-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AGlkAlhxiDEPCyTOuYltF/PHgQh1jGZKi7U5BaWv3IPs22Jbe8FJgg0u8EfEsYFk K+j4DT7LvyfqSu0sWG/VEw== 0000936392-96-000638.txt : 19960816 0000936392-96-000638.hdr.sgml : 19960816 ACCESSION NUMBER: 0000936392-96-000638 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED DIGITAL ACCESS INC CENTRAL INDEX KEY: 0000919048 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 680132939 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23698 FILM NUMBER: 96612261 BUSINESS ADDRESS: STREET 1: 9855 SCRANTON RD CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6196232200 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30. 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 000-23698 APPLIED DIGITAL ACCESS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 68-0132939 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 9855 SCRANTON ROAD, SAN DIEGO, CALIFORNIA 92121 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE) (619) 623-2200 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ There were 12,205,868 shares of the registrant's Common Stock, no par value, outstanding on July 31,1996. Page 1 of 16 2 Page 2 APPLIED DIGITAL ACCESS, INC. INDEX TO FORM 10-Q
Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets at June 30, 1996 and December 31, 1995 3 Condensed Statements of Operations for the three and six months ended June 30, 1996 and June 30, 1995 4 Condensed Statements of Cash Flows for the six months ended June 30, 1996 and June 30, 1995 5 Notes to Condensed Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 Risks and Uncertainties 11-13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14-15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16
3 Page 3 Item 1. APPLIED DIGITAL ACCESS, INC. CONDENSED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31, 1996 1995 ---- ---- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 1,883 $ 1,673 Investments - current 22,076 25,079 Accounts receivable, net 3,411 5,358 Inventory, net 7,441 6,572 Deferred income taxes 750 750 Prepaid expenses and other current assets 1,646 1,296 -------- -------- Total current assets 37,207 40,728 Investments - non-current 5,972 5,095 Property and equipment, net 4,019 3,361 Deferred income taxes 752 752 Other, net 315 - -------- -------- $ 48,265 $ 49,936 -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,724 $ 1,820 Accrued expenses 1,338 843 Accrued warranty 1,368 1,305 Current portion of obligations under capital leases 23 32 -------- ------- Total current liabilities 4,453 4,000 Obligations under capital leases, net of current portion 41 49 -------- ------- Total liabilities 4,494 4,049 -------- ------- Shareholders' equity: Preferred stock, no par value, 7,500,000 shares authorized, no shares issued - - Common stock, no par value, 30,000,000 shares authorized, 11,999,680 and 11,899,216 shares issued and outstanding at June 30, 1996 and December 31, 1995, respectively 49,318 49,000 Additional paid-in capital 2,416 2,391 Unrealized gain (loss) on investments (4) 147 Accumulated deficit (7,959) (5,651) -------- ------- Total shareholders' equity 43,771 45,887 -------- ------- $ 48,265 $49,936 -------- -------
The accompanying notes are an integral part of the financial statements. 4 Page 4 APPLIED DIGITAL ACCESS, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------------------------------ ----------------------------------------- 1996 (Amounts in thousands 1995 1996 (Amounts in thousands 1995 ---- except per share data) ---- ---- except per share data) ---- Revenue $4,516 $4,836 $11,153 $12,856 Cost of revenue 2,047 1,813 5,067 4,869 ---------- ------------ ---------- ---------- Gross profit 2,469 3,023 6,086 7,987 Operating expenses: Research and development 1,905 1,351 3,572 2,646 In-process research and development related to asset acquisition - - 1,186 - Sales and marketing 1,760 1,029 3,201 2,011 General and administrative 750 619 1,430 1,329 ---------- ------------ ----------- ----------- Total operating expenses 4,415 3,199 9,389 5,986 ---------- ------------ ----------- ----------- Operating income (loss) (1,946) (176) (3,303) 2,001 Interest income 479 522 953 1,026 Other income (expense), net 27 5 42 (2) ---------- ------------ ----------- ----------- Income (loss) before income taxes (1,440) 351 (2,308) 3,025 Provision for income taxes - 123 - 1,059 ---------- ------------ ----------- ------------ Net income (loss) ($1,440) $228 ($2,308) $1,966 =========== ============ =========== ============ Net income (loss) per share ($0.12) $0.02 ($0.19) $0.15 =========== ============ =========== ============ Number of shares used in per share computations 11,983 12,772 11,961 12,798
The accompanying notes are an integral part of the financial statements. 5 Page 5 APPLIED DIGITAL ACCESS, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, ------------------------ 1996 1995 ---- ---- (AMOUNTS IN THOUSANDS) Cash flows from operating activities: Net income (loss) ($2,308) $1,966 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: In-process research and development related to asset acquisition 1,186 - Depreciation and amortization 630 433 Other 25 26 Changes in assets and liabilities: Accounts receivable 1,947 (1,439) Inventory (869) (1,690) Prepaid expenses and other current assets (350) 5 Accounts payable (96) (823) Accrued expenses 510 264 Accrued warranty 63 (24) ------------ ------------ Net cash provided (used) by operating activities 738 (1,282) ------------ ------------- Cash flows from investing activities: Purchases of investments (12,026) (12,852) Maturities of investments 13,935 16,830 Purchases of property and equipment (838) (1,168) Purchase costs related to asset acquisition (1,900) - ------------- ------------- Net cash provided (used) by investing activities (829) 2,810 ------------ ------------- Cash flows from financing activities: Principal payments on capital leases (17) (89) Proceeds from the issuance of common stock under stock option plans 318 459 ------------ ------------ Net cash provided by financing activities 301 370 ------------ ------------- Net increase in cash and cash equivalents 210 1,898 Cash and cash equivalents, beginning of period 1,673 2,680 ------------ ------------- Cash and cash equivalents, end of period $1,883 $4,578 ------------ -------------
