-----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, UQXysVQ5KMmZPGpe784STU64Zt/NJGyd/Wor26FeE+4JkiPIkl9EfyP6qI6NGwN8 MauIZN71xpR9BrWWnL2vDw== 0000950112-96-000527.txt : 19960603 0000950112-96-000527.hdr.sgml : 19960603 ACCESSION NUMBER: 0000950112-96-000527 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960221 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL PRODUCTS CORP CENTRAL INDEX KEY: 0000028895 STANDARD INDUSTRIAL CLASSIFICATION: 7380 IRS NUMBER: 591141879 STATE OF INCORPORATION: FL FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09503 FILM NUMBER: 96523484 BUSINESS ADDRESS: STREET 1: 800 NW 33RD ST CITY: POMPANO BEACH STATE: FL ZIP: 33064 BUSINESS PHONE: 3057839600 MAIL ADDRESS: STREET 1: 800 N W 33 STREET CITY: POMANO BEACH STATE: FL ZIP: 33064 10-Q 1 DIGITAL PRODUCTS CORPORATION FORM 10-Q Securities and Exchange Commission Washington D.C. 20549 [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended: December 31, 1995 Commission file number: 0-9503 DIGITAL PRODUCTS CORPORATION (Exact name of registrant as specified in its charter) FLORIDA 59-1141879 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 N.W. 33rd Street Pompano Beach, Florida 33064 (Address of principal executive offices) (305) 783-9600 (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 ----------- ------------ Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of February 13, 1996: 11,589,267 shares of common stock, par value $.025 per share. PART I - FINANCIAL INFORMATION DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES INDEX TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION PERIOD ENDED DECEMBER 31, 1995 Item Page - - ---- Introductory Comment . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Item 1. Financial Statements: Consolidated Balance Sheets - December 31, 1995 and March 31, 1995 . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Operations and Deficit - For the Three Months Ended December 31, 1995 and 1994 . . . . . . . . 6 Consolidated Statements of Operations and Deficit - For the Nine Months Ended December 31, 1995 and 1994 . . . . . . . . . 7 Consolidated Statements of Changes in Shareholders' Equity - For the Nine Months Ended December 31, 1995 . . . . . . . . . . . . . 8 Consolidated Statements of Cash Flows - For the Nine Months Ended December 31, 1995 and 1994 . . . . . . . . . 9 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . 18 2 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED FINANCIAL STATEMENTS INTRODUCTORY COMMENT The condensed financial statements included herein have been prepared by Digital Products Corporation (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management of the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K, filed July 14, 1995 (File No. 0-9503). In the opinion of the management of the Company, the financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to fairly present the results for the interim periods to which these financial statement relate. The results of operations of the Company for the three and nine months ended December 31, 1995 are not necessarily indicative of the results to be expected for the full fiscal year ending March 31, 1996. 3 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND MARCH 31, 1995 December 31, 1995 March 31, 1995 ----------------- -------------- (Unaudited) ASSETS ------ CURRENT ASSETS: Cash $ 119,479 $1,087,707 Marketable securities 0 8,911 Accounts receivable - net 1,525,799 1,928,925 Inventory (Note 2) 320,619 442,840 Sales contracts receivable (Note 3) 7,918 50,161 Sales type lease receivable (Note 4) 215,494 434,685 Other current assets (Note 5) 399,689 201,997 ------- ------- Total Current Assets 2,588,998 4,155,226 RENTAL EQUIPMENT - Net (Note 6) 1,321,668 1,252,977 PROPERTY, PLANT AND EQUIPMENT - Net (Note 7) 625,060 741,080 SOFTWARE DEVELOPMENT COSTS - Net 669,368 911,732 SALES CONTRACTS RECEIVABLE - LONG TERM (Note 3) - 26,222 --- SALES TYPE LEASES - LONG TERM (Note 4) 300,716 257,780 OTHER ASSETS (Note 8) 110,577 90,358 ------- ------ TOTAL ASSETS $ 5,616,387 $7,435,375 ========= ========= See Notes to Financial Statements 4 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND MARCH 31, 1995 December 31, 1995 March 31, 1995 ----------------- ------------- (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Capitalized lease obligations - current $ 133,366 $132,037 Accounts payable (Note 9) 1,128,031 1,947,623 Accrued expenses (Note 9) 1,773,327 1,838,939 Deferred revenue (Note 11) 541,574 288,775 ------- ------- Total Current Liabilities 3,576,298 4,207,374 CAPITALIZED LEASE OBLIGATIONS 70,070 164,466 SUBORDINATED CONVERTIBLE NOTE 476,432 457,145 OTHER LONG TERM LIABILITIES (Note 10) 590,809 833,864 ------- ------- TOTAL LIABILITIES 4,713,609 5,662,849 --------- --------- SHAREHOLDERS' EQUITY: Common Stock, par value $.025 50,000,000 authorized, 11,589,267 issued 290,733 275,733 Additional paid-in capital 31,563,854 31,454,854 Accumulated deficit (30,852,693) (29,858,945) ------------ ------------ 1,001,894 1,871,642 Less: Treasury stock (at cost) (99,116) (99,116) -------- -------- TOTAL SHAREHOLDERS' EQUITY 902,778 1,772,526 ------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,616,387 $ 7,435,375 ========= ========= See Notes to Financial Statements 5 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT FOR THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994 (UNAUDITED) December 31, 1995 December 31, 1994 ----------------- ----------------- REVENUES: Sales of products and software $ 168,528 $ 1,617,340 Rental and monitoring revenues 927,401 987,028 Service and other revenue 196,911 396,992 ------- ------- Total Revenues 1,292,840 3,001,360 --------- --------- COST AND EXPENSES: Cost of revenues - Sales of products and software 82,630 536,942 Rental and monitoring revenues 354,165 502,063 Service and other revenue 82,131 437,939 Operating expenses 1,490,611 1,540,098 Research and development 14,772 110,307 ------ ------- Total Costs and Expenses 2,024,309 3,127,349 --------- --------- LOSS FROM OPERATIONS (731,469) (125,989) OTHER INCOME (EXPENSE): Interest income (expense) (44,299) (38,415) Other - net 0 0 - - Total Other Income (Expense) (44,299) (38,415) ------ ------ NET LOSS $ (775,768) $ (164,404) DEFICIT - BEGINNING $ (30,076,925) $ (28,110,813) ------------ ------------ DEFICIT - ENDING $ (30,852,693) $ (28,275,217) ============ ============ NET LOSS PER SHARE $ (0.06) $ (0.01) ====== ====== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 11,589,267 10,989,267 See Notes to Financial Statements 6 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT FOR NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994 (UNAUDITED) December 31, 1995 December 31, 1994 ----------------- ----------------- REVENUES: Sales of products and software $ 2,212,399 $ 3,923,320 Rental and monitoring revenues 2,730,223 3,338,620 Service and other revenue 859,399 1,221,622 ------- --------- Total Revenues 5,802,021 8,483,562 --------- --------- COST AND EXPENSES: Cost of revenues - Sales of products and software 734,251 1,334,497 Rental and monitoring revenues 1,233,474 1,630,886 Service and other revenue 354,113 1,518,809 Operating expenses 4,370,458 4,284,781 Research and development 103,277 313,852 ------- ------- Total Costs and Expenses 6,795,573 9,082,825 --------- --------- LOSS FROM OPERATIONS (993,552) (599,263) OTHER INCOME (EXPENSE): Interest income (expense) (153,818) (113,822) Other - net 153,622 (250,000) ------- ------- Total Other Income (Expense) (196) (363,822) ----- --------- NET LOSS $ (993,748) $ (963,085) DEFICIT - BEGINNING $ (29,858,945) $(27,312,132) ---------- ---------- DEFICIT - ENDING $ (30,852,693) $(28,275,217) ============ ============ NET LOSS PER SHARE $ (0.08) $ (0.09) ====== ====== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 11,589,267 10,999,511 See Notes to Financial Statements 7 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED DECEMBER 31, 1995 (UNAUDITED)
