-----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, BtKLpsKIyA13pBVqC/jzpW/MA/MxTYMP3rINtobOsHOx/y101Uh5WzenKAR/gBjG kdcL2BXQHWJ6I8jTTwOgEQ== 0001047469-98-015379.txt : 19980417 0001047469-98-015379.hdr.sgml : 19980417 ACCESSION NUMBER: 0001047469-98-015379 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980416 SROS: NASD 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-K/A SEC ACT: SEC FILE NUMBER: 000-23698 FILM NUMBER: 98595686 BUSINESS ADDRESS: STREET 1: 9855 SCRANTON RD CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6196232200 10-K/A 1 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 000-23698 APPLIED DIGITAL ACCESS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 68-0132939 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 9855 SCRANTON ROAD, SAN DIEGO, CALIFORNIA 92121 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (619) 623-2200 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ 1 The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on February 28, 1998 as reported on the Nasdaq National Market, was approximately $58,670,158. For the purposes of this calculation, shares owned by officers, directors and 5% shareholders known to the registrant have been deemed to be owned by affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. There were 12,629,469 shares of the Registrant's Common Stock, $0.001 par value, outstanding as of February 28, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held May 21, 1998, referred to herein as the "Proxy Statement", are incorporated by reference as provided in Part III. 2 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements are set forth on pages F-1 through F-25 of this Amendment to the Company's Annual Report on Form 10K. 3 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS 4 The following financial statements of the Company are included on pages F-1 through F-25 of this Annual Report on Form 10-K: Report of Independent Accountants Consolidated Balance Sheets at December 31, 1996 and December 31, 1997 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1996 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES The following financial statement schedules are included in Item 14 (d): Report of Independent Accountants Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (b) REPORTS ON FORM 8-K The Company filed a report on Form 8-K on December 23, 1997 in connection with its reincorporation in Delaware. (c) EXHIBITS 5
EXHIBIT PAGE NUMBER NUMBER ------ ------ 2.1(5) Asset Purchase Agreement between Applied Digital Access, Inc. and Applied -- Computing Devices, Inc. dated February 29, 1996 2.2(7) Asset Purchase Agreement between Applied Digital Access, Inc. and MPR -- Teltech, Ltd. dated July 16, 1996 2.3(11) Asset Purchase Agreement between the Company and Northern Telecom -- Limited dated June 27, 1997 (the "Asset Purchase Agreement") (with certain confidential portions omitted). 3.3(13) Certificate of Incorporation of the Company. -- 3.4(14) Certificate of Agreement of Merger of the Company and its California -- predecessor. +3.5(15) Bylaws of the Company. -- 10.1 (1) Registration Rights Agreement by and between the Company and certain -- shareholders of the Company, dated May 22, 1992 as amended pursuant to the Amendment to Registration Rights Agreement dated April 9, 1993. 10.2(1) Lease for the Company's facilities at 9855 Scranton Road, dated June 15, 1993. -- 10.3(1) Agreement dated July 1, 1991 by and between the Company and BellSouth
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EXHIBIT PAGE NUMBER NUMBER ------ ------ Services Incorporated, as amended (with certain confidential portions omitted). -- 10.4(1) Software License Agreement dated January 16, 1992 by and between the -- Company and GCOM (with certain confidential portions omitted). 10.5(1) Master Agreement for Operations Systems Modifications for the Integration of -- Network Elements, dated June 17, 1991 by and between the Company and BellCore, as amended. 10.6(1) Addendum #1 to Master Agreement for Operations Systems Modifications for -- the Integration of Network Elements, dated June 17, 1991 by and between the Company and BellCore dated July 10, 1991. 10.7(1) Addendum #2 to Master Agreement for Operations Systems Modifications for -- the Integration of Network Elements, dated June 17, 1991 by and between the Company and BellCore dated November 19, 1993. 10.8(1) Addendum #3 to Master Agreement for Operations Systems Modification for -- the Integration of Network Elements dated June 17, 1991 by and between the Company and BellCore dated December 27, 1993. +10.9(1) Severance Agreement dated November 27, 1990 by and between the Company -- and Peter P. Savage. +10.10(1) Severance Agreement dated June 20, 1988 by and between the Company and -- Paul R. Hartmann. +10.11(1) 1994 Stock Option/Stock Issuance Plan Form of Stock Option Agreement. -- +10.12(1) 1994 Stock Option/Stock Issuance Plan Form of Stock Issuance Agreement. -- +10.13(1) 1994 Employee Stock Purchase Plan Form of Stock Purchase Agreement. -- +10.14(1) Form of Employee Proprietary Information Agreement. -- 10.15(1) Binary Software License Agreement dated March 7, 1989 between the -- Company and Software Components Group, Inc., as amended. 10.16(2) Reinstatement Agreement dated September 22, 1994 between the Company and -- BellSouth Telecommunications Incorporated (with certain confidential portions omitted) (Exhibit 10.2). 10.17(2) Purchase Agreement for Telecommunications Products and Related Services -- between Ameritech Services, Inc. (with certain confidential portions omitted) (Exhibit 10.3). 10.18(3) First Amendment to Office Lease dated September 23, 1994 between the -- Company and Sorrento Tech Associates. 10.19(4) Purchase Agreement for Telecommunications Products and Related Services between Southwestern Bell Telephone Company and the Company, dated
