 226,000 226,000
Other assets 135,027 135,027
-------------------- --------------------
$ 49,490,507 $ 50,384,908
==================== ====================
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 735,897 $ 1,621,148
Accrued expenses:
Warranty 863,228 542,651
Payroll and related expenses 817,433 647,149
Restructuring 310,445 582,811
Other accrued expenses 1,480,708 1,039,227
Deferred revenue 3,175,290 1,902,556
-------------------- --------------------
Total current liabilities 7,383,001 6,335,542
Note payable 750,000 750,000
-------------------- --------------------
Total liabilities 8,133,001 7,085,542
Stockholders' equity:
Preferred stock; $.01 par value; authorized 5,000,000 shares;
none issued and outstanding - -
Common stock; $.01 par value; authorized 55,000,000 shares; issued and
outstanding 14,975,067 shares in 2003 and 14,950,749 in 2002. 149,751 149,507
Additional paid-in capital 5,911,810 5,845,740
Note receivable for common stock (382,783) (382,783)
Retained earnings 35,665,111 37,680,937
Accumulated other comprehensive gain, net 13,617 5,965
-------------------- --------------------
Total stockholders' equity 41,357,506 43,299,366
-------------------- --------------------
$ 49,490,507 $ 50,384,908
==================== ====================
See accompanying notes to consolidated financial statements.
-3-
APPLIED INNOVATION INC.
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31,
2003 2002
------------ ------------
Sales:
Products $ 4,389,950 $ 7,801,455
Services 1,218,792 1,681,189
------------ ------------
Total sales 5,608,742 9,482,644
Cost of sales:
Cost of sales - products 2,611,129 4,284,125
Cost of sales - services 641,600 1,140,037
------------ ------------
Total cost of sales 3,252,729 5,424,162
Gross profit 2,356,013 4,058,482
Operating expenses:
Selling, general and administrative 3,586,099 5,283,089
Research and development 1,400,117 2,442,414
Restructuring charges -- 633,922
------------ ------------
Loss from operations (2,630,203) (4,300,943)
Interest income and other income, net 110,377 194,700
------------ ------------
Loss before income taxes (2,519,826) (4,106,243)
Income taxes (504,000) (1,232,000)
------------ ------------
Net loss $ (2,015,826) $ (2,874,243)
============ ============
Loss per share:
Basic loss per share $ (0.13) $ (0.19)
============ ============
Diluted loss per share $ (0.13) $ (0.19)
============ ============
Weighted-average shares outstanding
for basic loss per share 14,975,067 15,394,584
============ ============
Weighted-average shares outstanding
for diluted loss per share 14,975,067 15,394,584
============ ============
See accompanying notes to consolidated financial statements.
-4-
APPLIED INNOVATION INC.
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss $ (2,015,826) $ (2,874,243)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 322,710 466,303
Amortization of intangible assets 52,500 52,500
Provision for doubtful accounts (50,396) 30,000
Gain on disposal of assets (2,115) (1,060)
Tax benefit of options exercised -- 340
Effects of changes in operating assets and liabilities:
Accounts receivable 1,186,042 (773,741)
Inventory (150,769) 447,465
Income taxes (498,465) (165,442)
Other current assets 123,138 (14,712)
Other assets -- 12,378
Accounts payable (885,251) (119,171)
Accrued expenses 629,776 (889,579)
Deferred revenue 1,272,734 (152,254)
------------ ------------
Net cash used in operating activities (15,922) (3,981,216)
------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (32,899) (347,046)
Proceeds from sales of property, plant and equipment 15,927 1,865
Purchases of investments (4,203,552) (2,565,718)
Maturities of investments 5,705,560 2,848,302
Sales of investments 200,816 244,853
------------ ------------
Net cash provided by investing activities 1,685,852 182,256
------------ ------------
Cash flows from financing activities:
Common stock repurchased -- (2,027,042)
Proceeds from issuance of common stock 66,314 7,313
------------ ------------
Net cash provided by (used in) financing activities 66,314 (2,019,729)
------------ ------------
Increase (decrease) in cash and cash equivalents 1,736,244 (5,818,689)
Cash and cash equivalents - beginning of period 8,986,292 15,698,594
------------ ------------
Cash and cash equivalents - end of period $ 10,722,536 $ 9,879,905
============ ============
See accompanying notes to consolidated financial statements.