The accompanying notes are an integral part of the financial statements. 6 Page 6 APPLIED DIGITAL ACCESS, INC. Notes to Condensed Financial Statements June 30, 1996 (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with the interim reporting requirements of Form 10-Q, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. These financial statements should be read in conjunction with the Company's audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 filed with the SEC. 2. Inventory Inventory is valued at the lower of cost (determined using the first-in, first-out method) or market. Inventory was as follows:
June 30, 1996 December 31, 1995 ------------- ----------------- (Dollars in thousands) Raw materials $3,875 $3,483 Work-in-process 2,530 2,314 Finished goods 1,505 1,313 ----- ------ 7,910 7,110 Less inventory reserve (469) (538) ------ ------- $7,441 $6,572 ====== ======
3. Per Share Information Per share information is computed using the weighted average number of common shares and common equivalent shares (when the effect is dilutive) outstanding during the periods presented. Common equivalent shares result from outstanding options and warrants to purchase common stock. 7 Page 7 4. Acquisitions On February 29, 1996, the Company acquired certain assets of Applied Computing Devices, Inc. ("ACD"), a company that developed and marketed operations systems ("OS") software used primarily by independent telephone companies to manage certain functions in their networks. The customer set and products of ACD complement those of ADA and ADA intends to continue to market and enhance these products. The Company acquired the assets for $1.7 million in cash and incurred approximately $.2 million in related costs. The assets were acquired at an auction held in Federal Bankruptcy Court, Southern District of Indiana. The transaction, which was accounted for as a purchase, included the acquisition of in-process research and development valued at approximately $1.2 million; property and equipment valued at approximately $.4 million; and purchased technology valued at approximately $.3 million. The Company recorded a one-time charge in the first quarter of 1996 for the $1.2 million associated with purchased research and development costs. The following condensed pro forma results of operations information has been presented to give effect to the purchase as if such transaction had occurred at the beginning of the periods presented. The historical results of operations have been adjusted to reflect additional depreciation and amortization expense based upon the value allocated to assets acquired in the purchase. The pro forma results of operations information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as of the beginning of the periods presented, nor is it necessarily indicative of future operating results. CONDENSED PRO FORMA RESULTS OF OPERATIONS (amounts in thousands except per share data) (unaudited)
Six Months Ended June 30, 1996 1995 ---- ---- Revenue $11,253 $17,231 Net income (loss) (2,828) (795) Net income (loss) per share ($0.24) ($0.07) Weighted average shares used in computation 11,983 11,742
5. Subsequent Events On July 16, 1996, the Company acquired certain assets of MPR Teltech, a subsidiary of BC TELECOM, Inc. The assets acquired were part of MPR Teltech's operating unit commonly known as the Special Services Network division ("SSN"). The Company and its Canadian subsidiary, Applied Digital Access - Canada, Inc. ("ADA-Canada") acquired the assets for $4.2 million in cash and 150,000 shares of the Company's common stock. SSN is an operations systems software development group with expertise in development of network management systems for public carriers. SSN developed operations systems software primarily for Northern Telecom ("Nortel"). SSN has become part of ADA-Canada and will develop network performance management operations systems software products for the Company and its customers, including Nortel. The acquisition of the SSN assets acquired will be treated as a purchase for accounting purposes. The Company intends to take a one-time charge in the third quarter for purchased research and development related to the acquisition. As of the filing of this report it was impractical to provide the financial statements of SSN and pro forma financial information. The Company will file the required financial statements and pro forma financial information under cover of Form 8-K/A on or before September 30, 1996. 8 Page 8 Item 2. APPLIED DIGITAL ACCESS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations June 30, 1996 The following should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risks and Uncertainties", contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 filed with the Securities and Exchange Commission. Overview On July 16, 1996, the Company acquired certain assets of MPR Teltech, a subsidiary of BC TELECOM, Inc. The assets acquired were part of MPR Teltech's operating unit commonly known as SSN. The Company and its Canadian subsidiary ADA-Canada acquired the assets for $4.2 million in cash and 150,000 shares of the Company's common stock. SSN is an operations systems software development group with expertise in development of network management systems for public carriers. SSN developed operations systems software primarily for Nortel. SSN has become part of ADA-Canada and will develop network performance management operations systems software products for the Company and its customers, including Nortel. The Company expects to take a one-time charge in the third quarter for purchased research and development related to the asset acquisition. On February 29, 1996, the Company acquired certain assets of ACD, a company that