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EXHIBIT PAGE NUMBER NUMBER ------ ------ September 8, 1995 (with certain confidential portions omitted) -- +10.20(6) Applied Digital Access, Inc. 1994 Stock Option/Stock Issuance Plan, as -- amended. 10.21(8) Master Agreement between Northern Telcom, Ltd. and Applied Digital Access, -- Inc. dated July 16, 1996. 10.22(8) Stock Purchase Agreement between Applied Digital Access, Inc. and MPR -- Teltech, Ltd. dated July 16, 1996. 10.23(8) License Agreement between Northern Telcom, Ltd. and Applied Digital -- Access, Inc. dated July 16, 1996 10.24(8) Second Amendment to Lease between Sorrento Tech Associates and Applied -- Digital Access, Inc. dated August 8, 1996. 10.25(8) Lease Agreement between Rose Hulman Institute of Technology, through its -- authorized leasing agent, Ragle and Company, and Applied Digital Access, Inc. dated September 15, 1996. 10.26(9) Sublease agreement between the Company and ENOVA Corporation dated -- December 9, 1996. 10.27(9) First Amendment to Sublease between the Company and ENOVA Corporation -- dated January 24, 1997. 10.28(9) Office Lease Agreement between 2725321 Canada Inc. and Applied Digital -- Access - Canada, Inc. dated January 1, 1997. 10.29(10) License Agreement between Northern Telecom, Ltd. and the Company dated -- as of January 24, 1997. 10.30(11) License Agreement between Northern Telecom, Ltd. and the Company dated -- as of June 27, 1997 (with certain confidential portions omitted). 10.31(11) Applied Digital Access, Inc. 1997 Registration Rights Agreement between the -- Company and Northern Telecom, Ltd. dated as of June 27, 1997. 10.32(11) Stock and Warrant Purchase Agreement between the Company and Northern -- Telecom, Ltd. dated as of June 27, 1997. 10.33(11) Master Purchase Agreement between MCI Telecommunications Corporation -- and the Company dated June 16, 1997 (with certain confidential portions omitted). 10.34(11) Master Agreement between Northern Telecom, Ltd. and the Company dated as -- of June 26, 1997 (with certain confidential portions omitted). 10.35(12) Joint Development Agreement between Northern Telecom, Inc. and the -- Company dated September 30, 1997 (with certain confidential portions omitted). +10.36(15) Applied Digital Access, Inc. Amended and Restated 1996 Non-qualified Stock Option Plan
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EXHIBIT PAGE NUMBER NUMBER ------ ------ +10.37(15) Amended and Restated 1996 Non-qualified Stock Option Plan Form of Stock Option Agreement. +10.38(16) Severance Agreement dated March 24, 1995 by and between the Company and Donald J. O'Connor. +10.39(16) Severance Agreement dated March 12, 1997 by and between the Company and Steven F.X. Murphy. 10.40(16) Lease Agreement between Campbell Creek, Ltd. and the Company dated as of October 1, 1997. 10.41(16) First Amendment to Lease Agreement between Campbell Creek, Ltd. and the Company dated as of January 22, 1998. 10.42(16) Second Amendment to Sublease between the Company and ENOVA Corporation dated December 31, 1997. +10.43(16) Form of Indemnification Agreements between the Company and each of its directors. +10.44(16) Form of Indemnification Agreements between the Company and each of its officers. +10.45(16) Applied Digital Access, Inc. 1994 Employee Stock Purchase Plan, as amended. +10.46(16) Management Team Incentive Compensation Plan, as amended. 23.1 Consent of Independent Accountants. 24.1(16) Power of Attorney 27.1(16) Financial Data Schedule. + Management contract or compensatory plan. (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-75258), as amended. (2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 0-23698). (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (File No. 0-23698). (4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-23698). (5) Incorporated by reference to the Company's Current Report on Form 8-K dated March 15, 1996 (File No. 0-23698). (6) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-08297), as amended (7) Incorporated by reference to the Company's Current Report on Form 8-K dated July 31, 1996 (File No. 0-23698). (8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 (File No. 0-23698). (9) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-23698). (10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (File No. 0-23698). (11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 0-23698).
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EXHIBIT PAGE NUMBER NUMBER ------ ------ (12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 (File No. 0-23698). (13) Incorporated by reference to the Company's Current Report on Form 8-K dated December 23, 1997(File No. 0-23698). (14) Incorporated by reference to the Company's Current Report on Form 8-K/A dated January 12, 1998 (File No. 0-23698). (15) Incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 333- 48105). (16) Incorporated by reference to the Company's Annual Report on Form 10-K dated March 31, 1998 (File No. 0-23698).