Common Stock Treasury Shares ------------ --------------- Additional Total Paid In Accumulated Shareholders' Shares Amount Capital Deficit Shares Amount Equity ------------------------------------------------------------------------------------------- BALANCE - 11,029,328 $275,733 $31,454,854 $(29,858,945) 40,061 $(99,116) $1,772,526 April 1, 1995 Compensatory Shares Issued 600,000 15,000 109,000 124,000 NET LOSS $ (993,748) $ (993,748) ------------------------------------------------------------------------------------------- BALANCE - December 31, 1995 11,629,328 $290,733 $31,563,854 $(30,852,693) 40,061 $(99,116) $ 902,778 ========== ======= ========== ========== ====== ======== =======
See Notes to Financial Statements 8 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994 (UNAUDITED) December 31, 1995 December 31, 1994 ----------------- ---------------- RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES: Net (Loss) $ (993,748) $ (963,085) --------- --------- Operating activities: Depreciation and amortization 643,589 1,105,548 Provision for losses on receivables 0 90,000 Decrease in sale contracts and sales type leases receivable 244,720 137,260 (Increase) decrease in accounts receivable 403,128 (1,246,853) 122,221 (92,118) (Increase) decrease in inventory (419,156) (29,748) (Increase) in rental inventory 109,203 (65,580) (Increase) decrease in software development costs (217,911) (148,827) (Increase) in other assets (1,128,259) (1,015,790) (Decrease) in accounts payable 0 (87,989) and accrued liabilities 252,799 52,818 (Decrease) in customer deposits 0 250,000 - ------- Increase in deferred revenue 10,334 (1,051,279) ------ ----------- Loss on Investment (983,414) (2,014,364) --------- =========== Total Adjustments Net Cash (Used In) Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (43,945) (22,226) Sale of marketable securities 0 2,250,000 Compensatory shares issued 124,000 - ------- ---------- Net Cash Provided By (Used in) Investing Activities 80,055 2,227,774 ------- ---------- CASH FLOWS (USED IN) FINANCING ACTIVITIES: Payment of capitalized lease obligation (73,780) (89,481) -------- -------- NET INCREASE (DECREASE) IN CASH $ (977,139) $ 123,929 Cash at beginning of period 1,096,618 866,927 --------- ------- CASH AT END OF PERIOD $ 119,479 $ 990,856 ======= ======= Supplemental disclosure of cash flow information: Reacquisition of stock from sale of subsidiary $ 26,891 Increase in capital lease obligations $ 124,241 See Notes to Financial Statements 9 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 Note 1. Business Activity. - - -------------------------- Digital Products Corporation and its subsidiaries (the "Company") are engaged in the design, fabrication and marketing of electronic devices for the criminal justice industry. The Company derives its revenues principally from sales and rentals to governmental agencies and entities which provide services to government agencies. The Company has also been engaged in the development and marketing of computer applications programs for various industries. Note 2. Inventory. - - ------------------ Inventory is stated at the lower of cost or market using the first in, first out method in determining cost, and replacement cost or net realizable value in determining market. Inventory consists of the following: December 31, 1995 March 31, 1995 ----------------- -------------- (Unaudited) Supplies $ 74,266 $ 65,436 Finished goods 246,353 377,404 ------- ------- Total Inventory $ 320,619 $ 442,840 ======= ======= Note 3. Sales Contracts Receivable. - - ----------------------------------- Sales contracts receivable consists of the following: December 31, 1995 March 31, 1995 ----------------- -------------- (Unaudited) Gross sales contracts receivables $ 132,102 $ 242,383 Less: Unearned revenue (124,184) (166,000) --------- --------- Net sales contract receivables 7,918 76,383 Current portion of sales contract receivables 7,918 50,161 ------ Long term portion of sales contract receivables $ 0 $ 26,222 = ====== 10 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 Note 4. Net Investments in Sales Type Leases. - - --------------------------------------------- Net investments in sales type leases consist of the following: December 31, 1995 March 31, 1995 ----------------- -------------- (Unaudited) Total minimum lease payments to be received $692,500 $ 833,465 Less: unearned income (176,290) (141,000) --------- --------- Net investment in sales type leases 516,210 692,465 Amounts due within one year 215,494 434,685 ------- ------- Net long term portion $300,716 $ 257,780 ======= ======= Note 5. Other Current Assets. - - ----------------------------- Other current assets consist of the following: December 31, 1995 March 31, 1995 ----------------- -------------- (Unaudited) Prepaid royalties $ 169,451 $ 76,949 Deposits on bids 16,901 Prepaid expenses 173,335 66,621 Note receivable 20,000 20,000 Other 20,002 12,327 ------ ------ $ 399,689 $ 201,997 ======= ======= 11 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 Note 6. Rental Equipment Inventory. - - ----------------------------------- Rental equipment is stated at cost and is depreciated on a straight line basis over estimated useful lives of up to five years. Depreciation commences as the units are placed into rental inventory. The equipment, manufactured by the Company, is recorded at cost as follows: December 31, 1995 March 31, 1995 ----------------- -------------- (Unaudited) Rental equipment at cost $ 4,190,437 $ 3,732,734 Less: Accumulated depreciation (2,868,769) (2,479,757) ----------- ----------- $ 1,321,668 $ 1,252,977 ========= ========= Note 7. Property, Plant and Equipment. - - -------------------------------------- Property, plant and equipment consists of the following: December 31, 1995 March 31, 1995 ----------------- -------------- (Unaudited) Office and computer equipment $1,772,853 $ 1,634,459 Production equipment 46,428 46,428 Leasehold Improvements 8,514 2,894 ----- ------ 1,827,795 1,683,781 Less: Accumulated depreciation (1,202,735) (942,701) ----------- --------- Net property, plant and equipment $ 625,060 $ 741,080 ======= ======= 12 