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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, 2004
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 7, 2004 there were 15,064,375 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, 2004 (unaudited)
and December 31, 2003 3
Consolidated Statements of Operations for the three months
ended March 31, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
Item 4. Controls and Procedures 14
Part II. Other Information
Items 1 - 5. 15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 15
(b) Reports on Form 8-K 15
Signatures 16
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
APPLIED INNOVATION INC.
Consolidated Balance Sheets
(Unaudited)
March 31, 2004 December 31, 2003
-------------- -----------------
Assets
Current assets:
Cash and cash equivalents $13,010,109 $12,030,638
Short term investments 6,463,535 5,582,325
Accounts receivable, net 2,124,414 3,449,052
Inventory, net 3,867,551 2,814,442
Income taxes receivable 985,077 268,287
Other current assets 630,009 1,255,700
Deferred income taxes 1,953,000 1,963,000
----------- -----------
Total current assets 29,033,695 27,363,444
Property, plant and equipment, net 7,057,977 7,060,034
Investments 9,242,488 10,360,075
Intangible assets, net 78,750 131,250
Goodwill 3,525,801 3,525,801
Deferred income taxes 127,000 127,000
Other assets 1,327,938 1,315,275
----------- -----------
$50,393,649 $49,882,879
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,321,962 $ 790,037
Accrued expenses:
Warranty 431,925 479,062
Payroll and related expenses 939,565 787,819
Restructuring 38,281 43,825
Taxes, other than income taxes 582,900 563,252
Other accrued expenses 753,822 723,249
Deferred revenue 3,089,720 2,268,999
Note payable 750,000 750,000
----------- -----------
Total current liabilities 7,908,175 6,406,243
----------- -----------
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 15,062,775 shares in 2004 and 15,033,409 in 2003 150,628 150,334
Additional paid-in capital 6,266,288 6,140,540
Retained earnings 36,011,549 37,145,452
Accumulated other comprehensive gain, net 57,009 40,310
----------- -----------
Total stockholders' equity 42,485,474 43,476,636
----------- -----------
$50,393,649 $49,882,879
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
APPLIED INNOVATION INC.
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31,
2004 2003
------------ ------------
Sales:
Products $ 4,441,748 $ 4,389,950
Services 1,406,570 1,218,792
------------ ------------
Total sales 5,848,318 5,608,742
Cost of sales:
Cost of sales - products 2,285,257 2,611,129
Cost of sales - services 604,521 641,600
------------ ------------
Total cost of sales 2,889,778 3,252,729
Gross profit 2,958,540 2,356,013
Operating expenses:
Selling, general and administrative 3,424,460 3,586,099
Research and development 1,391,190 1,400,117
------------ ------------
Loss from operations (1,857,110) (2,630,203)
Interest and other income, net 85,207 110,377
------------ ------------
Loss before income taxes (1,771,903) (2,519,826)
Income taxes (638,000) (504,000)
------------ ------------
Net loss $ (1,133,903) $ (2,015,826)
============ ============
Basic and diluted loss per share $ (0.08) $ (0.13)
============ ============
Weighted-average shares outstanding
for basic and diluted loss per share 15,060,852 14,975,067
============ ============
See accompanying notes to consolidated financial statements.
-4-
APPLIED INNOVATION INC.
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $ (1,133,903) $ (2,015,826)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 290,210 322,710
Amortization of intangible assets 52,500 52,500
Loss (gain) on disposal of assets 57,543 (2,115)
Tax benefit of options exercised 14,398 -
Effects of changes in operating assets and liabilities:
Accounts receivable 1,324,638 1,135,646
Inventory (1,053,109) (150,769)
Income taxes (716,790) (498,465)
Other current assets 625,691 123,138
Other assets (12,663) -
Accounts payable 531,925 (885,251)
Accrued expenses 149,286 629,776
Deferred revenue 820,721 1,272,734
------------ ------------
Net cash provided by (used in) operating activities 950,447 (15,922)
------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (361,336) (32,899)
Proceeds from sales of property, plant and equipment 15,640 15,927
Purchases of investments (3,252,262) (4,203,552)
Proceeds from maturities of investments 2,911,085 5,705,560
Proceeds from sales of investments 604,253 200,816
------------ ------------
Net cash (used in) provided by investing activities (82,620) 1,685,852
------------ ------------
Cash flows from financing activities -
Proceeds from issuance of common stock 111,644 66,314
------------ ------------
Net cash provided by financing activities 111,644 66,314
------------ ------------
Increase in cash and cash equivalents 979,471 1,736,244
Cash and cash equivalents - beginning of period 12,030,638 8,986,292
------------ ------------
Cash and cash equivalents - end of period $ 13,010,109 $ 10,722,536
============ ============
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, 2004,
and the consolidated statements of operations and cash flows for the three
months ended March 31, 2004 and 2003, 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, 2003 Annual Report on Form 10-K.