10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to the Company's report on Form 10K to be signed on its behalf by the undersigned, thereunto duly authorized. APPLIED DIGITAL ACCESS, INC. Date: March 30, 1998 By: /s/ PETER P. SAVAGE ------------------------------------- Peter P. Savage President and Chief Executive Officer 11 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY REPORT ON AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- 1. CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Accountants ................................ F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997...... F-3 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997.................................. F-4 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1996 and 1997.................................. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997.................................. F-6 Notes to Consolidated Financial Statements........................ F-7 2. FINANCIAL STATEMENT SCHEDULE: Schedule II - Valuation and Qualifying Accounts for the Years Ended December 31, 1995, 1996 and 1997...................... F-25
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Applied Digital Access, Inc. and subsidiary We have audited the accompanying consolidated balance sheets of Applied Digital Access, Inc. and subsidiary as of December 31, 1996 and 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Applied Digital Access, Inc. and subsidiary as of December 31, 1996 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. San Diego, California January 23, 1998 F-2 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------ 1996 1997 ---- ---- ASSETS (DOLLARS IN THOUSANDS) Current assets: Cash and cash equivalents...................................................$ 1,504 $ 4,400 Investments - available for sale............................................ 19,957 8,779 Accounts receivable, less allowance for doubtful accounts of $50 ....................................................... 6,798 12,981 Inventory, net.............................................................. 7,363 5,859 Deferred income taxes....................................................... 130 130 Prepaid expenses and other current assets................................... 1,089 3,775 -------- -------- Total current assets............................................. 36,841 35,924 Property and equipment, net....................................................... 4,936 6,165 Intangible assets, net............................................................ 2,823 2,822 Deferred income taxes............................................................. 1,372 1,372 -------- -------- Total assets.....................................................$ 45,972 $ 46,283 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................................................$ 2,120 $ 3,478 Accrued expenses ........................................................... 1,491 2,846 Accrued warranty............................................................ 1,398 1,323 Current portion of obligations under capital leases......................... 16 18 Deferred revenue............................................................ 587 1,471 -------- -------- Total current liabilities........................................ 5,612 9,136 Obligations under capital leases, net of current portion.......................... 33 15 -------- -------- Total liabilities................................................ 5,645 9,151 -------- -------- Commitments and contingency Shareholders' equity: Preferred stock, no par value, 7,500,000 shares authorized, no shares issued....................................................... - - Common stock, $0.001 par value, 30,000,000 shares authorized, 12,255,334 and 12,605,082 shares issued and outstanding at December 31, 1996 and 1997, respectively............................... 50,631 51,610 Additional paid-in capital.................................................. 2,492 2,492 Unrealized gain on investments ............................................. 25 84 Deferred compensation....................................................... (50) - Accumulated deficit......................................................... (12,771) (17,054) -------- -------- Total shareholders' equity....................................... 40,327 37,132 -------- -------- Total liabilities and shareholders' equity.......................$ 45,972 $ 46,283 -------- -------- -------- --------
The accompanying notes are an integral part of the financial statements. F-3 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------ 1995 1996 1997 ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue ......................................................................... $20,470 $24,422 $34,050 Cost of revenue ......................................................................... 8,717 12,609 15,116 ------- ------- ------- Gross profit......................................................................... 11,753 11,813 18,934 ------- ------- ------- Operating expenses: Research and development............................................................. 5,807 7,356 9,164 In-process research and development related to acquisitions.................................................................. - 3,286 1,578 Sales and marketing.................................................................. 4,234 6,312 7,995 General and administrative........................................................... 2,976 3,529 5,252 ------- ------- ------- Total operating expenses................................................. 13,017 20,483 23,989 ------- ------- ------- Operating loss........................................................... (1,264) (8,670) (5,055) ------- ------- ------- Interest income ......................................................................... 2,023 1,673 904 ------- ------- ------- Income (loss) before income taxes........................................ 759 (6,997) (4,151) ------- ------- ------- Provision for income taxes................................................................ - 123 132 ------- ------- ------- Net income (loss)........................................................ $ 759 $(7,120) $(4,283) ------- ------- ------- ------- ------- ------- Net income (loss) per share, basic and diluted .......................... $.06 $(.59) $(.34) ---- ----- ------ ---- ----- ------ Shares used in per share computations ................................... 12,848 12,084 12,460 ------ ------ ------ ------ ------ ------