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 Note 8. Other Assets. - - --------------------- Other assets consist of the following: December 31, 1995 March 31, 1995 ----------------- -------------- (Unaudited) Pre-paid royalties $ 17,400 $ 21,600 Fixed asset purchases 30,178 4,100 in progress 44,057 45,902 Security deposits 18,942 18,756 ------ ------ Other $110,577 $ 90,358 ======= ====== Note 9. Accounts Payable and Accrued Expenses. - - ---------------------------------------------- Included in accounts payable at December 31, 1995 and March 31, 1995 is a liability of $80,684 and $521,389 respectively, to unaffiliated third party lenders who purchased certain receivables from the Company on a full recourse basis. The liability is being reduced as the receivables are collected. The Company's accounts receivable are collateral under one of the financing agreements. Accrued expenses are comprised of the following: December 31, 1995 March 31, 1995 ----------------- -------------- (Unaudited) Payroll, payroll taxes and benefits $ 199,736 $ 235,276 Commissions 141,927 105,696 Sales tax payable 65,810 184,392 Warranty and repairs 252,489 223,737 Accrued rent settlement - current portion 27,182 27,182 Current portion of litigation settlement 75,000 318,000 Other 1,011,183 744,656 --------- ------- $ 1,773,327 $ 1,838,939 ========= ========= 13 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 Note 10. Other Liabilities - Long-Term - - --------------------------------------- Other long-term liabilities at December 31, 1995 and March 31, 1995 are comprised of the following: December 31, 1995 March 31, 1995 ----------------- -------------- (Unaudited) Long-term portion of rent settlement $ 215,565 $ 383,622 Long-term portion of litigation settlement 75,000 150,000 Long-term portion of warranty reserve 148,800 148,800 Other 151,444 151,442 ------- ------- $ 590,809 $ 833,864 ======= ======= Note 11. Revenue Recognition - - ----------------------------- The Company recognizes revenues on correctional services systems sales and sales-type leases upon delivery. Revenue for warranties sold with these products are recognized immediately and a reserve for future costs is recorded simultaneously. Warranties on electronic devices sold separately are deferred and recorded as income over the term of the warranty. Related costs are expensed as incurred. The Company recognizes rental revenues as earned over the terms of the applicable operating leases which generally do not exceed one year. Revenue from the sale or licensing of software systems is recognized upon delivery to the customer when the Company has no further obligations or has insignificant obligations remaining under the sale of licensing agreement and collectibility is probable. Service revenue on support contracts for software systems is recognized over the life of the contract, usually one year. Other revenue includes license fees received for the granting of exclusive territorial rights for the leasing of the Company's electronic products which are recognized in full upon contract signing, provided the Company has no significant remaining economic obligations. Note 12 Contingencies - - --------------------- The Company is the subject of product liability claims. One of such claims alleges that the Company's monitoring equipment was defectively designed and manufactured and negligently installed. This action is in the preliminary stage. The other claims alleged certain deficiencies with respect to the Company's monitoring equipment. All of such lawsuits have been forwarded to the Company's insurance carrier. The Company is involved in other litigation incidental to the conduct of its business. The ultimate outcome of these 14 matters cannot presently be determined. No provision for any liability that may result from such litigation has been made in the financial statements as such amount, if any, cannot be determined. On or about May 26, 1995 DPC/International Business Solutions, Inc. ("IBS") filed suit against AFTEC, Inc., ACCESS/IBS, John P. Foss and Gustavo Valez for money damages and injunctive relief arising out of a dispute over the ownership interest of a software licensing agreement known as the "BABI Software" in the case styled DPC/International Business Solutions, Inc. vs. AFTEC, Inc., ----------------------------------------------------------- ACCESS/IBS, John P. Foss and Gustavo Valez, case No. 95007402 "FLA 17 JUD DIR - - ------------------------------------------ 1995". The complaint sought money damages for tortious interference with IBS advantageous business relationship, civil conspiracy arising therefrom, breach of contract, breach of confidentiality agreement and also sought a temporary and permanent injunction against all defendants. On or about November 3, 1995, defendants AFTEC, Inc. and Gustavo Valez served a counterclaim against IBS and a third party complaint against the Company, David J. Dell and Richard A. Angulo. The counterclaim and third party complaint purports to seek damages for breach of contract and breach of oral contract and for the issuance of an injunction against IBS. In addition, the counterclaim and third party complaint seeks damages for breach of contract against the Company, David Dell and Richard Angulo. Liability against the Company is alleged in the complaint to exist by virtue of the fact that the Company allegedly dominated and controlled the assets, accounts and operations of IBS to such an extent that IBS had no independence or existence of its own and therefore was the Company's alter ego. The counterclaim and third party complaint states that damages sought against the Company, IBS, Angulo and Dell are in excess of $15,000.00. Note 13. Manufacturing Agreement - - --------------------------------- The Company has entered into a manufacturing and engineering services agreement with KBS, Inc. for the manufacturing of the Company's home monitoring equipment. There are no minimum production quantities under the agreement. Note 14. Other - - --------------- The Agreement and Plan of Merger dated as of October 13, 1995 providing for the merger of a wholly owned subsidiary of Strategic Technologies, Inc. with and into the Company was mutually terminated by the Company and Strategic on December 18, 1995 since the then current market conditions made the financing aspects of the Merger impractical for the parties. In the Merger Agreement, Strategic agreed to fund the Company's transaction costs relative to the Merger up to $275,000. The Company has incurred approximately $200,000 in professional and administrative costs in connection with the Merger. In connection with entering into the Merger Agreement, Strategic was issued a warrant to acquire 500,000 shares of Company common stock at $0.25 per share plus a conditional warrant to acquire an additional 1,500,000 shares of Company common stock at $0.25 per share. To the extent provided in the Warrant Agreements, Strategic may recover expenses of the Company funded by Strategic by the application of such funded expenses to the exercise price of the Warrants. 