developed and marketed OS software used primarily by independent telephone companies to manage certain functions in their networks. The customer set and products of ACD complement those of ADA, and ADA intends to continue to market and enhance these products. The Company acquired the assets for $1.7 million in cash and incurred approximately $.2 million in related costs. The assets were acquired at an auction held in Federal Bankruptcy Court, Southern District of Indiana. Since filing for bankruptcy in September 1995, ACD had not generated significant revenue. The Company recorded a one-time charge of approximately $1.2 million associated with purchased research and development in the first quarter of 1996 as a result of the acquisition. In February 1996, the settlement of a class action lawsuit filed against the Company and two of its officers in March 1995 was finalized and received court approval. The settlement had previously been announced in December 1995. The litigation was settled for approximately $1.5 million, of which the Company was obligated to pay approximately $.4 million with the remainder paid by the Company's directors' and officers' liability insurance carrier. Charges associated with the suit were accrued in 1995. Factors that may be affecting the Company's results of operations include the impact of one major customer delaying its reengineering program during 1995. Although this customer resumed ordering the Company's T3AS products in late 1995, the Company is uncertain whether this customer will continue its reengineering program beyond its current level, if at all. Other factors include continued capital spending constraints at several of the Company's other customers; the impact of reorganizations, restructurings and reductions-in-force at several of the Company's Regional Bell Operating Company ("RBOC") customers; deregulation of the telecommunications industry; and the delay in the receipt of the FCC's informal assessment on the Company's Remote Module product, received in September 1995 following introduction of the product in March 1995. The Company believes that deregulation and the resulting increased number of competitors providing telecommunications services could result in an expansion of the Company's customer base and increased competition with regard to service levels and costs, ultimately causing an increased demand for the Company's products. However, additional delays in the deployment of the Company's products and continued uncertainty surrounding the telecommunications industry may have a material adverse impact on the Company's business, operating results and financial condition. As a result of the uncertainties faced by the Company's customers, the Company continues to have limited visibility with regard to future customer orders and the timing of such orders. Customers have been placing orders quarterly and the Company has been operating in a book and ship mode. With a small customer base and fluctuating order size, this trend has resulted in quarter-to-quarter revenue fluctuations that are likely to continue for the foreseeable future. 9 Page 9 Results of Operations Revenue decreased 7% from $4,836,000 for the three months ended June 30, 1995 to $4,516,000 for the three months ended June 30, 1996. Revenue decreased 13% from $12,856,000 for the six months ended June 30, 1995 to $11,153,000 for the six months ended June 30, 1996. The decrease resulted from decreased sales of the Company's T3AS products compared to the same period in the prior year. Revenue for the quarter ended June 30, 1996 included approximately $.9 million in engineering and installation ("E&I") services provided to customers for the installation of the Company's T3AS products, compared to $.8 million for the same quarter a year ago and $2.6 million for the six months ended June 30, 1996 compared to $.9 million for the same period last year. One RBOC customer accounted for the majority of the E&I revenue, and to date, the Company has not received significant orders for E&I services from any other customer. Although the Company intends to continue to offer E&I services to its customers, the Company does not expect to maintain the current level of E&I revenue, and is uncertain as to the future level of business, if any, related to E&I services. Revenue for the quarter ended June 30, 1996, included approximately $.8 million in OS product sales and services. The Company intends to continue to market and develop OS products and services but is uncertain as to the future level of business related to these products. The majority of the Company's revenue to date has been derived from the sale of T3AS products. The Company expects that revenue from sales of T3AS products will continue to account for the majority of the Company's revenue for the foreseeable future. Gross profit decreased 18% from $3,023,000 for the three months ended June 30, 1995 to $2,469,000 for the three months ended June 30, 1996 and decreased as a percent of revenue from 62% for the three months ended June 30, 1995 to 55% for the three months ended June 30, 1996. Gross profit decreased 24% from $7,987,000 for the six months ended June 30, 1995 to $6,086,000 for the six months ended June 30, 1996 and decreased as a percent of revenue from 62% for the six months ended June 30, 1995 to 55% for the six months ended June 30, 1996. The decreases were primarily the result of decreased sales of the Company's T3AS products, product mix weighted toward lower margin products and services, and the absorption of relatively fixed manufacturing overhead costs by a lower revenue base, compared to the same period last year. There can be no assurance that the Company will be able to maintain current gross profit or gross profit as a percent of revenue levels. In September 1995, the Company implemented price reductions on certain components of the Company's T3AS base system to reduce the cost of initial system deployments in new sites, particularly in low-circuit-density applications of DS1 