The results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the results for the full year.
2. 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 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 ("SFAS") No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation using the Black Scholes
model:
Three months ended March 31,
2004 2003
------------- -------------
Net loss, as reported $ (1,133,903) $ (2,015,826)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (414,986) (338,395)
------------- -------------
Pro forma net loss $ (1,548,889) $ (2,354,221)
============= =============
Loss per share:
Basic - as reported $ (0.08) $ (0.13)
Basic - pro forma $ (0.10) $ (0.16)
Diluted - as reported $ (0.08) $ (0.13)
Diluted - pro forma $ (0.10) $ (0.16)
-6-
3. 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, 2004 and December 31, 2003 are summarized below:
March 31, 2004 December 31, 2003
-------------- -----------------
Raw materials $ 2,366,743 $ 1,516,034
Work-in-process 46,463 134,874
Finished goods 1,700,345 1,597,534
----------- -----------
4,113,551 3,248,442
Reserve for obsolescence (246,000) (434,000)
----------- -----------
$ 3,867,551 $ 2,814,442
=========== ===========
4. Warranty - The Company's warranty activity for the three months ended March
31, 2004 is summarized below:
2004
----------
Beginning balance $ 479,062
Warranty provision 164,554
Warranty costs incurred (211,691)
---------
Ending balance $ 431,925
=========
5. Income taxes - The Company has recorded its interim income tax provision
based on estimates of the Company's effective tax rate and income tax credits
expected to be applicable for the full fiscal year. Estimated taxes and credits
recorded during interim periods may be periodically revised, if necessary, to
reflect revised estimates for the full fiscal year.
6. Comprehensive loss - Comprehensive loss for the three months ended March 31,
2004 and 2003 was $1,117,204 and $2,008,174, respectively. The sole adjustment
necessary to reconcile net loss with comprehensive loss is for the net
unrealized gain, net of taxes, on available-for-sale securities, which was
$16,699 and $7,652 for the three months ended March 31, 2004 and 2003,
respectively.
7. 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, 2004 and 2003, 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, 2004 and 2003 were
1,033,980 and 380,628, 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,
2004 and 2003 which were excluded because they were out-of-the-money were
1,020,750 and 1,492,120, respectively.
-7-
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, 2004 March 31, 2003
--------------- --------------
Basic loss Diluted loss Basic loss Diluted loss
per share per share per share per share
--------- --------- --------- ---------
Outstanding shares 15,062,775 15,062,775 14,975,067 14,975,067
Effect of weighting changes
in outstanding shares (1,923) (1,923) -- --
----------- ----------- ----------- -----------
Adjusted shares 15,060,852 15,060,852 14,975,067 14,975,067
=========== =========== =========== ===========
8. Major customers and geographic data - Because of the Company's concentration
of sales to the Regional Bell Operating Companies (RBOCs), wireless service
providers and one foreign service provider, a small number of customers
typically represent substantial portions of total sales. For the three months
ended March 31, 2004, sales to four companies comprised 81% of total sales.
These customers contributed 11%, 21%, 22% and 27% 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.