15 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 Note 15. Segment Information - - ----------------------------- The following table sets forth selected items from the Company's Statements of Operation for the three months ended December 31, 1995 and 1994. (Unaudited) December 31, 1995 December 31, 1994 Amount % of Segment Amount % of Segment ------ ---- ------- ------ ---- ------- Revenues: Criminal Justice Segment $1,064,491 82.3 $2,036,267 67.8 Computer Software Segment 228,349 17.7 965,093 32.2 ------- ------- Total Revenue 1,292,840 3,001,360 --------- --------- Cost of Sales: Criminal Justice Segment 472,674 91.1 845,161 57.2 Computer Software Segment 46,252 8.9 631,783 42.8 ------ ------- Total Costs of Sales 518,926 1,476,944 ------- --------- Gross Margin: Criminal Justice Segment 591,817 76.5 1,191,107 78.1 Computer Software Segment 182,097 23.5 333,309 21.9 ------- ------- Total Gross Margin 773,914 1,524,416 ------- --------- Operating Expenses: Criminal Justice Segment 1,212,130 80.5 1,061,984 64.3 Computer Software Segment 293,253 19.5 588,421 35.7 ------- ------- Total Operating Expenses 1,505,383 1,650,405 --------- --------- Other Income (Expenses): Criminal Justice Segment (40,457) 91.3 (36,484) 95.0 Computer Software Segment (3,842) 8.7 (1,931) 5.0 ------- ------- Total Other Income (44,299) (38,415) -------- -------- (Expense) Net Loss: Criminal Justice Segment (660,770) 85.2 92,639 (56.3) Computer Software Segment (114,998) 14.8 (257,043) 156.3 --------- --------- Total Net Loss $ (775,768) $ (164,404) ========= ========= 16 DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 The following table sets forth selected items from the Company's statements of operation for the nine months ended December 31, 1994 and 1994.
December 31, 1995 December 31, 1994 Amount % of Segment Amount % of Segment ------ ------------ ------ ------------ Revenues: Criminal Justice Segment $ 4,669,810 80.5 $ 5,761,662 67.9 Computer Software Segment 1,132,211 19.5 2,721,900 32.1 --------- --------- Total Revenue 5,802,021 8,483,562 --------- --------- Cost of Sales: Criminal Justice Segment 2,085,682 89.8 2,540,484 56.7 Computer Software Segment 236,256 10.2 1,943,708 43.3 ------- --------- Total Costs of Sales 2,321,838 4,484,192 --------- --------- Gross Margin: Criminal Justice Segment 2,584,228 74.3 3,221,178 80.5 Computer Software Segment 895,955 25.7 778,192 19.5 ------- ------- Total Gross Margin 3,480,183 3,999,370 --------- --------- Operating Expenses: Criminal Justice Segment 3,226,300 72.1 2,990,758 65.0 Computer Software Segment 1,247,435 27.9 1,607,875 35.0 --------- --------- Total Operating Expenses 4,473,735 4,598,633 --------- --------- Other Income (Expense): Criminal Justice Segment 10,707 (5,434.5) (358,334) 98.5 Computer Software Segment (10,903) 5,534.5 (5,488) 1.5 -------- ------- Total Other Income (Expense): (196) (363,822) ----- --------- Net Loss: Criminal Justice Segment (631,365) 63.5 (127,912) 13.3 Computer Software Segment (362,383) 36.5 (835,173) 86.7 --------- --------- Total Net Loss $ (993,748) $ (963,085) ======= =========
17 Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- Digital Products Corporation and its subsidiaries (the "Company") provide information management solutions to specific aspects of the criminal justice and corrections industry. The Company, through its DPC Monitoring Services, Inc. ("DPCMSI") subsidiary, provides such solutions through the development and distribution of equipment, technology and computer software programs marketed to the public and private agencies conducting community corrections, supervision and offender monitoring and check-in programs for individuals subject to probation, parole and pre-trial diversion (the "Criminal Justice Segment"). Within the construction industry, the Company's BLR, Inc. subsidiary (which conducts its business under the trade name "BGIS Systems, Co.") ("BGIS"), develops, distributes and supports computer software application programs for the highway and utility segment of the industry. The Company also provides post-sale support services for all such products, technology and software programs and, in connection with the sale of its products, technology, software licenses and services it may act as a dealer of computer hardware and other software products. During the fiscal quarter ended September 30, 1995, the Company substantially discontinued the operations of its DPC/International Business Solutions, Inc. ("IBS") subsidiary, which developed, distributed and supported financial accounting computer software programs for multi-national corporations requiring concurrent, multi-national, multi-currency, and multi- lingual capabilities. The Company is pursuing a sale of BLR, Inc. for the strategic intent of focusing future efforts and opportunities in the Criminal Justice Segment. 18 RESULTS OF OPERATIONS The following table sets forth selected items from the Company's unaudited Consolidated Statements of Operations for the quarter ended December 31, 1995 and 1994, as percentages of corresponding revenues and percentage of increase (decrease) in each such item from the prior periods. Percentage of Revenues ----------------------- Three Months Ending -------------------
% of Increase December 31, 1995 December 31, 1994 (Decrease) ------------------ ----------------- ---------- Revenues: Product 13.0 59.9 (89.6) Rental & Monitoring 71.7 32.9 (6.0) Service 15.3 13.2 (50.4) ---- ---- ---- Total 100.0 100.0 (56.9) ----- ----- ---- Cost of Revenues* Product 49.0 33.2 84.6 Rental & Monitoring 38.2 50.9 29.5 Service 41.7 110.3 81.2 ---- ----- ---- Total 40.1 49.2 39.2 ---- ---- ---- Gross Margin* Product 51.0 66.8 (92.0) Rental & Monitoring 61.8 49.1 18.2 Service 58.3 (10.3) 380.2 ---- ---- ----- Total 59.9 50.8 (49.2) ---- ---- ---- Operating Expenses 115.3 51.3 3.2 Research and Development 1.1 3.7 86.6 --- --- ---- Operating Loss (56.5) (4.2) (480.6) Total Other Income (Expense) (3.5) (1.3) (15.3) ----- ----- ---- Net Loss (60.0) (5.5) (371.9) ====== ===== =======
* Percentage of revenues for Cost of Revenues and Gross Margin are expressed as a percentage of corresponding revenues. 19 The following table sets forth selected items from the Company's unaudited Consolidated Statements of Operations for the nine months ended December 31, 1995 and 1994, as percentages of corresponding revenues and percentage of increase (decrease) in each such item from the prior periods. Percentage of Revenues Nine Months Ending ------------------
% of Increase December 31, 1995 December 31, 1994 (Decrease) ------------------ -------------------- ---------- Revenues: Product 38.1 46.2 (43.6) Rental & Monitoring 47.1 39.4 (18.2) Service 14.8 14.4 (29.7) ---- ---- ---- Total 100.0 100.0 (31.6) ----- ----- ---- Cost of Revenues* Product 33.2 34.0 45.0 Rental & Monitoring 45.2 69.1 24.4 Service 41.2 124.3 76.7 ---- ----- ---- Total 40.0 52.9 48.2 ---- ---- ---- Gross Margin* Product 66.8 66.0 (42.9) Rental & Monitoring 54.8 30.9 (12.4) Service 58.8 24.3 270.0 ---- ---- ----- Total 60.0 47.1 (13.0) ---- ---- ------ Operating Expenses 75.3 50.5 (2.0) Research and Development 1.8 3.7 67.1 --- --- ---- Operating Loss (17.1) (7.1) (65.8) Total Other Income (Expense) - (4.3) 999.5 --- ----- ----- Net Loss (17.1) (11.4) (3.2) ====== ==== ===