circuit applications. In the event future product mix is weighted toward price-reduced components, there may be a negative impact on gross profit. There can be no assurance that the price reductions will result in increased orders for the Company's products. In addition to the factors discussed above, other factors which may materially and adversely affect the Company's gross profit in the future include its level of revenue, competitive pricing pressures in the telecommunication network management market, new product introductions by the Company or its competitors, potential inventory obsolescence and scrap, possible recalls, production or quality problems, timing of development expenditures, changes in material costs, disruptions in sources of supply, regulatory changes, seasonal patterns of bookings, capital spending, and changes in general economic conditions. Research and development expenses increased 41% from $1,351,000 for the three months ended June 30, 1995 to $1,905,000 for the three months ended June 30, 1996. Research and development expenses increased 35% from $2,646,000 for the six months ended June 30, 1995 to $3,572,000 for the six months ended June 30, 1996. The increases were primarily due to the additions of research and development personnel and related recruiting efforts, and increases in non-recurring engineering (NRE) expenses due to timing of planned development projects compared to the same period last year. Research and development personnel expenses for the three and six month periods ended June 30, 1996 increased 43% and 33%, respectively, compared to the same periods in the prior year. Of these percentage increases, approximately seventeen points and twelve points, respectively, are attributable to the addition of research and development personnel related to the ACD asset acquisition. The Company believes that its future success depends on its ability to maintain its technological leadership through enhancement of its existing products and development of innovative new products and services that meet customer needs. Therefore, the Company intends to continue to make significant investments in research and product development in association with planned development projects. In the first quarter of 1996, the Company recorded a one-time charge of approximately $1.2 million for purchased research and development costs related to the ACD asset acquisition. The Company expects to take a one-time charge in the third quarter of 1996 for purchased research and development related to the SSN acquisition. Sales and marketing expenses increased approximately 71% from $1,029,000 for the three months ended June 30, 1995 to $1,760,000 for the three months ended June 30, 1996. Sales and marketing expenses increased approximately 59% from $2,011,000 for the six months ended June 30, 1995 to $3,201,000 for the six months ended June 30, 1996. The increases were primarily the result of the addition of technical support and marketing personnel and increased promotional expenses. Of the total percentage increases above, approximately 21 and 14 points, respectively, of the total increase are attributable to the addition of marketing and customer support personnel related to the ACD asset acquisition. The Company expects that sales and marketing expenses will continue to increase in absolute dollars as the Company continues to hire additional sales, marketing and technical support personnel to support planned product introductions. 10 Page 10 General and administrative expenses decreased approximately 8%, from $819,000 for the three months ended June 30, 1995 to $750,000 for the three months ended June 30, 1996. This decrease is primarily due to lower legal expenses related to last year's lawsuit, offset by increased consulting expenses related to the Company's recruiting efforts for additional personnel. General and administrative expenses increased approximately 8%, from $1,329,000 for the six months ended June 30, 1995 to $1,430,000 for the six months ended June 30, 1996. The increase was mostly the result of increased consulting expenses related to the Company's recruiting efforts for additional personnel and increased administrative support. The Company expects that general and administrative expenses will increase in absolute dollars as the administrative support needs of the Company increase. Interest income decreased approximately 8% from $522,000 for the three months ended June 30, 1995 to $479,000 for the three months ended June 30, 1996. Interest income decreased approximately 7% from $1,026,000 for the six months ended June 30, 1995 to $953,000 for the six months ended June 30, 1996. The decreases are primarily the result of a decrease in cash investments compared to the same periods last year. The Company did not provide for income taxes for the six months ended June 30, 1996 due to a net loss, compared to an effective rate of 35% for the six months ended June 30, 1995. The Company expects to provide for federal and state income taxes for 1996 at applicable statutory rates, after giving effect to remaining available net operating loss carryforwards and any available tax credits. As a result of the factors discussed above, the Company incurred a net loss of $1,440,000, or $.12 per share, for the three months ended June 30, 1996 compared to net income of $228,000, or $.02 per share for the three months ended June 30, 1995. The Company incurred a net loss of $2,308,000, or $.19 per share, for the six months ended June 30, 1996 compared to net income of $1,966,000, or $.15 per share for the six months ended June 30, 1995. Excluding the $1.2 million charge associated with the acquisition of ACD assets, the Company would have recorded a net loss of $1,122,000, or $.09 per share, for the six months ended June 30, 1996. Liquidity and Capital Resources At June 30, 1996, the Company had approximately $29,931,000 in cash and investments, compared to $31,847,000 at December 31, 1995. The decrease in cash and investments is primarily due to