The accompanying notes are an integral part of the financial statements. F-4 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNREALIZED ADDITIONAL GAIN COMMON PAID-IN (LOSS) ON DEFERRED ACCUMULATED STOCK CAPITAL INVESTMENTS COMPENSATION DEFICIT TOTAL ----- ------- ----------- ------------ ------- ----- (DOLLARS IN THOUSANDS) Balance, January 1, 1995.................... $48,281 $2,492 $(436) $(153) $ (6,410) $43,774 Exercise of stock options and warrants for 261,662 shares of common stock.......... 76 - - - - 76 Issuance of 62,493 shares of common stock under stock purchase plan............. 643 - - - - 643 Unrealized gain on investments.............. - - 583 - - 583 Amortization of deferred compensation related to stock options.................... - - - 52 - 52 Net income ................................. - - - - 759 759 ------- ------ ------ ----- -------- ------- Balance, December 31, 1995.................. 49,000 2,492 147 (101) (5,651) 45,887 Exercise of stock options for 149,261 shares of common stock...................... 115 - - - - 115 Issuance of 56,857 shares of common stock under stock purchase plan............. 428 - - - - 428 Unrealized loss on investments.............. - - (122) - - (122) Amortization of deferred compensation related to stock options.................... - - - 51 - 51 Issuance of 150,000 shares of common stock in connection with acquisition........ 1,088 - - - - 1,088 Net loss ................................... - - - - (7,120) (7,120) ------- ------ ------ ----- -------- ------- Balance, December 31, 1996.................. 50,631 2,492 25 (50) (12,771) 40,327 Exercise of stock options for 221,235 shares of common stock...................... 381 - - - - 381 Issuance of 128,513 shares of common stock under stock purchase plan............. 598 - - - - 598 Unrealized gain on investments.............. - - 59 - - 59 Amortization of deferred compensation related to stock options.................... - - - 50 - 50 Net loss ................................... - - - - (4,283) (4,283) ------- ------ ------ ----- -------- ------- Balance, December 31, 1997.................. $51,610 $2,492 $ 84 $ - $(17,054) $37,132 ------- ------ ------ ----- -------- ------- ------- ------ ------ ----- -------- -------
The accompanying notes are an integral part of the financial statements. F-5 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------ 1995 1996 1997 ---- ---- ---- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net income (loss)......................................................... $ 759 $(7,120) $(4,283) Adjustments to reconcile net income (loss) to net cash used by operating activities: In-process research and development related to acquisitions........ - 3,286 1,578 Depreciation and amortization...................................... 904 1,819 3,089 Amortization of discount or premium on investments................. 119 95 (119) Amortization of deferred compensation.............................. 52 51 50 Change in accounts receivable and inventory reserves............... 103 (68) 101 Changes in operating assets and liabilities: Accounts receivable............................................ (2,792) (1,440) (6,183) Inventory...................................................... (2,232) (723) 1,403 Prepaid expenses and other current assets...................... (327) 207 (2,686) Accounts payable............................................... (440) 300 1,358 Accrued expenses............................................... (515) 648 1,355 Accrued warranty .............................................. (15) 93 (75) Deferred revenue............................................... - 587 884 ------ ------ ------ Net cash used by operating activities....................... (4,384) (2,265) (3,528) ------ ------ ------ Cash flows from investing activities: Purchases of investments.................................................. (33,863) (20,923) (18,517) Maturities of investments................................................. 38,595 30,923 29,792 Purchases of property and equipment....................................... (1,948) (1,709) (2,432) Purchase costs related to asset acquisitions.............................. - (6,356) (3,382) Purchase of license agreement............................................. - (350) - ------ ------ ------ Net cash provided by investing activities................... 2,784 1,585 5,461 ------ ------ ------ Cash flows from financing activities: Principal payments on obligations under capital leases.................... (126) (32) (16) Proceeds from exercise of stock options and warrants...................... 76 115 381 Proceeds from issuance of common stock, net of costs..................... 643 428 598 ------ ------ ------ Net cash provided by financing activities................... 593 511 963 ------ ------ ------ Net increase (decrease) in cash and cash equivalents........ (1,007) (169) 2,896 Cash and cash equivalents at beginning of year................................ 2,680 1,673 1,504 ------ ------ ------ Cash and cash equivalents at end of year........................... $1,673 $1,504 $4,400 ------ ------ ------ ------ ------ ------
The accompanying notes are an integral part of the financial statements. F-6 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS: Applied Digital Access, Inc. and subsidiary (the "Company") designs, engineers and manufactures network test and performance monitoring systems, software and services for the management and test of telecommunication circuits. Current sales are concentrated with telecommunication service providers or affiliated companies in the United States and Canada. 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. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and short-term investments with original maturities of 90 days or less when purchased. INVENTORY Inventory is stated at the lower of cost or market using the first-in, first-out method. The Company currently buys certain key components of its products from a limited number of suppliers. Although there are a limited number of suppliers of the components, management believes that other suppliers could provide similar key components on comparable terms. A change in suppliers, however, could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results. F-7 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: INVESTMENTS The Company determines the appropriate classification of its debt securities at the time of purchase and re-evaluates such designations at each balance sheet date. Investments are classified as "available for sale" and are carried at their fair value. Realized gains and losses are determined using the specific identification method and are included in other income. Gross unrealized holding gains or losses are excluded from earnings and reported, net of the related tax effect, as a separate component of shareholders' equity. The amortized cost of debt securities is adjusted for the amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Fair value is determined based on quoted market prices. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and depreciated over the estimated useful lives of the assets (3 to 7 years) using the straight-line method. Leased property meeting certain criteria is capitalized and the present value of the related lease payments is recorded as an obligation. Amortization of capitalized leased assets is computed on the straight-line method over the shorter of the lease term or the assets' estimated useful lives. Maintenance and repairs are charged to expense as incurred. Upon the retirement or other disposition, the property and related accumulated depreciation or amortization are removed from the accounts and any resulting profit or loss is reflected in income. INTANGIBLE ASSETS The Company amortizes costs in excess of fair value of net assets of businesses acquired using the straight-line method over 3 to 5 years. Recoverability is reviewed annually or sooner if events or changes in circumstances indicate that the carrying value may exceed fair value. REVENUE RECOGNITION Revenue is generally recognized at the time of shipment or delivery, based on specified shipping terms, or when services have been performed. When customer acceptance criteria are specified in the customer order, revenue recognition is deferred until the acceptance criteria are met. F-8 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: INCOME TAXES Deferred income taxes are recognized for the tax consequences in future years for differences between the tax basis of assets and liabilities ("temporary differences") and their financial reporting amounts at each year end based on enacted tax laws and statutory rates applicable to the periods in which the temporary differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. ADVERTISING COSTS Advertising costs are expensed as incurred. Total advertising expense was approximately $141,000, $217,000 and $250,000 for the years ended December 31, 1995, 1996 and 1997, respectively. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. Accordingly, options granted at below fair market value result in deferred compensation to the extent of the difference between the fair market value at the date of grant and the exercise price. The deferred compensation is charged to earnings ratably over the vesting period. During the three year period ended December 31, 1997, no options were granted at below fair market value. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates. F-9 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity in a business enterprise during a period from transactions and other events and circumstances from nonowner sources. SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operating decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. The impact of adopting SFAS No. 130 and SFAS No. 131, both effective for the Company in 1998, has not yet been determined. In October 1997, the American Institute of Certified Public Accountants issued State of Position 97-2 ("SOP 97-2"), SOFTWARE REVENUE RECOGNITION. This statement establishes requirements for revenue recognition for software companies for fiscal years beginning after December 15, 1997. The Company is currently evaluating the impact of SOP 97-2 and has not determined the result, if any, on the Company's financial position, results of operations or cash flows. The Company has adopted the provisions of SFAS No. 128, EARNINGS PER SHARE, effective December 31, 1997. SFAS No. 128 requires the presentation of basic and diluted earnings per share. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the conversion of convertible preferred stock (using the "if converted") method) and exercise of stock options and warrants for all periods. All prior period earnings per share amounts have been restated to comply with SFAS No. 128. RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. F-10 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 3. STATEMENTS OF CASH FLOWS: Non-cash investing and financing activities for the years ended December 31, 1995, 1996 and 1997 are as follows:
1995 1996 1997 ---- ---- ---- (DOLLARS IN THOUSANDS) Issuance of stock in connection with acquisition........ $ - $1,088 $ -
Cash payments for interest and income taxes for the years ended December 31, 1995, 1996 and 1997 are as follows:
1995 1996 1997 ---- ---- ---- (DOLLARS IN THOUSANDS) Interest ................................ $ 13 $ 7 $ 4 Income taxes............................. 506 - 229
4. INVESTMENTS: Marketable securities at December 31, 1996 and 1997 consist of obligations of the U.S. Government and its agencies and are summarized as follows:
1996 1997 ---- ---- (DOLLARS IN THOUSANDS) Cost......................................... $19,936 $8,767 Gross unrealized gains....................... 57 31 Gross unrealized losses...................... (36) (19) ------- ------ Estimated fair value.................... $19,957 $8,779 ------- ------ ------- ------
F-11 5. INVENTORY: Inventory at December 31, 1996 and 1997 consists of the following:
1996 1997 ---- ---- (DOLLARS IN THOUSANDS) Raw materials................................ $4,211 $3,419 Work-in-process.............................. 2,558 2,223 Finished goods............................... 1,063 787 ------ ------ 7,832 6,429 Less inventory reserve....................... (469) (570) ------ ------ $7,363 $5,859 ------ ------ ------ ------
F-12 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. PROPERTY AND EQUIPMENT: Property and equipment at December 31, 1996 and 1997 consists of the following:
1996 1997 ---- ---- (DOLLARS IN THOUSANDS) Computers........................................ $ 4,254 $ 5,655 Machinery, furniture and equipment............... 3,614 4,782 Purchased computer software...................... 894 1,371 Leasehold improvements........................... 766 911 -------- ------- 9,528 12,719 Less accumulated depreciation and amortization... (4,592) (6,554) -------- ------- $ 4,936 $ 6,165 -------- ------- -------- -------
Property and equipment acquired under capital leases totaled approximately $216,000 at December 31, 1996 and 1997. Accumulated amortization related to assets under capital leases totaled approximately $106,000 and $140,000 as of December 31, 1996 and 1997 respectively. 7. INTANGIBLE ASSETS: Intangible assets at December 31,1996 and 1997 consist of the following:
1996 1997 ---- ---- (DOLLARS IN THOUSANDS) Goodwill and know-how...................... $2,588 $ 3,619 Purchased technology, customer contracts... 337 337 License agreement.......................... 350 350 ------ ------- 3,275 4,306 Less accumulated amortization................ (452) (1,484) ------ ------- $2,823 $2,822 ------ ------- ------ -------
F-13 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 8. ACCRUED EXPENSES: Accrued expenses at December 31, 1996 and 1997 consist of the following:
1996 1997 ---- ---- (DOLLARS IN THOUSANDS) Accrued payroll and related costs $ 443 $ 902 Income taxes 444 388 Accrued vacation 431 583 Other 173 973 ------ ------ $1,491 $2,846 ------ ------ ------ ------
9. COMMITMENTS AND CONTINGENCY: LEASES The Company leases office space and equipment under operating leases. Certain of these leases include renewal or purchase options. Rent expense related to these leases was approximately $386,000, $613,000 and $673,000 for the years ended December 31, 1995, 1996 and 1997, respectively. The Company also leases certain property and equipment under capital leases. Minimum commitments under these leases are as follows:
OPERATING CAPITAL YEAR ENDING DECEMBER 31, LEASES LEASE ------------------------ --------- ------- (DOLLARS IN THOUSANDS) 1998 $1,006 $ 20 1999 1,297 16 2000 980 - 2001 1,004 - 2002 1,034 - Thereafter 1,127 - ------ ---- Total minimum lease payments $6,448 36 ------ ------ Less amounts representing interest (3) ---- Obligations under capital leases 33 Less current portion (18) ---- $ 15 ---- ----