* Percentage of revenues for Cost of Revenues and Gross Margin are expressed as a percentage of corresponding revenues. 20 FISCAL QUARTER ENDED DECEMBER 31, 1995 COMPARED TO QUARTER ENDED DECEMBER 31, 1994 The Company incurred a loss from operations of approximately $731,500 during the third quarter of the Company's fiscal year ending March 31, 1996 (the "1996 Fiscal Year"), compared to a loss from operations of approximately $126,000 for the third quarter of the fiscal year ended March 31, 1995 (the "1995 Fiscal Year"). The Company's net loss for the third quarter of the 1996 Fiscal Year totaled approximately $775,800 compared to a loss of $164,000 for the third quarter of the 1995 Fiscal Year. The unfavorable results incurred in the third quarter of the 1996 Fiscal Year are primarily due to a decrease in revenues in the Criminal Justice Segment as well as a decrease in revenues in both companies comprising the Computer Software Segment, one of which was substantially discontinued in the fiscal quarter ended September 30, 1995. The Company is pursuing a sale of the remaining Computer Software company for the strategic intent of focusing future efforts and opportunities in the Criminal Justice Segment. Revenues The Company's total revenue for the third quarter of the 1996 Fiscal Year totaled approximately $1,292,800, a decrease of $1,708,500 or 56.9% compared to the third quarter of the 1995 Fiscal Year. On a year to date basis the total revenues for the 1996 Fiscal Year totaled approximately $5,802,000, a decrease of $2,681,500 or 31.6% compared to the year to date revenues for the 1995 Fiscal Year. Revenues generated by the Criminal Justice Segment totaled approximately $1,064,500 and 82.3% for the third quarter of the 1996 Fiscal Year, while the Computer Software Segment totaled approximately $228,300 and 17.7 %. Revenues generated by the Criminal Justice Segment for the third quarter of the 1996 Fiscal Year decreased by approximately $971,800 or 47.7% compared to the third quarter of the 1995 Fiscal Year. The decline in revenues in the Criminal Justice Segment for the third quarter of the 1996 Fiscal Year is attributable to continued intense price competition in the industry and delays and elimination of funding due to budget constraints of government agencies which adversely affected the availability of funds for electronic monitoring equipment and services during the current quarter. The decline in revenues accounted for in the current quarter by the Criminal Justice Segment is also attributable to the shift by the Company from sale, lease, purchase and capitalized rental of equipment, to rentals with convenience clauses. Revenues of rentals with convenience clauses are recognized monthly over the term of the rental agreement. The sale, lease purchase and capitalized rental sales are recognized entirely in the month of the sale. Monthly rentals with convenience clauses are a current market trend. The Computer Software Segment's revenues declined during the third quarter of the 1996 Fiscal Year by approximately $736,700 or 76.3%. During the fiscal quarter ended September 30, 1995, the Company discontinued a substantial portion of the operations of its IBS subsidiary as a result of the departure of a number of the original employees who formed a new company to compete with IBS. See Note 12. Contingencies. IBS does not anticipate any future significant revenue to be derived from the licensing of its software but does anticipate some revenues generated from on-going support to the program's established customer base. The Company is pursuing a sale of BLR, Inc. for the strategic intent of focusing future efforts and opportunities in the Criminal Justice Segment. On a year to date basis the Criminal Justice Segment totaled approximately $4,669,800. Compared to the same period for the 1995 Fiscal Year, revenues decreased approximately $1,091,900 or 19.0%. Year to date revenues for the Computer Software Segment of approximately $1,132,200 decreased by approximately $1,589,700 and 58.4% compared to the same period for the 1995 Fiscal Year. Product Sales. Product sales for the third quarter of the 1996 Fiscal Year - - ------------- totaled approximately $168,500 compared to approximately $1,617,000, a decrease of 1,448,500 or 89.6%. The Criminal Justice Segment totaled approximately $74,500 a decrease of $808,800 and 91.6%. As mentioned above, most current sales are monthly rentals as opposed to the outright sale of products. The Computer Software Segment's product sales totaled approximately $94,000, a decrease of $639,700 and 87.2%. For the third quarter of the 1996 Fiscal Year, the Criminal Justice Segment contributed 44.2% of the category, while the Computer Software Segment accounted for 55.8%. 21 Total year to date product sales for the 1996 Fiscal Year totaled approximately $2,212,400 a decrease of $1,710,900 and 43.6%, compared to the year to date revenue for the 1995 Fiscal Year. The Criminal Justice Segment product sales totaled approximately $1,595,200 with an increase over the same period for the 1995 Fiscal Year of $410,500 or 20.5%. The Computer Software Segment's year to date product sales were approximately $617,200 a decrease of $1,300,400 or 67.8%. On a year to date basis, the Criminal Justice Segment contributed 72.1% of the product sales, while the Computer Software Segment totaled 27.9%. Rental & Monitoring Revenue. Revenue in this category is comprised of recurring - - --------------------------- revenues from the rental of the Company's monitoring equipment and recurring services revenues from the Company's Monitoring Center, both of which are included in the Criminal Justice Segment. The combined categories of rental and monitoring revenue totaled approximately $927,400 for the third quarter of the 1996 Fiscal Year compared to revenues of approximately $987,000 for the 1995 Fiscal Year or a decrease of $59,600 and 6%. Total monitoring revenue for the nine months of the 1996 Fiscal Year totaled approximately $2,730,200 compared to $3,338,600 for the nine months of the 1995 Fiscal year or a decrease of $608,400 and 18.2%. Due to the increased price competition in the pay per day type contracts, and the Company's position towards pricing such contracts based upon true cost and other risk factors, the Company has continued to accept a smaller market share in exchange for a higher price per day. In addition, budgetary constraints of government agencies have continued to adversely affected the availability of funds for electronic monitoring equipment and services. In the nine months of the 1996 Fiscal Year, the Monitoring Center had approximately 1,700 clients as compared to 1,800 clients during the nine months of the 1995 Fiscal Year. Service and Other Revenue. Service and other revenues include revenues - - ------------------------- generated