cash payments related to the ACD asset acquisition. Working capital decreased approximately $3,974,000 from $36,728,000 at December 31, 1995 to $32,754,000 at June 30, 1996. The decrease in working capital was primarily the result of the ACD asset acquisition, an increase in long-term investments and an increased inventory level. For the six months ended June 30, 1996, the Company generated $738,000 from operating activities primarily as a result of decreased accounts receivable compared to the use of $1,282,000 by operating activities for the six months ended June 30, 1995. Net cash used in investing activities was $829,000 for the six months ended June 30, 1996 compared to cash provided from investing activities of $2,810,000 for the same period a year ago. The increased use of cash was primarily due to cash payments related to the ACD asset acquisition and cash used for capital expenditures. Cash used for capital expenditures was approximately $838,000 for the six months ended June 30, 1996 compared to $1,168,000 for the six months ended June 30, 1995. Most of the additions were for the purchase of computer and lab equipment to support the Company's expanded research and development efforts. The majority of tangible assets acquired from ACD consisted of computer equipment. The Company expects the level of capital expenditures will increase in 1996 in proportion to increases in planned development projects and increased personnel levels. In July 1996, the Company and its Canadian subsidiary, ADA-Canada, purchased the assets of MPR Teltech's SSN division for $4.2 million in cash and 150,000 shares of the Company's common stock. The majority of the tangible assets acquired from MPR Teltech consisted of computer equipment. Assuming no material changes in the Company's current operating plans, the Company believes that cash generated from operations and the total of its cash and investments, will be sufficient to meet its working capital and capital expenditure requirements for at least the next twelve months. Significant additional capital resources, however, may be required to fund acquisitions of complementary businesses, products or technologies. Alternatively, the Company may need to issue additional shares of its capital stock or incur indebtedness in connection with any such acquisitions. At present, the Company does not have any agreements or commitments with respect to any such acquisition. The Company believes the impact of inflation on its business activities has not been significant to date. 11 Page 11 RISKS AND UNCERTAINTIES Concentration of Major Customers; Telephone Company Qualification Requirements. The market for telephone network test and performance monitoring systems consists primarily of telephone companies, including the seven RBOCs, other local telephone companies and long distance telephone companies. The Company's marketing efforts have focused on the RBOCs. Accordingly, at present the Company's customer base is highly concentrated and there can be no assurance that its customer base will become less concentrated. Further, the Company's customers are significantly larger than the Company and may be able to exert a high degree of influence over the Company. The loss of one or more of the Company's major customers, the reduction of orders, or a delay in deployment of the Company's products could materially and adversely affect the Company's business, operating results and financial condition. Prior to selling products to a telephone company, a vendor must first undergo a product qualification process for its products with the telephone company. Although the qualification process for a new product varies somewhat among these prospective customers, the Company's experience is that the process often takes a year or more. Currently, six of the seven RBOCs have qualified and deployed the Company's T3AS products. Further, any failure on the part of any of the RBOCs or other telephone companies to maintain their qualification of the Company's T3AS products, failure of any of the RBOCs or other telephone companies to deploy the Company's T3AS products, or any attempt by any of the RBOCs or other telephone companies to seek out alternative suppliers could have a material adverse effect on the Company's business, operating results and financial condition. BellSouth, Ameritech, Southwestern Bell and U S West have entered into purchase contracts with the Company. Other RBOCs, independent telephone companies, and other telephone service providers purchase the Company's T3AS products under standard purchase orders. Since the RBOC contracts may be terminated at the convenience of the RBOC, the Company believes that the purchase contracts are not materially different than purchasing under purchase orders. There can be no assurance that the Company's T3AS products will be qualified by new customers, or that such qualification will not be significantly delayed. Furthermore, telephone company work force reductions and staff reassignments have in the past delayed the product qualification process, and the Company expects such reductions and reassignments to continue in the future. There can be no assurance that such reductions and reassignments will not have a material adverse effect on the Company's business, operating results and financial condition. High Dependence on Single Product Line. The majority of the Company's revenue to date has been derived from the sale of T3AS products and services and the Company expects that this will continue for the foreseeable future. Failure by the Company to enhance its existing T3AS products and to develop new product lines and new markets could materially and adversely affect the Company's business, operating results and financial condition. There is no assurance that the Company will be able to develop and market new products and technology or otherwise diversify its source of revenue. Rapid Technological Change and Dependence on New Products. The market for the Company's products is characterized by rapid