F-14 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 9. COMMITMENTS AND CONTINGENCY: PURCHASE COMMITMENTS At December 31, 1996 and 1997, the Company has open purchase commitments of approximately $3,731,000 and $4,413,000 respectively, which include approximately $2,264,000 and $1,938,000 of cancelable purchase ocmmitments. LEGAL PROCEEDING In March 1995, a class action lawsuit was filed against the Company and two of its officers, one of whom is also a director of the Company, in the U.S. District Court for the Southern District of Southern California. The suit alleged violations of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended (the "Act"), arising out of alleged misrepresentations and omissions made by the Company and the named officers. The suit also alleged violation of Section 20(a) of the Act arising out of alleged "control" of the Company by the officer defendants. The suit was brought on behalf of purchasers of the Company's securities during the period October 10, 1994 through March 29, 1995, and sought unspecified damages. In December 1995, the Company entered into a settlement agreement pursuant to which all claims were dismissed with prejudice. The total settlement amount was approximately $1,500,000, of which the Company paid approximately $446,000 with the remaining amount paid by the Company's Directors' and Officers' liability insurance carriers. Obligations of the Company with respect to this matter were provided for in the financial statements during the year ended December 31, 1995 and paid during the year ended December 31, 1996. 10. SHAREHOLDERS' EQUITY: STOCK COMPENSATION PLANS The Company applies Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans and its stock purchase plan. Had compensation costs for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards in 1995, 1996 and 1997 under those plans consistent with the methods of SFAS No. 123, the Company's net income (loss) and earnings per share would have been reduced to the pro forma amounts indicated below: F-15 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 10. SHAREHOLDERS' EQUITY, CONTINUED:
1995 1996 1997 ---- ---- ---- (DOLLARS IN THOUSANDS) Net income (loss): As reported $ 759 $(7,120) $(4,283) Pro forma (195) (8,352) (6,830) Net income (loss) per common share: As reported, basic $.06 $(.59) $(.34) As reported, diluted .06 (.59) (.34) Pro forma, basic and diluted (.02) (.69) (.55)
FIXED STOCK OPTION PLANS In May 1996, the Company adopted the 1996 Non-Qualified Stock Option Plan (the "1996 Plan"). The 1996 Plan does not affect the 1994 Plan described below. Under the 1996 Plan, the Company is authorized to issue 650,000 shares of common stock. The 1996 Plan is intended to promote the interests of the Company or its parents or subsidiary corporations. Under the 1996 Plan, eligible individuals may be granted options to purchase shares of the Company's common stock at not less than 85% of the fair market value of such shares on the date of grant. Such options shall be exercisable in one or more installments as specified in the Notice of Grant and have a maximum term of 10 years. Persons eligible to receive stock options under the 1996 Plan are key employees of the Company other than officers who are responsible for the growth and financial success of the Company and consultants and other independent contractors who provide valuable services to the Company. In February 1994, the Company adopted the 1994 Stock Option/Stock Issuance Plan (the "1994 Plan"). The 1994 Plan supersedes and consolidates the 1988 Stock Option Plan and Restricted Stock Purchase Plan (the "1988 Plan"). Outstanding stock options and unvested share issuances under the 1988 Plan were incorporated into and assumed in the 1994 Plan. In May of 1996, the Board of Directors received shareholder approval to increase the authorized shares to 3,800,000 under the 1994 Plan. The 1994 Plan is divided into three separate components: the Discretionary Option Grant Program (the "Discretionary Program"); the Automatic Option Grant Program (the "Automatic Program") and the Stock Issuance Program (the "Issuance Program"). Under the Discretionary Program, eligible individuals may be granted options to purchase shares of the Company's stock at not less than 85% of the fair market value of such shares on the date of grant. Under the Automatic Program, non-employee Directors will automatically be granted options to purchase common stock at 100% of the fair market value on the grant date. Under the Issuance F-16 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 10. SHAREHOLDERS' EQUITY, CONTINUED: Program, eligible individuals may be allowed to purchase shares of the Company's common stock at discounts from the fair market value of such shares of up to 15%. Such shares may be issued as fully-vested shares or as shares to vest over time and have a maximum term of 10 years (5 years for options granted to a 10% shareholder). Persons eligible to receive stock issuances under the Issuance Program and/or option grants under the Discretionary Program are officers and other key employees of the Company and certain consultants or other independent contractors, as defined in the plan. The individuals eligible to receive option grants under the Automatic Program are individuals who are elected, re-elected or appointed as non-employee Board members. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1997: no dividend yield; expected volatility; risk-free interest rates on or about the date of grant represented by the interest rate on U.S. Treasury Bills with a term of maturity equal to the vesting period of the options, and expected lives of 5 years. The following table summarizes stock option transactions for each of the three years in the period ended December 31, 1997:
1994 AND 1996 PLANS OTHER ------------------------- ------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ------ ----- ------ ----- Outstanding at January 1, 1995 1,439,744 $4.22 27,587 $.14 Granted 737,025 $12.30 - - Exercised (205,068) $.35 (10,500) $.14 Canceled (300,392) $18.30 - - --------- ------- Outstanding at December 31, 1995 1,671,309 $5.63 17,087 $.14 Granted 874,887 $9.01 - - Exercised (149,261) $.77 - - Canceled (598,732) $18.30 - - --------- ------- Outstanding at December 31, 1996 1,798,203 $5.54 17,087 $.14 Granted 1,422,039 $6.58 - - Exercised (252,313) $6.34 - - Canceled (317,071) $7.65 - --------- ------- Outstanding at December 31, 1997 2,650,858 $6.20 17,087 $.14 --------- ------- --------- -------
F-17 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 10. SHAREHOLDERS' EQUITY, CONTINUED: The range of exercise prices of stock options outstanding at December 31, 1997 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED RANGE OF AVERAGE AVERAGE AVERAGE EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE ------ ----------- ---------------- ----- ----------- -------- $.14 - $1.05 544,785 4.60 $ .30 544,785 $ .30 $2.80 - $6.44 568,613 9.40 6.06 30,707 5.70 $6.50 - $6.63 320,543 8.56 6.51 65,811 6.51 $6.88 533,721 9.12 6.88 143,244 6.88 $7.00 - $16.13 700,283 8.26 10.09 417,912 10.25 --------- ---- ------ --------- ------ $.14 - $16.13 2,667,945 7.97 $ 6.16 1,202,459 $ 5.02 --------- ---- ------ --------- ------ --------- ---- ------ --------- ------