from post sale support service, product warranty and non-warranty support activity associated with the support and maintenance of the Company's Criminal Justice Segment and service revenues generated from post sale support services provided by the Computer Software Companies. Service revenues for the third quarter of the 1996 Fiscal Year totaled approximately $196,900, a decrease of $200,100 and 50.4% from the same period in the 1995 Fiscal Year. The Criminal Justice Segment accounted for approximately $62,600 of the total for the quarter, compared to approximately $166,000 for the third quarter of 1995 Fiscal Year or a decrease of $103,400 and 62.3%. The Computer Software Segment contributed approximately $134,300 for the third quarter of the current fiscal year compared to approximately $231,000, a decrease of $96,700 and 41.8% from the third quarter of the 1995 Fiscal Year. Total service revenue for the nine months of the 1996 Fiscal Year totaled approximately $859,400 compared to the nine months of the 1995 Fiscal Year of $1,221,600, a decrease of $362,200 and 29.7%. On a year to date basis, the Criminal Justice Segment decreased $72,900 for the 1996 Fiscal Year or a decrease of 17.5%. The Computer Software Segment's service revenue for the nine months of the 1996 Fiscal Year totaled approximately $515,000, a decrease of $289,300 and 36.0% compared to the same period for the 1995 Fiscal Year. On a year to date basis the Criminal Justice Segment accounted for 40.1% of the service revenue with the Computer Software Segment contributing 59.9%. Costs and Expenses Product Costs. Total product costs for the third quarter of the 1996 Fiscal - - ------------- Year totaled approximately $82,600 or 49.0% of corresponding revenues compared to approximately $537,000 and 33.2% for the third quarter of the 1995 Fiscal Year, a decrease in costs of approximately $454,400 and 84.6%. The Criminal Justice Segment's product costs totaled approximately $55,500 decreasing from the third quarter of the 1995 Fiscal Year by $227,900. The costs were impacted favorably by the contracting of the manufacturing to KBS, Inc. The Computer Software Segment's product costs for the third quarter of the 1996 Fiscal Year totaled approximately $27,100, a decrease of $226,500 or 89.3% from the third quarter of the 1995 Fiscal Year. The decrease in product costs is related to the decrease in product sales by both segments. Product costs for the nine months of the 1996 Fiscal Year totaled approximately $734,300 compared to approximately $1,334,500 or a decrease of $600,200 from the nine months of the 1995 Fiscal Year. The Criminal Justice Segment contributed approximately $616,400 of the current year's total or 84.0%. The Computer Software Segment accounted for the balance or approximately $117,900 and 16.0% of the total. 22 Cost of Rental and Monitoring. Costs of rental and monitoring for the third - - ----------------------------- quarter of the 1996 Fiscal Year totaled approximately $354,200 compared to $502,100, a decrease of $147,900 or 29.5% compared to the third quarter of the 1995 Fiscal Year. On a year to date basis, the total costs for the 1996 Fiscal Year totaled approximately $1,233,500 and has decreased from the 1995 Fiscal Year's total of approximately $1,630,900 or a decrease of $397,400 and 24.4%. Costs in this category are made up entirely of the Criminal Justice Segment. Costs of Service and Other. Costs of service and other revenues in the third - - -------------------------- quarter of the 1996 Fiscal Year totaled approximately $82,100 compared to an approximate total of $437,900 for the third quarter of the 1995 Fiscal Year, a decrease of $355,800 and 81.2%. The Criminal Justice Segment totaled approximately $63,000 with almost no change from the same period of the 1995 Fiscal Year. The Computer Software Segment costs for the third quarter totaled approximately $19,100 compared to $378,300 for the third quarter 1995 Fiscal Year, or a decrease of $359,200 and 94.9%. The Company is pursuing a sale of BLR, Inc. for the strategic intent of focusing future efforts and opportunities in the Criminal Justice Segment. The Criminal Justice Segment accounted for 76.7% of the costs for this category during the third quarter, while the Computer Software Segment's costs accounted for 23.3% of the total. Total costs of service for the nine months of the 1996 Fiscal Year totaled approximately $354,100 compared to $1,518,800 for the nine months of the 1995 Fiscal Year or a decrease of $1,164,700 and 76.7%. The majority of the decrease was experienced in the Computer Software Segment's costs as the nine months of the 1996 Fiscal Year of $118,400 decreased from the nine months of the 1995 Fiscal Year's total of approximately $1,285,200 or a decrease of $1,166,800 and 90.8%. Operating Expenses. Operating expenses for the third quarter of the 1996 Fiscal - - ------------------ Year totaled approximately $1,490,600 compared to the 1995 Fiscal Year's third quarter of approximately $1,540,000, a decrease of $49,400 or 3.2%. Of the costs for the third quarter of the 1996 Fiscal Year, the Criminal Justice Segment accounted for 80.5% with the Computer Software Segment contributing 19.5% of the total. Total operating costs for the nine months of the 1996 Fiscal Year totaled approximately $4,370,500 compared to $4,284,800 for the nine months of the 1995 Fiscal Year, an increase of $85,700 and 2.0%. For the nine months of the 1996 Fiscal Year the Criminal Justice Segment accounted for 72.1% of the total while the Computer Software Segment's portion totaled 27.9%. Research and Development. Research and development ("R&D") costs for the third - - ------------------------ quarter of the 1996 Fiscal Year totaled $14,800 compared to the 1995 Fiscal Year's third quarter of $110,000 or a decrease of $95,200 and 86.6%. For the nine months of the 1996 Fiscal Year, R&D costs totaled approximately $103,300 compared to a previous $314,000 for the nine months of the 1995 Fiscal Year or a decrease of $210,700 and 67.1%. Research and Development costs are predominately made up of the Criminal Justice Segment expenditures as the R&D costs for the Computer Software Segment's major upgrade and product development had been completed by the end of the 1995 Fiscal Year. Other Income and Expenses. In the third quarter of the 1996 Fiscal Year, other - - ------------------------- income and expenses totaled approximately $44,300 of expense compared to $38,400 for the same period of the prior year. The majority of the current quarter was comprised of interest expense. The total for the nine months of the 1996 Fiscal Year was approximately $200 of expense compared to the nine months of the 1995 Fiscal year which totaled approximately $363,800 in other expenses. The year to date 1996 Fiscal Year other income totals are comprised of interest expense of $167,700 and offset by interest income of $13,900 and income of $153,600 associated with the renegotiation of the building lease after vacating the portion of the premises relating to the manufacturing process. In the nine months of the 1995 Fiscal Year, the majority of expenses were related to the loss on the sale of the Primedex Shares of approximately $250,000 and interest expense of approximately $147,200. 