technological advances, evolving industry transmission standards, changes in customer requirements, and frequent new product introductions and enhancements. The introduction of telephone network test and performance- monitoring products involving superior technologies or the evolution of alternative technologies or new industry transmission standards could render the Company's existing products, as well as products currently under development, obsolete and unmarketable. The Company believes its future success will depend in part upon its ability, on a cost-effective and timely basis, to continue to enhance T3AS products, to develop and introduce new products for the telephone network test and performance-monitoring market and other markets, to address new industry transmission standards and changing customer needs, and to achieve broad market acceptance for its products. In particular, the Company anticipates that the SONET and SDH optical transmission standards will become the industry transmission standards over the coming years for the North American and international networks, respectively. The Company's current T3AS products do not address either the SONET or SDH transmission standard. The Company intends to extend its current products and develop new products to accommodate such new transmission standards, as they evolve. The widespread adoption of SONET and/or SDH as industry transmission standards before the Company is able to successfully develop a product which addresses such transmission standards could adversely affect the sale and deployment of the Company's T3AS products. Any failure by the Company to anticipate or respond on a cost-effective and timely basis to technological developments, changes in industry transmission standards or customer requirements, or any significant delays in product development or introduction could have a material adverse effect on the Company's business. There can be no assurance that the Company will be able to successfully develop new products to address new industry transmission standards and technological changes or to respond to new product announcements by others, or that such products will achieve market acceptance. The Company may acquire from time to time, complementary businesses, products or technologies. In connection with such acquisitions, the Company may be required to commit substantial capital and human resources and may incur increased expenses. In February 1996, the Company acquired certain assets of ACD and in July 1996, the Company acquired certain assets of MPR Teltech. As the Company invests in product development, marketing, and sales support for the acquired assets, the associated expenses could have an adverse effect on the Company's business, operating results and financial condition. Dependence on Suppliers and Subcontractors; Need to Make Advance Purchase Commitments. Certain components used in the Company's T3AS products and Remote Module product, including its VLSI ASICs and other components, are 12 Page 12 available from a single source or a limited number of sources. The Company has no supply agreements and generally makes its purchases with purchase orders. Further, certain components require an order lead time of up to one year. Other components that currently are readily available may become difficult to obtain in the future. Failure of the Company to order sufficient quantities of these components in advance could prevent the Company from increasing production in response to customer orders in excess of amounts projected by the Company. In the past, the Company has experienced delays in the receipt of certain of its key components, which have resulted in delays in product deliveries. There can be no assurance that delays in key component and part deliveries will not occur in the future. The inability to obtain sufficient key components as required or to develop alternative sources if and as required in the future could result in delays or reductions in product shipments, which in turn could have a material adverse effect on the Company's customer relationships and operating results. Additionally, the Company uses third-party subcontractors for the manufacture of its subassemblies. This reliance on third-party subcontractors involves several risks, including the potential absence of adequate capacity, the unavailability of or interruption in access to certain process technologies, and reduced control over product quality, delivery schedules, manufacturing yields and costs. Shortages of raw materials or production capacity constraints at the Company's subcontractors could negatively affect the Company's ability to meet its production obligations and could result in increased prices for affected parts. To procure adequate supplies of certain components, the Company must make advance commitments to purchase relatively large quantities of such components in a number of circumstances. A large portion of the Company's purchase commitments consist of custom parts, some of which are sole-source such as VLSI ASICs, for which there is no alternative use or application. The inability of the Company to incorporate such components in its products could have a material adverse effect on the Company's business, operating results and financial condition. Product Recall. Producers of telephone network equipment, including test access and performance monitoring systems such as those being marketed by the Company, are often required to meet rigorous standards imposed by Bellcore, the research and development entity created following the divestiture of AT&T to provide ongoing engineering support to the RBOCs. In addition, the Company must meet specialized standards imposed by its customers. The Company's systems are also required to interface in a complex and changing environment with telecommunication network equipment made by numerous suppliers. In the event there are material deficiencies or defects in the design or manufacture of the Company's systems, or if the Company's systems become