-5-
APPLIED INNOVATION INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of presentation - The consolidated balance sheet as of March 31, 2003,
and the consolidated statements of operations and cash flows for the three
months ended March 31, 2003 and 2002, have been prepared by the Company without
audit. In the opinion of management, all adjustments necessary to present
fairly, in accordance with generally accepted accounting principles in the
United States of America, the financial position, results of operations and cash
flows for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's December 31, 2002 Annual Report on Form 10-K.
The results of operations for the three months ended March 31, 2003 are not
necessarily indicative of the results for the full year.
2. Inventory - Inventory is stated at the lower of cost or market. Cost is
computed using standard cost, which approximates actual cost on the first-in,
first-out basis, net of allowances for estimated obsolescence. Major classes of
inventory at March 31, 2003 and December 31, 2002 are summarized below:
March 31, 2003 December 31, 2002
-------------- -----------------
Raw materials $ 3,345,302 $ 3,508,806
Work-in-process 58,206 15,004
Finished goods 1,364,262 993,191
----------- -----------
4,767,770 4,517,001
Reserve for obsolescence (1,207,159) (1,107,159)
----------- -----------
$ 3,560,611 $ 3,409,842
=========== ===========
3. Warranty - During the three months ended March 31, 2003, the Company
initiated a product recall after a manufacturing defect was identified in a
power supply component that was purchased from a third party manufacturer,
integrated into the Company's products, and shipped to customers in 1997 and
1998. The Company estimated the number of units that it expects customers to
return in the recall and has recorded the associated costs of $450,000 in the
first quarter to recall and replace those units. The Company is considering
making a claim against the power supply component manufacturer and a claim under
its product recall insurance. However, since there is no assurance of whether or
when either of such claims may be paid, the Company has not reduced the first
quarter charge to reflect such contingent claims at this time.
-6-
The Company's warranty activity for the three months ended March 31, 2003 is
summarized below:
Beginning balance $ 542,651
Warranty provision 634,710
Warranty costs incurred (314,133)
-----------------
Ending balance $ 863,228
=================
4. Income taxes - The Company has recorded its interim income tax provision
based on estimates of the Company's effective tax rate expected to be applicable
for the full fiscal year. Estimated effective rates recorded during interim
periods may be periodically revised, if necessary, to reflect current estimates.
5. Comprehensive loss - Comprehensive loss for the three months ended March 31,
2003 and 2002 was $2,008,174 and $2,917,344, respectively. The sole adjustment
necessary to reconcile net loss with comprehensive loss is for the net
unrealized gain (loss), net of taxes, on available-for-sale securities, which
was $7,652 for the three months ended March 31, 2003 and ($43,101) for the three
months ended March 31, 2002.
6. Loss per share - Basic loss per share is calculated using the
weighted-average number of common shares outstanding during the periods. Diluted
loss per share is calculated using the weighted-average number of common and
common equivalent shares outstanding during the periods. Due to the Company's
net loss for the three months ended March 31, 2003 and 2002, no common
equivalent shares were included in the calculation of diluted loss per share for
either period because their effect would have been anti-dilutive. The Company's
weighted-average number of options which were in-the-money and, therefore,
potentially dilutive for the three months ended March 31, 2003 and 2002 were
380,628 and 671,519, respectively.
Stock options which were out-of-the-money and, therefore, were anti-dilutive
under the treasury stock method have also been excluded from the calculation of
diluted loss per share. The Company's stock options outstanding at March 31,
2003 and 2002 which were excluded because they were out-of-the-money were
1,503,120 and 1,965,750, respectively.