The Company's sales by geographic areas for the three months ended March 31,
2004 and 2003 are summarized below:
Three months ended March 31,
2004 2003
---------- ----------
United States $4,465,661 $5,207,421
International 1,382,657 401,321
---------- ----------
$5,848,318 $5,608,742
========== ==========
9. Employee Stock Purchase Plan - The Applied Innovation Inc. Employee Stock
Purchase Plan (ESPP), approved and adopted by the stockholders on April 25,
2002, authorizes the Company to issue up to 500,000 shares of common stock to
eligible employees, as defined. 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 2, 2004, the Company issued 14,766 shares of common stock at a price
of $3.02 per share based on employee payroll deductions for the six-month
offering period ended December 31, 2003. Since the inception of the plan, 59,526
shares have been issued to eligible employees.
10. Subsequent event - On April 22, 2004, the Board of Directors authorized a
twelve month stock repurchase program under which the Company may purchase up to
1,000,000 shares of common stock through April 21, 2005.
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Applied Innovation Inc. (Applied Innovation, AI, and the Company) 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, AI delivers unique hardware,
software and service solutions that provide greater connectivity, visibility and
control of network elements and the systems that support them. By providing
solutions in the areas of network mediation, aggregation and adaptation, the
Company enables its customers to more effectively and efficiently manage their
large, complex networks.
Applied Innovation's products and services help its customers to improve network
quality and uptime and, at the same time, reduce network maintenance and repair
costs. By leveraging its extensive knowledge of network infrastructure, its
vendor-neutral methodology and its customer-centric approach, AI provides
solutions which help customers better manage and control both their capital
expenditures and their operating expenditures. The Company targets three primary
markets in the U.S. and abroad: 1) telecommunications companies using wireline
networks; 2) telecommunications companies using wireless networks; and 3)
government networks. Its largest customers in those markets are the four RBOCs,
domestic wireless service providers and other large domestic and foreign phone
companies.
Historically, the first quarter has been the Company's slowest quarter of the
year due to budgetary approval cycles at the major wireline carriers. This
historical pattern of light first quarter spending was compounded in the first
quarter of 2004 by a delay in the budgetary approval process at one of the
Company's key wireline customers, leading to reduced wireline sales compared to
the same quarter a year ago. However, the Company's market diversification
efforts resulted in increased sales in the wireless and international markets
that helped offset the reduced wireline spending. Improved order flow at the
Company's largest international customer and further penetration into the
wireless market led to a dramatic increase in revenues in these markets compared
to the first quarter of 2003. Combined international and wireless sales
represented over 50% of total sales for the first quarter of 2004 compared to 8%
for the same quarter a year ago.
The Company remains cautiously optimistic about overall sales growth for 2004
based primarily on anticipated strong demand from wireless and international
customers. In addition to continued wireless and international sales growth, the
Company anticipates improved wireline order flow compared to the first quarter
of 2004 based on discussions with customers and industry projections. However,
overall wireline sales could be negatively impacted, at least in the near-term,
by ongoing labor issues at one key customer.
RESULTS OF THE THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 2003
TOTAL SALES AND GROSS PROFIT
Sales for the first quarter of 2004 totaled $5,848,000 compared to $5,609,000
for the same quarter last year, an increase of 4%. Several factors contributed
to this modest increase. First, improved order flow from the Company's largest
international customer led to an increase in international sales
-9-
from $401,000 in the first quarter of 2003 to $1,383,000 in the first quarter of
2004. In addition, strength in the wireless market led to a dramatic increase in
wireless sales from $22,000 in the first quarter of 2003 to $1,578,000 in the
current year's comparable quarter. Partially offsetting these increases, sales
in the domestic wireline market decreased from $4,823,000 in last year's first
quarter to $2,865,000 in this year's first quarter. Postponed orders and
lengthened budgetary approval cycles at the Company's key wireline customers
contributed to the wireline sales decrease.
Because of the Company's concentration of sales to RBOCs, wireless service
providers and one foreign service provider, a small number of customers
typically represent substantial portions of total sales. For the three months
ended March 31, 2004, sales to four companies comprised 81% of total sales.
These customers contributed 11%, 21%, 22% and 27% 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.