incompatible with existing third-party network equipment, the affected products could be subject to a recall. The Company has experienced two significant product recalls in its history and there can be no assurance that the Company will not experience any product recalls in the future. The cost of any subsequent product recall and associated negative publicity could have a material adverse effect on the Company's business, operating results and financial condition. Competition. The Company believes the principal competitive factors in its market are conformance with Bellcore and other industry transmission standards and specifications; product features, including price, performance and reliability; technical support; and the maintenance of close working relationships with customers. The Company believes it has competed favorably, to date, with respect to each of these factors. There can be no assurance, however, that the Company will compete successfully in the future. The Company believes there are currently no competitors that provide an integrated comprehensive solution to performance monitoring and testing of the DS3 circuit as does the Company's T3AS system. The Company believes there are fewer than 10 current competitors that provide partial solutions to either performance monitoring or testing of the DS1 or DS0 circuits that make up the DS3 circuit. Such competitors and prospective competitors include a number of companies, such as manufacturers of DS1 test and monitoring equipment, manufacturers of NIUs, manufacturers of digital cross-connect test and performance monitoring equipment and manufacturers of large transmission equipment. Additionally, the Company believes there are currently fewer than 20 current competitors that provide OS applications for network systems management. Many of these competitors have significantly greater technical, financial, manufacturing and marketing resources than the Company, and several of them have long-established relationships with telephone companies. In addition, product price reductions resulting from market share penetration initiatives or competitive pricing pressures could have a material and adverse effect on the Company's business, operating results, and financial condition. There can be no assurance that the Company will have the financial resources, technical expertise or manufacturing, marketing, distribution and support capabilities to compete successfully in the future. Proprietary Technology. The Company relies on a combination of technical leadership, trade secret, copyright and trademark protection and non-disclosure agreements to protect its proprietary rights. Although the Company has pursued and intends to continue to pursue patent protection of inventions that it considers important and for which such protection is available, the Company believes its success will be largely dependent on its reputation for technology, product innovation, affordability, marketing ability and response to customer's needs. Currently, the Company has two U.S. patents granted and three U.S. patent applications allowed. One of the allowed patent applications relates to the Company's Remote Module product. Additionally, the Company has seven pending U.S. patent applications and two international (Patent Cooperation Treaty) applications on file covering various circuit and system aspects of its products. There can be no assurance that the Company will be granted additional patents or that, if any patents are granted, they will provide the Company with significant protection or will not be challenged. As part of its confidentiality procedures, the Company generally enters into non-disclosure 13 Page 13 agreements with its employees and suppliers, and limits access to and distribution of its proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's technology without authorization. Accordingly, there can be no assurance that the Company will be successful in protecting its proprietary technology or that ADA's proprietary rights will preclude competitors from developing products or technology equivalent or superior to that of the Company. The telecommunications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. The Company is not aware of infringement by its products or technology of the proprietary rights of others. There can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such assertions will not result in costly litigation or require the Company to obtain a license to intellectual property rights of such parties. There can be no assurance that any such licenses would be available on terms acceptable to the Company, if at all. Further, litigation, regardless of outcome, could result in substantial cost to and diversion of efforts by the Company. Any infringement claims or litigation against the Company could materially and adversely affect the Company's business, results of operations and financial condition. Moreover, the laws of some foreign countries do not protect the Company's proprietary rights in the products to the same extent as do the laws of the United States. Management of Changing Business. In February 1996, the Company acquired certain assets of ACD and in July 1996, the Company acquired certain assets of MPR Teltech. As a result of these acquisitions, the Company obtained additional office space and hired additional personnel in both Indiana and British Columbia, Canada to support the business operations of the new products, services and technologies acquired. In addition, over the past three years, the Company has experienced significant growth in its infrastructure as the Company seeks to expand its business. Such growth has placed, and is expected to continue to place, a significant strain on the Company's management, information systems and operations. The strain experienced to date has chiefly been in hiring sufficient numbers of qualified personnel to support the expansion of the business. The Company is not able to forecast additional strains that may be placed on the Company's