Shares of common stock used in calculating loss per share differed from
outstanding shares reported in the consolidated financial statements as follows:
Three months ended Three months ended
March 31, 2003 March 31, 2002
--------------- --------------
Basic loss Diluted loss Basic loss Diluted loss
per share per share per share per share
---------- ------------ ---------- ------------
Outstanding shares 14,975,067 14,975,067 15,140,749 15,140,749
Effect of weighting changes
in outstanding shares -- -- 253,835 253,835
---------- ---------- ---------- ----------
Adjusted shares 14,975,067 14,975,067 15,394,584 15,394,584
========== ========== ========== ==========
7. Stock-based compensation plans - The Company accounts for stock option grants
under its stock option plans and for stock purchases under its employee stock
purchase plan in accordance
-7-
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, no compensation cost has
been recognized in the consolidated financial statements for stock option grants
or for shares purchased under the employee stock purchase plan.
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation using the Black-Scholes model:
Three months ended March 31,
2003 2002
---- ----
Net loss, as reported $ (2,015,826) $ (2,874,243)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (338,395) (684,650)
------------- -------------
Pro forma net loss $ (2,354,221) $ (3,558,893)
============= =============
Loss per share:
Basic - as reported $ (0.13) $ (0.19)
Basic - pro forma $ (0.16) $ (0.23)
Diluted - as reported $ (0.13) $ (0.19)
Diluted - pro forma $ (0.16) $ (0.23)
8. Restructuring costs - During 2002, the Company enacted two restructuring
plans resulting in restructuring charges of $2,890,000 in 2002. Charges recorded
during the three months ended March 31, 2002 were $634,000. The charges related
primarily to workforce reductions throughout all departments as well as charges
related to excess equipment and leased offices.
As of March 31, 2003, the remaining restructuring accrual was $310,445. The
remaining accrued restructuring costs are expected to be paid in 2003, with the
exception of $65,000 related to lease payments (net of estimated sublease
receipts) extending to 2005.
December 31, Cash March 31,
2002 accrual deductions 2003 accrual
------------ ---------- ------------
Employee separations $458,021 $236,978 $221,043
Lease commitments, net of sublease 124,790 35,388 89,402
-------- -------- --------
$582,811 $272,366 $310,445
======== ======== ========
9. Employee Stock Purchase Plan - The Applied Innovation Inc. Employee Stock
Purchase Plan (ESPP) was approved and adopted by the stockholders on April 25,
2002. The ESPP authorizes the Company to issue up to 500,000 shares of common
stock to eligible employees. The ESPP has semi-annual offering periods
commencing January 1 and July 1 during which eligible employees may purchase
shares at a price equal to 90% of fair market value on the first or last
business day of the offering period, whichever is lower. On January 3, 2003, the
Company issued 24,318 shares of common stock at a price of $2.73 per share based
on employee payroll deductions for the six-month offering period ended December
31, 2002.
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Applied Innovation Inc. is a network management solutions company that
simplifies and enhances the operation of complex, distributed voice and data
networks. Building on a deep knowledge of network architecture, elements and
management, the Company delivers unique hardware, software and service solutions
that provide greater connectivity, visibility and control of network elements
and the systems that support them. The Company's largest customers are the four
Regional Bell Operating Companies ("RBOCs"), other large domestic and foreign
phone companies and certain Competitive Local Exchange Carriers ("CLECs").
Sustained weakness in the telecommunications industry and the lack of
significant capital investment by the major telecommunications carriers
continues to impact the Company. While the first quarter has typically been the
Company's slowest quarter of the year, weak and uncertain economic and market
conditions and prolonged budgetary approval cycles resulted in lower than
expected revenues in the first quarter. In addition, changes in the ordering
pattern of the Company's largest international customer resulted in reduced
international sales when compared to last year's first quarter. The Company
remains confident, however, that industry conditions will improve and the pent
up domestic demand, combined with the Company's market expansion initiatives and
new product introductions planned for the remainder of 2003, will keep it well
positioned to capitalize on the market recovery.