23 Gross Margins Overall gross margins for the third quarter of the 1996 Fiscal Year were $773,900 or 59.9% of revenue compared to the third quarter of the 1995 Fiscal Year of $1,524,400 or 50.8% of related revenue. Of the total gross margin for the period, the Criminal Justice Segment contributed a total of $591,800 and 55.6% while the Computer Software Segment added $182,100 and 79.7%. On an year to date basis, the gross margin totaled approximately $3,480,200 compared to $3,999,400 for the same period of the 1995 Fiscal Year, or a decrease of $519,200 and 13.0%. The Criminal Justice Segment contributed approximately $2,584,200 or 55.3% of the total while the Computer Software Segment contributed approximately $896,000 and 44.7%. Compared to a prior year for the same period, the overall gross margin of 59.9% has improved from a previous 50.8%. See Note 15. Segment Information. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1995, the Company had a working capital deficiency of approximately $987,300, as compared with a working capital deficiency of $52,000 at March 31, 1995, an increase of $935,300. This increase is primarily attributable to the Company's net loss for the nine months of the 1996 Fiscal Year of $869,700. In November 1993, Acorn Venture Capital Corporation ("Acorn") loaned the Company $500,000 as evidenced by a $500,000 principal amount 10% Subordinated Convertible Note Due 1996 (the "Note"). The Note, which bears interest at 10% per annum payable semi-annually commencing in May 1994, is due in November 1996. The Note is convertible (in whole or part) into shares of the Company's Common Stock at the rate of one share for $1.50 of principal and/or accrued interest. Payment of the principal and interest on the Note is subordinated to all other debt of the Company, except such debt specifically made subordinate to the Note. In connection with the issuance of the Note, Acorn was granted a Warrant, expiring in November 1996 to purchase up to 750,000 shares of the Company's Common Stock at $2.00 per share. The Company has placed an estimated value of $75,000 on the Warrant issued to Acorn which has been recorded as a debt discount on the Note principal. The debt discount is amortized ratably over the term of the Note. Management believes that it will meet its working capital requirements through the end of the 1996 Fiscal Year through cash flow from operations and the use of various debt facilities described below. In November 1993, the Company entered into a receivables financing agreement with a financing corporation (the "FC"), whereby the FC agreed, at its sole discretion, to purchase certain receivables of the Company and advance the Company approximately eighty (80%) percent of such receivables purchased. In addition to the receivables financing agreement, as of December 31, 1995 the FC has committed a line of credit to the Company to borrow $400,000 for working capital with a payback period over 18 months. Under the receivables financing agreement, if the FC fails to collect such receivables directly from the Company's customers within approximately ninety days of invoice date of the receivables, then the Company is obligated, to repurchase the receivables from the FC or replace the receivables with others satisfactory to the FC. The Company records as a liability such receivables sold to the FC and relieves the liability upon notification from the FC that such receivables have been satisfactorily collected. In conjunction with these facilities the Company has granted the FC a continuing lien and security interest in all of the Company's accounts receivables and certain other assets of the Company. As of December 31, 1995, the Company has recorded a liability of approximately $80,900 to the FC. The Company has also obtained a commitment for an additional line of credit from another financing entity of up to $800,000 for equipment financing. The Company recognizes the substantial cash investment required to finance sales contract and sales type lease receivables. The Company utilizes the services of unrelated third party finance companies to finance a number of its sales type lease and sales contracts. The Company intends to continue to use third party financing 24 sources to finance the sale of equipment to its customers as a means to increase cash flow. In the third quarter of the 1996 Fiscal Year, the Company did not sell any sales type lease and long-term sales contract receivables to unrelated third party finance sources. See Note 3. Sales Contracts Receivable. The Company also intends to use third party financing sources to finance its shorter term lease contracts as a means to increase cash flow. As discussed, it is management's intent to continue to use third parties to finance sales contract, sales type lease receivables and short term lease contracts, however, no assurance can be given that such negotiations or other efforts of the Company will result in future sales or financing of its receivables. The Company does not believe it is reliant upon any one source for future sales or financing of its receivables. The failure by third party finance sources to collect receivables sold with full recourse to the Company would negatively impact the Company's cash flow. Further, the failure by a third party finance sources to collect a receivable sold on a non-recourse basis could negatively affect such third party's willingness to purchase receivables from the Company in the future, whether on a full recourse or non-recourse basis. Management believes that the Company may require additional sources of capital to meet its working capital requirements over the next twelve months. The Company intends to fund its cash needs for the next twelve months from current available cash, revenues generated from operations, third party financing sources described above, as well as one or more of the alternatives under consideration by the Company to increase its equity position. There can be no assurance that the Company will be able to obtain future funding or that such funding will be available on terms which are favorable to the Company. During the fiscal quarter ended September 30, 1995, the Company discontinued a substantial portion of the operations of its IBS subsidiary as a result of the departure of a number of the original employees who formed a new company to compete with IBS. See Note 12. Contingencies. IBS is continuing to support the remaining customers. In October 1995, the Company and Strategic Technologies Inc. ("Strategic"), announced the execution of a definitive Agreement and Plan of Merger dated as of October 13, 1995 (the "Merger Agreement") providing for the merger (the "Merger") of a wholly owned subsidiary of Strategic with and into the Company. On December 18, 1995, the Merger Agreement was mutually terminated by the Company and Strategic since the then current market conditions made the financing aspects of the Merger impractical for the parties. In the Merger Agreement, Strategic agreed to fund the Company's transaction costs relative to the Merger up to $275,000. The Company has incurred approximately $200,000 in professional and administrative costs in connection with the Merger. In connection with entering into the Merger Agreement, Strategic was issued a warrant to acquire 500,000 shares of Company common stock at $0.25 per share plus a conditional warrant to acquire an additional 1,500,000 shares of Company common stock at $0.25 per share. To the extent provided in the Warrant Agreements, Strategic may recover expenses of the Company funded by Strategic by the application of such funded expenses to the exercise price of the Warrants. 