management, information systems and operations as a result of either the ACD and MPR Teltech asset acquisitions or in the future in the event that growth continues. The Company's potential inability to manage its changing business effectively could have a material adverse effect on the Company's business, results of operations and financial condition. Dependence on Key Personnel. The success of the Company is dependent, in part, on its ability to attract and retain highly qualified personnel. Competition for such personnel is intense and the inability to attract and retain additional key employees or the loss of one or more current key employees could adversely affect the Company. There can be no assurance that the Company will be successful in hiring or retaining requisite personnel. Volatility of Stock Price. The Company's future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings from levels expected by public market analysts and investors could have an immediate and significant adverse effect on the trading price of the Company's common stock. 14 Page 14 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. From time to time, ADA may be involved in litigation relating to claims arising out of its operations in the normal course of business. As of the date of this Quarterly Report, the Company is not a party to any legal proceedings. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. The Annual Meeting of Shareholders was held on May 23, 1996. At the meeting, the shareholders elected Patricia L. Higgins, Christopher B. Paisley, Peter P. Savage, Edward F. Tuck and Geoffrey Y. Yang as directors of the Company for the ensuing year and until their respective successors are elected. The following table sets forth the voting in this election:
For Against Withheld Patricia L. Higgins 9,662,231 - 284,691 Christopher B. Paisley 9,662,531 - 284,391 Peter P. Savage 9,663,506 - 283,416 Edward F. Tuck 9,665,397 - 281,525 Geoffrey Y. Yang 9,664,097 - 282,825
In addition, the shareholders voted on the following proposals: (a) To approve an amendment to the 1994 Stock Option/Stock Issuance Plan increasing the number of shares of Common Stock authorized to be issued by 1,000,000 shares:
For Against Abstain Broker Non-Votes --------------------------------------------------------------------------------------- 5,008,466 1,850,315 41,456 2,952,085
This proposal was approved. (b) To approve an amendment to the 1994 Employee Stock Purchase Plan increasing the number of shares of Common Stock authorized to be issued by 100,000 shares:
For Against Abstain Broker Non-Votes 6,692,532 370,467 41,456 2,747,867
15 Page 15 This proposal was approved. (c) To ratify the appointment of Coopers and Lybrand L.L.P. as the Company's independent public accountants for the fiscal year ending December 31, 1996:
For Against Abstain 9,908,232 15,925 22,765
This proposal was approved. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.
Exhibit Number Description 10.1* Applied Digital Access 1994 Stock Option/Stock Issuance Plan, as amended (Exhibit 99.1). 10.2* Applied Digital Access 1994 Employee Stock Purchase Plan, as amended (Exhibit 99.4). 10.3* Applied Digital Access 1996 Non-Qualified Stock Option Plan (Exhibit 99.6). 11.1 Statement regarding computation of net income (loss) per share. 27.1 Financial Data Schedule.
* Incorporated by reference to the same numbered exhibit (except as otherwise referenced) in the Company's registration statement on Form S-8 (No. 333-08297) filed by the Company with the SEC on July 17, 1996. (b) Reports on Form 8-K. On March 15, 1996, the Company filed a report on Form 8-K in connection with the acquisition of certain assets of ACD at an auction held in Federal Bankruptcy Court, Southern District of Indiana. ACD developed and marketed operations systems software used primarily by independent telephone companies to manage certain functions in their networks. On May 14, 1996, the Company filed a report on Form 8-K/A to provide financial statements of ACD as required by Regulation S-X, along with applicable pro forma financial information required pursuant to Article 11 of Regulation S-X. On July 31, 1996, the Company filed a report on Form 8-K in connection with the acquisition of certain assets of MPR Teltech. 16 Page 16 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Applied Digital Access, Inc. Date: August 14, 1996 /s/ Peter P. Savage --------------- -------------------- Peter P. Savage Director President and Chief Executive Officer Date: August 14, 1996 /s/ James L. Keefe --------------- ------------------- James L. Keefe Vice President Finance and Administration and Chief Financial Officer EX-11.1 2 COMPUTATION OF NET INCOME (LOSS) PER SHARE 1 EXHIBIT 11.1 APPLIED DIGITAL ACCESS, INC. STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE (UNAUDITED) (Amounts in thousands, except per share data)
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1996 1995 1996 1995 ---- ---- ---- ---- Net income (loss) ($1,440) $228 ($2,308) $1,966 =============== ============= ================= =================== Reconciliation of weighted average number of shares outstanding to amount used in net income per share computation: Weighted average number of shares outstanding 11,983 11,828 11,961 11,742 Weighted average number of options and warrants outstanding, - 944 - 1,056 --------------- ------------- ----------------- ------------------- Weighted average number of shares outstanding 11,983 12,772 11,961 12,798 =============== ============= ================= =================== Net income (loss) per share ($0.12) $0.02 ($0.19) $0.15 =============== ============= ================= ===================
See Note 3 to Condensed Financial Statements EX-27.1 3 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1996 JUN-30-1996 1,883 22,076 3,461 (50) 7,441 37,207 7,800 (3,781) 48,265 4,453 0 0 0 49,318 2,412 48,265 11,153 11,153 5,067 5,067 9,387 0 (4) (2,308) 0 (2,308) 0 0 0 (2,308) (0.19) (0.19)
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