RESULTS OF THE THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 2002
Sales for the first quarter of 2003 totaled $5,609,000 compared to $9,483,000
for the comparable quarter last year, a decrease of 41%. The overall reduction
in sales reflected the lower than expected domestic sales as orders were
postponed and budgetary approval cycles lengthened. Internationally, sales to
one customer totaled $354,000 in the first quarter of 2003, compared to sales of
$2,932,000 in the first quarter of 2002. The $2,578,000 decrease was primarily
attributable to a change in the timing of orders for this international
customer. Last year, the customer placed the majority of its orders during the
last quarter of its fiscal year ended March 31, 2002. The customer has
subsequently spread its orders more evenly from quarter to quarter, resulting in
the decrease in sales for the quarter ended March 31, 2003 compared to the same
period in 2002.
Gross profit as a percentage of total sales was 42% for the first quarter of
2003, comparable with gross profit of 43% for the first quarter of 2002.
-9-
The following table summarizes revenues and gross profit for products and
services:
For the Quarter Ended March 31, 2003 For the Quarter Ended March 31, 2002
------------------------------------ ------------------------------------
Products Services Total Products Services Total
-------- -------- ----- -------- -------- -----
Sales $4,390,000 $1,219,000 $ 5,609,000 $ 7,802,000 $ 1,681,000 $ 9,483,000
Gross Profit 1,779,000 577,000 2,356,000 3,517,000 541,000 4,058,000
Gross Profit % 41% 47% 42% 45% 32% 43%
Product sales of $4,390,000 were 78% of total sales in the first quarter of
2003, versus product sales of $7,802,000, or 82% of total sales in the first
quarter of 2002. This represented a 44% decrease in product sales from the
comparable quarter in the prior year. The decrease in product sales was largely
attributable to a change in the timing of orders from one international
customer, as well as overall decreased product demand domestically. Product
sales include revenues from the sale of AIswitch, AIscout, AIbadger and other
products, as well as software licensing revenues.
Gross profit on product sales was 41% of total product sales for the first
quarter of 2003, compared with 45% of total product sales for the same period
last year. During the quarter ended March 31, 2003, the Company's gross profit
on product sales was negatively impacted by the establishment of a specific
warranty reserve of $450,000 for a product recall, discussed below. Excluding
the impact on gross profit margins of the warranty charge, product margins were
$2,229,000 during the quarter, or 51% of product sales. The improvement in
product gross profit margins in the quarter was primarily due to inventory
reserves totaling $463,000 recorded in the first quarter last year for slow
moving optical and other components. In the first quarter of 2003, the Company
recorded $100,000 of inventory charges to reserve for potentially excess or
obsolete inventory, including long-reach laser components.
The Company initiated a product recall after a manufacturing defect was
identified in a power supply component that was purchased from a third party
manufacturer, integrated into the Company's products, and shipped to customers
in 1997 and 1998. The Company estimated the number of units that it expects
customers to return in the recall and has recorded the associated costs of
$450,000 in the first quarter to recall and replace those units. The Company is
considering making a claim against the power supply component manufacturer and a
claim under its product recall insurance. However, since there is no assurance
of whether or when either of such claims may be paid, the Company has not
reduced the first quarter charge to reflect such contingent claims at this time.
Services sales were $1,219,000, or 22% of total first quarter sales in 2003,
compared to $1,681,000, or 18% of total first quarter sales in 2002. The 27%
decrease in services sales during the first quarter of 2003 as compared to the
first quarter of last year was consistent with the decrease in product sales
between years, the overall reduced spending in the industry and the Company's
reduction in installation services personnel as a result of the restructurings
in 2002. Services sales consist primarily of network planning and design,
installation services, project management, engineering services, training and
maintenance.
-10-
Gross profit on services sales was 47% during the first quarter of 2003,
compared with 32% for the same period last year. The increase in services
margins was due to the reduction of lower margin installation services, and a
greater mix of higher margin maintenance contracts and network management system
(NMS) services.