At December 31, 1996 and 1997, 1,191,381 and 339,959 shares, respectively, are available for granting of options under the 1994 and 1996 Plans. STOCK PURCHASE PLAN The Amended 1994 Employee Stock Purchase Plan, originally adopted in February 1994 (the "Stock Purchase Plan"), authorizes the Company to issue up to 300,000 shares of common stock to participating employees. The Stock Purchase Plan is intended to provide qualifying employees with the opportunity to acquire an interest in the Company by accumulating amounts for the employees' account through payroll deductions and the periodic application of such amounts to the purchase of shares of the Company's common stock. Under the terms of the Stock Purchase Plan, qualified employees can choose each year to have up to 15% of their annual base earnings withheld to purchase the Company's common stock. The purchase price of the stock will be equal to 85% of the lower fairmarket value of the common stock on (i) the commencement date of the offering period or (ii) the purchase date. The Stock Purchase Plan terminates on December 31, 2003. Under the Stock Purchase Plan, the Company sold 56,857 and 97,413 shares to employees in 1996 and 1997, respectively. There are 31,102 shares of common stock available for purchase under the Stock Purchase Plan at December 31, 1997. In order to disclose the pro forma net income and earnings per share as required by SFAS No. 123 (see Stock Compensation Plans above), the fair value of the employees' purchase rights is estimated using the Black-Scholes model with the following assumptions for 1996 and 1997: no dividend yield, expected volatility of 69.76%; risk-free interest rates on the date of grant represented by the interest rate on U.S. treasury bills with a term of maturity equal to the period from the subscription date to the purchase date. The weighted-average fair value of those purchase rights granted in 1996 and 1997 was $9.56 and $6.58, respectively. F-18 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. INCOME TAXES: The provision for income taxes for the years ended December 31, 1996 and 1997 consists of current taxes for foreign operations. Differences between the statutory rate and the effective tax rate for the year ended December 31, 1995, 1996 and 1997 are as follows:
1995 1996 1997 ---- ---- ---- Taxes at federal statutory rate 34.0% (34.0%) (34.0%) Foreign income taxes - % 1.8% 3.2% Net operating loss carryforwards and research and development tax credits (utilized) not utilized (33.0%) 33.0% 33.0% Change in valuation allowance - % - % - % Other (1.0%) 1.0% 1.0% ----- ----- ----- Provision for income taxes - % 1.8% 3.2% ----- ----- ----- ----- ----- -----
The components of the deferred tax assets at December 31, 1996 and 1997 are as follows:
1996 1997 ---- ---- (DOLLARS IN THOUSANDS) Allowances and reserves $ 773 $ 780 Vacation accrual 146 178 Capitalized research and development 2,211 2,577 Net operating loss carryforwards 4,774 5,908 Tax credits 1,429 1,991 Accelerated depreciation (252) (287) Other 10 10 ------- ------- Total gross deferred tax asset 9,091 11,157 Less valuation allowance (7,589) (9,655) ------- ------- Net deferred tax asset $ 1,502 $ 1,502 ------- ------- ------- -------
The Company has recorded a net deferred tax asset of $1,502,000 as of December 31, 1997 and 1996. Realizability is dependent on generating sufficient taxable income prior to expiration of the net operating loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. F-19 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. INCOME TAXES, CONTINUED: At December 31, 1997, the Company has net operating loss carryforwards for federal income tax purposes of approximately $15,644,000, of which $5,378,000 is attributable to disqualifying dispositions of stock options. The Company also has net operating loss carryforwards for California tax purposes of approximately $7,561,000 at December 31, 1997, of which $2,724,000 is attributable to disqualifying dispositions of stock options. The amount attributable to the disposition of stock options will not impact the Company's effective tax rate in future periods as the impact will be reflected as a component of equity when recognized. The Company also has research and development tax credit carryforwards of approximately $1,620,000 for federal and $371,000 for California tax purposes at December 31, 1997. These carryforwards will begin expiring, if unused, in 2003. The Internal Revenue Code (the "Code") imposes limits on the availability of net operating loss carryforwards and certain tax credits that arose prior to certain cumulative changes in a corporation's ownership resulting in a change of control of the Company. The Company's use of approximately $1,166,000 of its federal net operating loss carryforwards and $408,000 of its federal and $105,000 of its California tax credit carryforwards are significantly limited because the Company underwent "ownership-changes" in January 1989 and March 1991. In each year following the change, the Company will be able to offset taxable income by a limited amount of the pre-ownership change carryforwards. This limitation is determined by the value of the Company immediately prior to the ownership change multiplied by the long-term tax-exempt rate. Net operating losses and tax credits that are unavailable in any year as a consequence of this limitation may be carried forward for future use subject to certain restrictions. 12. EMPLOYEE BENEFITS: The Company has a 401(k) defined contribution plan available to all employees who have been with the Company for more than one month. Employees may contribute up to 15% of their salary each year and the Company may elect to make a discretionary contribution to the plan once a year. All plan participants who are employed at the end of the plan year and have completed 1,000 hours of service in that plan year are eligible to receive a share of the employer contribution. Participant's rights to the employer contributions vest 25% per year of service with the participant being fully vested at the end of the fourth year of service. The Company did not make a discretionary contribution in 1995, 1996 or 1997. F-20 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 12. EMPLOYEE BENEFITS, CONTINUED: In 1995, the Company adopted a profit sharing plan available to all employees. The plan provides financial benefits to employees when the Company exceeds certain targeted objectives. The Compensation Committee of the Board of Directors annually determines the maximum amount that is allocated to the plan. Employees are eligible to participate in the plan at the start of the quarter following their employment at the Company. The Company allocated $-0-, $-0- and approximately $418,000 in 1995, 1996 and 1997, respectively. 