Gross profit as a percentage of total sales was 51% for the first quarter of
2004, compared to gross profit of 42% for the first quarter of 2003. As
discussed further below, the 2004 increase in gross profit percentage is
primarily attributable to product recall and inventory obsolescence charges in
the first quarter of 2003, which negatively impacted 2003 gross profit. No such
charges were incurred in the first quarter of 2004. In addition, services
margins were higher in 2004 due to higher maintenance revenue and increased
utilization of services personnel, both of which positively impacted gross
profit in 2004.
The following table summarizes revenues and gross profit for products and
services:
For the Quarter Ended March 31, 2004 For the Quarter Ended March 31, 2003
------------------------------------ ------------------------------------
Products Services Total Products Services Total
-------- -------- ----- -------- -------- -----
Sales $4,442,000 $1,406,000 $5,848,000 $4,390,000 $1,219,000 $5,609,000
Gross Profit 2,157,000 802,000 2,959,000 1,779,000 577,000 2,356,000
Gross Profit % 49% 57% 51% 41% 47% 42%
PRODUCT SALES AND GROSS PROFIT
Product sales of $4,442,000 represented 76% of total sales in the first quarter
of 2004, versus product sales of $4,390,000, or 78% of total sales in the first
quarter of 2003. As noted above, strength in the wireless and international
markets contributed to the increase in product sales, although the increase in
these two markets was partially offset by decreased sales in the domestic
wireline market.
Product sales include revenues from the sales of the Company's hardware
products, as well as third-party hardware and software licensing revenues.
Gross profit on product sales was 49% of total product sales for the first
quarter of 2004, compared with 41% 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 both the establishment of a specific
warranty reserve of $450,000 for a product recall and inventory charges of
$100,000. In the first quarter of 2004, there were no comparable product recall
-10-
charges and product margins were positively impacted by the sale of $57,000 of
fully reserved inventory.
SERVICES SALES AND GROSS PROFIT
Services sales were $1,406,000, or 24% of total first quarter sales in 2004,
compared to $1,219,000, or 22% of total first quarter sales in 2003. The 15%
increase in services sales during the first quarter of 2004 as compared to the
first quarter of last year was a result of higher maintenance revenue and an
increased demand for installation services, primarily in the wireless market.
Services sales consist primarily of network planning and design, installation
services, project management, engineering services, training and maintenance.
Gross profit on services sales was 57% during the first quarter of 2004,
compared with 47% for the same period last year. The increase in services
margins in the first quarter of 2004 was primarily due to a higher mix of
maintenance revenue and high utilization of services personnel meeting the
increased demand for installation services in the wireless market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses decreased to $3,424,000 in
the first quarter of 2004, from $3,586,000 in the first quarter of 2003. As a
percentage of total quarterly sales, this represented 59% in 2004 and 64% in
2003. The decrease between the two quarters was largely attributable to the
Company's continuing emphasis on controlling costs evidenced by reduced spending
on consulting, insurance and profit sharing. The Company anticipates SG&A
expenses for the remainder of 2004 will be slightly higher than the first
quarter due to increases in variable expenses, such as commissions and travel,
associated with anticipated increases in sales volume.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development ("R&D") expenses were $1,391,000 for the first quarter
of 2004, consistent with R&D expenses of $1,400,000 in the first quarter of
2003. As a percentage of total quarterly sales, this represented 24% in 2004 and
25% in 2003. The Company expects to continue to invest in product enhancements
and new product development in response to customer needs and market
opportunities. Currently, the primary focus is on new products for the wireless
market and IP-enabled network management products. The Company expects R&D
expenditures for the remaining quarters in 2004 to be generally consistent with
those in the first quarter.
INTEREST AND OTHER INCOME, NET
Interest and other income, net decreased to $85,000 in the first quarter of 2004
versus $110,000 in the comparable quarter last year. The overall decrease
resulted primarily from lower interest income due to overall lower yields on
cash and investment balances.
-11-
INCOME TAXES
The Company's effective income tax benefit rate was 36% for the current quarter
versus 20% for the same period in 2003. The Company expects to generate fewer
research and experimentation credits in 2004 and the higher effective rate
primarily reflects the impact of the reduction of these credits.