Because of the Company's concentration of sales to the RBOCs, long distance
phone companies, and one foreign service provider, a small number of customers
have represented substantial portions of total sales. For the first three months
of 2003, sales to two companies comprised 59% of total sales. One customer
contributed 23% and the other customer contributed 36% of total sales.
Selling, general and administrative ("SG&A") expenses decreased to $3,586,000 in
the first quarter of 2003, from $5,283,000 in the first quarter of 2002. As a
percentage of total quarterly sales, this represented 64% in 2003 and 56% in
2002. The decrease of $1,697,000 between the two quarters was largely
attributable to headcount reductions in sales, marketing and other
administrative functions, as well as decreased bonuses and commissions,
advertising, trade shows and travel. The Company anticipates SG&A expenses for
the remainder of 2003 will continue to be less than prior year amounts due to
decreased staffing and other cost-saving measures.
Research and development ("R&D") expenses decreased to $1,400,000 for the first
quarter of 2003, versus $2,442,000 for the same period in 2002. As a percentage
of total quarterly sales, this represented 25% in 2003 and 26% in 2002. The
$1,042,000 reduction in R&D expenses was due to reduced personnel and consulting
costs, as well as lower materials costs. These cost savings resulted from
streamlining the Company's R&D focus to target only those development projects
with the greatest potential for acceptance in the core telecommunications
market. The Company expects to continue to invest in product enhancements and
new product development to support changing customer and industry needs and
product introductions. The Company expects R&D expenditures for the remaining
quarters in 2003 to be generally consistent with those in the first quarter.
The Company recorded a non-recurring charge to operating expenses of $634,000 in
the first quarter of 2002 related to a workforce reduction in February. The
charge was separately stated on the consolidated statements of operations and
consisted primarily of estimated severance and fringe benefit costs associated
with the terminated employees. As of March 31, 2003, the Company had paid out
all of such costs. During the first quarter of 2003, no such charge was
incurred.
As a result of the above factors, the Company recorded a loss from operations of
$2,630,000 in the first quarter of 2003, versus a loss from operations of
$4,301,000 during the same period last year. The first quarter loss from
operations in 2003 represented 47% of total sales versus loss from operations of
45% of total sales during the first quarter of 2002.
Interest income and other income, net decreased to $110,000 in the first quarter
of 2003 versus $195,000 in the comparable quarter last year. The overall
decrease resulted primarily from lower interest income due to lower average cash
and investment balances, as well as overall lower yields on those balances.
-11-
Loss before income taxes in the first quarter of 2003 was $2,520,000, or 45% of
sales, compared to $4,106,000, or 43% of sales, for the same period last year.
The Company's effective income tax rate was 20% for the current quarter versus
an effective rate of 30% for the same period in 2002. The decrease in the
effective tax rate reflects the greater relative impact of estimated full-year
tax savings from research and experimentation credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $24,011,000 of cash and cash equivalents and short- and
long-term investments at March 31, 2003, an increase of $47,000 from the total
December 31, 2002 balance of $23,964,000. Despite the net loss of $2,016,000
during the first quarter of 2003, operating activities used only $16,000 of cash
due to certain non-cash operating expenses and favorable changes in working
capital. Operating expenses not requiring the use of cash included depreciation
of $323,000 and amortization of $53,000. Significant changes in working capital
which provided cash included decreased accounts receivable of $1,186,000,
increased deferred revenue of $1,273,000 and increased accrued expenses of
$630,000. Partially offsetting those changes were other working capital changes
which used cash, including decreased accounts payable of $885,000 and increased
income taxes receivable of $498,000. In addition, during the first quarter of
2003, $1,686,000 of cash was provided by investing activities. Maturities and
sales of investments provided $5,906,000 of cash, while $4,204,000 of cash was
used for purchases of investments.
Subsequent to the end of the quarter, the Company received $3,648,000 of income
tax refunds as a result of carrying back 2002 net operating losses to prior
years.