13. CONCENTRATION OF CREDIT RISK: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investments and trade receivables. The Company has approximately $4,908,000 of cash and cash equivalents in excess of FDIC insured limits at two financial institutions at December 31, 1997. The Company has not experienced any losses on its cash and cash equivalents. All of the Company's investments, all of which mature in 1998, are in obligations of the U.S. Government and its agencies at December 31, 1997. At December 31, 1996 and 1997, the Company's trade receivables are concentrated with "Regional Bell Operating Companies" and independent phone companies and suppliers or affiliated companies in the United States, all of which management believes are large companies with substantial financial resources. Sales are typically made on credit, with terms that vary depending upon the customer and the nature of the product. The Company does not hold collateral to secure payment. Although the Company maintains a reserve for uncollectible receivables that it believes to be adequate, a payment default on a significant sale or customer receivable could materially and adversely affect its operating results and financial condition. Sales to major customers for each year are as follows (% of revenue):
1995 1996 1997 ---- ---- ---- Nynex 18% 23% 8% Bell South 13% 7% 17% US West 45% 31% 4% Ameritech 19% 9% 3% Nortel - 15% 20% MCI - - 18%
F-21 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 13. CONCENTRATION OF CREDIT RISK, CONTINUED: Sales to an affiliate of a shareholder during the years ended December 31, 1995, 1996 and 1997 were approximately $3,836,000, $2,263,000 and $922,000 respectively, of which approximately $140,000 and $342,800 are included in accounts receivable at December 31, 1996 and 1997, respectively. 14. ACQUISITIONS: In February 1996, the Company acquired certain assets of Applied Computing Devices, Inc. ("ACD"), a company that developed and marketed operations systems software used primarily by independent telephone companies to manage certain functions in their networks. The customer set and products of ACD complement those of the Company and the Company intends to continue to market and enhance these products. The Company acquired the assets for $1,700,000 in cash and incurred approximately $200,000 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 $1,200,000, property and equipment valued at approximately $377,000 and purchased technology valued at approximately $337,000. The Company recorded a one-time charge in the first quarter of 1996 for the $1,200,000 associated with purchased research and development costs. In July 1996, the Company acquired certain assets of MPR Teltech, a subsidiary of BC TELCOM, 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, ADA-Canada, acquired the assets for $4,200,000 million in cash and 150,000 shares of the Company's common stock, and incurred approximately $200,000 in related costs. SSN was 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 transaction, which was accounted for as a purchase, included the acquisition of in-process research and development valued at approximately $2,100,000, property and equipment valued at approximately $900,000 and goodwill and know-how valued at approximately $2,588,000. The Company recorded a one-time charge in the third quarter of 1996 for the $2,100,000 associated with purchased research and development costs. F-22 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 14. ACQUISITIONS, CONTINUED: In June 1997, the Company acquired an exclusive worldwide license to Nortel's Digital Support System II(TM) ("DSSII") operations system software product, subject to certain residual rights retained by Nortel. The Company acquired the license and certain assets related to the DSSII product for an amount of $3,100,000, $2,232,000 of which was paid in cash and the remainder of which is payable in cash and/or stock at the Company's option on January 15, 1998. The Company recorded a charge of approximately $1,578,000 for purchased research and development associated with the acquisition of the license and the assets. As part of the transaction, the Company also issued Nortel a warrant to purchase 150,000 shares of the Company common stock at an exercise price of $12 per share. The warrant has a three year term. The following condensed pro forma results of operations information has been presented to give effect to the acquisitions as if such transactions had occurred at the beginning of each 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 purchases. The pro forma results of operations information is presented for information purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions 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) YEARS ENDED DECEMBER 31, ------------------------ 1996 1997 ---- ---- Revenue ...................................... $29,660 $34,050 Net loss ..................................... ( 7,474) (4,283) Net loss per share, basic and diluted......... (.61) (.34) Weighted average shares used in computation... 12,165 12,605
Sales to Canadian customers, generated from both the Company's United States and Canadian operations in fiscal 1996 and 1997 were approximately $4,351,000 and $9,861,000, respectively. The identifiable assets of the Company's operations at December 31, 1996 and 1997 were approximately $970,000 and $1,997,000, respectively. F-23 APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 15. EARNINGS PER SHARE ("EPS") DISCLOSURES: In accordance with the disclosure requirements of SFAS No. 128, a reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (dollars in thousands, except per share amounts). YEAR ENDED DECEMBER 31 ---------------------- 1995 1996 1997 ---- ---- ---- Numerator - basic and diluted EPS: Net income (loss)....................... $ 759 $(7,120) $(4,283) Denominator - basic and diluted EPS: Weighted average common stock outstanding.......................... 11,899 12,255 12,605 ------- ------- ------- Basic and diluted earnings per share..... $.06 $(.59) $(.34) ---- ----- ------ ---- ----- ------
F-24 SCHEDULE II APPLIED DIGITAL ACCESS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 BALANCE AT BEGINNING BALANCE AT DESCRIPTION YEAR OF YEAR ADDITIONS DEDUCTIONS END OF YEAR ----------- ---- ------- --------- ---------- ----------- Allowance for doubtful accounts 1995 $ 50,000 $ - $ - $ 50,000 1996 50,000 - - 50,000 1997 50,000 - - 50,000 Inventory reserve 1995 434,617 150,000 (47,055) 537,562 1996 537,562 - (68,092) 469,470 1997 469,470 312,496 (211,966) 570,000
F-25 EX-23.1 2 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of Applied Digital Access, Inc. on Form S-8 of our report dated January 23, 1998 on our audits of the financial statements and financial statement schedule of Applied Digital Access, Inc. as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, which report is included in the Annual Report on Form 10-K/A of Applied Digital Access, Inc. for the year ended December 31, 1997. COOPERS & LYBRAND L.L.P. San Diego, California April 14, 1998 -----END PRIVACY-ENHANCED MESSAGE-----