NET LOSS AND LOSS PER SHARE
As a result of the above factors, the Company recorded a net loss of $1,134,000
in the first quarter of 2004, or $0.08 per share, compared to a net loss of
$2,016,000, or $0.13 per share, during the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $21,126,000 at March 31, 2004, compared to $20,957,000
at December 31, 2003. At March 31, 2004, the current ratio was 3.7:1 and the
Company's only debt outstanding was a $750,000 note payable issued in
conjunction with an acquisition that 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 had $28,716,000 of cash and cash equivalents and short- and
long-term investments at March 31, 2004, an increase of $743,000 from the total
December 31, 2003 balance of $27,973,000.
OPERATING ACTIVITIES
Despite the net loss of $1,134,000 during the first quarter of 2004, operating
activities provided cash of $950,000. Significant components of cash flows from
operations included: non-cash depreciation and amortization expenses of
$343,000; decreased accounts receivable of $1,325,000 resulting from continued
emphasis on collections and lower sales; decreased other current assets of
$626,000 resulting from the receipt of insurance and other refunds; increased
accounts payable of $532,000 resulting from the timing of a large inventory
purchase near the end of the quarter; and increased deferred revenue of $821,000
resulting from annual maintenance agreements invoiced in the first quarter.
Partially offsetting the above items were the following additional working
capital changes: an increase in inventory of $1,053,000 primarily resulting from
the large inventory purchase mentioned above as well as planned increases in
inventory levels in anticipation of customer orders in the second quarter; and
an increase in income taxes receivable of $717,000 resulting from the Company's
net loss.
INVESTING ACTIVITIES
During the first quarter of 2004, investing activities used cash totaling
$83,000. The Company purchased $361,000 of property, plant and equipment
primarily related to information technology infrastructure and engineering test
equipment. Maturities and sales of investments, net of purchases, provided cash
of $263,000.
-12-
FINANCING ACTIVITIES
Common stock issued for stock option exercises and purchases under the Employee
Stock Purchase Plan provided cash of $112,000 during the first quarter of 2004.
The Company believes that its existing cash, cash equivalents, investments and
cash to be generated from future operations 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.
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 sales growth in 2004 (paragraph
4), improved wireline order flow (paragraph 4), future SG&A expenditures
(paragraph 15), future R&D expenditures (paragraph 16), research and
experimentation credits in 2004 and resulting effective tax rates (paragraph
18), customer orders anticipated in the second quarter (paragraph 22), and
sufficiency of capital resources (paragraph 25). 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, 2003. 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
-13-
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 due in August
2004, bearing interest at a fixed rate of 8% annually.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company's management
carried out an evaluation, with the participation of the Company's principal
executive officer and principal financial officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934). Based upon
that evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report. 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.
There were no changes in the Company's internal controls over financial
reporting that occurred during the Company's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
Items 1 - 5. Inapplicable
Item 6. (a) Exhibits
Exhibit 10.1 - Employment Agreement between the Company and
Andrew J. Dosch
Exhibit 10.2 - Employment Agreement between the Company and
Michael P. Keegan
Exhibit 31.1 - Rule 13a-14(a) Certification of Principal
Executive Officer
Exhibit 31.2 - Rule 13a-14(a) Certification of Principal
Financial Officer
Exhibit 32.1 - Section 1350 Certification of Principal
Executive Officer
Exhibit 32.2 - Section 1350 Certification of Principal
Financial Officer
(b) Reports on Form 8-K
On February 11, 2004, the Company furnished a Current Report
on Form 8-K (Items 7 and 12), dated February 11, 2004,
regarding its consolidated financial results of operations for
its year and quarter ended December 31, 2003.
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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 12, 2004 /s/ Gerard B. Moersdorf, Jr.
- ------------ ----------------------------
Date Gerard B. Moersdorf, Jr.
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
May 12, 2004 /s/ Michael P. Keegan
- ------------ ---------------------
Date Michael P. Keegan
Executive Vice President and Chief Operating Officer
May 12, 2004 /s/ Andrew J. Dosch
- ------------ -------------------
Date Andrew J. Dosch
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
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