Net working capital was $24,051,000 at March 31, 2003, compared to $25,128,000
at December 31, 2002. At March 31, 2003, the current ratio was 4.3:1 and the
Company's only debt outstanding was a $750,000 note payable issued in
conjunction with an acquisition which occurred in 2001. The note payable bears
interest at the annual rate of 8%, with interest payments due semi-annually and
principal due at maturity in August 2004.
The Company believes that its existing cash, cash equivalents, investments, cash
to be generated from future operations and available credit facility providing
up to $10,000,000 will provide sufficient capital to meet the business needs of
the Company for the next twelve months. In addition, the Company believes it
could generate additional funding through issuance of debt or equity or through
the sale of land if the Company's working capital needs significantly increase
due to circumstances such as sustained weakness in the telecommunications
industry resulting in decreased demand for the Company's products and services
and operating losses; faster than expected growth resulting in increased
accounts receivable and inventory; additional investment or acquisition
activity; or significant research and development efforts. However, there can be
no assurance that additional financing will be available on terms favorable to
the Company or at all.
-12-
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The foregoing Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. These forward-looking statements
include, but may not be limited to, all statements regarding intent, beliefs,
expectations, projections, forecasts, and plans of the Company and its
management, and include any statements regarding industry conditions and market
recovery (paragraph 2), potential claims associated with the product recall
(paragraph 8), future SG&A expenditures (paragraph 12), future R&D expenditures
(paragraph 13) and sufficiency of capital resources (paragraph 22). These
forward-looking statements involve numerous risks and uncertainties, including,
without limitation, fluctuations in demand for the Company's product and
services, the impact of competitive products and services, general and economic
business conditions, the Company's ability to develop new products as planned
and on budget, the fact that the Company may decide to substantially increase
R&D expenditures to meet the needs of its business and customers, currently
unforeseen circumstances that could require the use of capital resources,
current and future mergers of key customers and the various risks inherent in
the Company's business and other risks and uncertainties detailed from time to
time in the Company's periodic reports filed with the Securities and Exchange
Commission, including the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002. One or more of these factors have affected, and
could in the future affect, the Company's business and financial results and
could cause actual results to differ materially from plans and projections.
Therefore, there can be no assurance that the forward-looking statements
included in this Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company, or any other person, that the objectives and
plans of the Company will be achieved. All forward-looking statements are based
on information presently available to the management of the Company. The Company
assumes no obligation to update any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosure 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.
The Company invests in various debt obligations, primarily U.S. government and
agency obligations and high quality commercial paper, with maturities generally
less than three years. Although the yields on such investments are subject to
changes in interest rates, the potential impact to the Company and its future
earnings as a result of customary interest rate fluctuations is immaterial.
Furthermore, the Company has not entered into any derivative contracts. Related
to an acquisition in 2001, the Company has a $750,000 note payable, bearing
interest at a fixed rate of 8% annually and due in August 2004.
-13-
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, our
Chief Executive Officer along with our Chief Financial Officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated subsidiaries)
required to be included in our periodic SEC filings. It should be noted that the
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
Since the date of our evaluation to the filing date of this Quarterly Report,
there have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
- ---------------------------
Items 1 - 5. Inapplicable
Item 6. (a) Exhibits
Exhibit 99.1 - Certification by Chief Executive Officer
Exhibit 99.2 - Certification by Chief Financial Officer
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements 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.
-----------------------
(Registrant)
May 13, 2003 /s/ Gerard B. Moersdorf, Jr.
- ------------ ----------------------------
Date Gerard B. Moersdorf, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
May 13, 2003 /s/ Michael P. Keegan
- ------------ ---------------------
Date Michael P. Keegan
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
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CERTIFICATION
I, Gerard B. Moersdorf, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Applied
Innovation Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
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b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
------------
/s/ Gerard B. Moersdorf, Jr.
----------------------------
Gerard B. Moersdorf, Jr.
Chairman, President and Chief Executive
Officer
CERTIFICATION
I, Michael P. Keegan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Applied
Innovation Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
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b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 13, 2003
------------
/s/ Michael P. Keegan
---------------------
Michael P. Keegan,
Vice President, Chief Financial Officer
and Treasurer
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