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings. ----------------- Reference is hereby made to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995, Item 3 thereof, filed July 14, 1995 (Commission File No.: 0-9503), and to the references therein, for a list of all material pending legal proceedings to which the Company or any of its subsidiaries are parties. To the knowledge of the Company, no proceedings of a material nature have been or are contemplated by governmental authorities. On or about May 26, 1995 DPC/International Business Solutions, Inc. ("IBS") filed suit against AFTEC, Inc., ACCESS/IBS, John P. Foss and Gustavo Valez for money damages and injunctive relief arising out of a dispute over the ownership interest of a software licensing agreement known as the "BABI Software" in the case styled DPC/International Business Solutions, Inc. vs. AFTEC, Inc., ----------------------------------------------------------- ACCESS/IBS, John P. Foss and Gustavo Valez, case No. 95007402 "FLA 17 JUD DIR - - ------------------------------------------ 1995". The complaint sought money damages for tortious interference with IBS advantageous business relationship, civil conspiracy arising therefrom, breach of contract, breach of confidentiality agreement and also sought a temporary and permanent injunction against all defendants. On or about November 3, 1995, defendants AFTEC, Inc. and Gustavo Valez served a counterclaim against IBS and a third party complaint against the Company, David J. Dell and Richard A. Angulo. The counterclaim and third party complaint purports to seek damages for breach of contract and breach of oral contract and for the issuance of an injunction against IBS. In addition, the counterclaim and third party complaint seeks damages for breach of contract against the Company, David Dell and Richard Angulo. Liability against the Company is alleged in the complaint to exist by virtue of the fact that the Company allegedly dominated and controlled the assets, accounts and operations of IBS to such an extent that IBS had no independence or existence of its own and therefore was the Company's alter ego. The counterclaim and third party complaint states that damages sought against the Company, DPC/IBS, Angulo and Dell are in excess of $15,000.00. Item 2. Changes in Securities. NONE --------------------- Item 3. Defaults Upon Senior Securities. NONE ------------------------------- Item 4. Submission of Matters to a Vote of Security Holders. NONE --------------------------------------------------- Item 5. Other Information. NONE ----------------- 26 Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits. The following list sets forth the applicable exhibits (Numbered in accordance with Item 601 of Regulation S-K) required to be filed with this Quarterly Report on Form 10-Q: Exhibit Number Title ------ ----- 4 Exhibits Defining the Rights of Security ---------------------------------------- Holders, Including Indentures. ----------------------------- (a) Form of Common Stock Certificate, $.025 par value* (b) Form of Class B Public Warrant* (c) Form of Warrant Agreement with American Stock Transfer and Trust Company, with respect to the Class B Warrants* (d) Warrant Agreement dated as of October 13, 1995 between the Company and Strategic with respect to 500,000 shares of Common Stock of the Company.* (e) Warrant Agreement dated as of October 13, 1995 between the Company and Strategic with respect to 1,500,000 shares of Common Stock of the Company.* 10 Material Contracts. ------------------ (a) On Guard Telecomputer System Licensing Agreement for New Jersey* (b) On Guard Telecomputer System Licensing Agreement for Australia* (c) Lease Agreement for premises at 800 N.W. 33rd Street, Pompano Beach, Florida* (d) Registration Rights Agreement, dated January 18, 1991* (e) Registration Rights Agreement, dated June 4, 1992* (f) 1991 Incentive Stock Option Plan* (g) Agreement, dated as of November 22, 1993, between the Company and Acorn Venture Capital Corporation* (h) Third Amendment Lease Agreement dated May 8, 1995 for premises at 800 Northwest 33rd Street, Pompano Beach, Florida* (i) Employment Agreement dated July 3, 1995 between the Company and Richard A. Angulo* (j) Consulting Agreement dated August 1, 1995 between the Company and John E. Dell (k) Consulting Agreement dated August 1, 1995 between the Company and Clinton L. Pagano - - ----------- * Incorporated by reference. See Exhibit Index. - - ----------- (b) Reports on Form 8-K. On October 26, 1995, the Company filed a Current Report on Form 8-K dated October 23, 1995. On December 21, 1995, the Company filed a Current Report on Form 8-K dated December 20, 1995. 27 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Digital Products Corporation Dated: February 20, 1996 By:/s/ Richard A. Angulo -------------------------------- Richard A. Angulo, President and Chief Executive Officer (Duly Authorized Officer and Principal Financial Officer) 28 DIGITAL PRODUCTS CORPORATION QUARTERLY REPORT ON FORM 10-Q Fiscal Quarter Ended December 31, 1995 Exhibit Index
Exhibit Number Description of Exhibit Location ------ ---------------------- -------- 4(a) Form of Common Stock Certificate, $.025 par value . . . . *1, Ex. 4(a) 4(b) Form of Class B Public Warrant . . . . . . . . . . . . . *2, Ex. 4(d) 4(c) Form of Warrant Agreement with American Stock Transfer and Trust Company, with respect to the Class B Warrants . *3, Ex. 4(k) 4(d) Warrant Agreement dated as of October 13, 1995 between the Company and Strategic with respect to 500,000 shares of Common Stock of the Company . . . . . . . . . . . . . . . *11 Ex. 7(c)(4) 4(e) Warrant Agreement dated as of October 13, 1995 between the Company and Strategic with respect of 1,500,000 shares of Common Stock of the Company . . . . . . . . . . . . . . . . . Ex. 7(c)(5) 10(a) On Guard Licensing Agreement for New Jersey . . . . . . . *4 Ex. 10(a) 10(b) On Guard Licensing Agreement for Australia . . . . . . . *5, Ex. 10(n) 10(c) Lease Agreement for premises at 800 N.W. 33rd Street, Pompano Beach, Florida . . . . . . . . . . . . . . . . . *6, Ex. 10(c) 10(d) Registration Rights Agreement, dated January 18, 1991 . . *7, Ex. 28(e) 10(e) Registration Rights Agreement, dated June 4, 1992 . . . . *2, Ex. 10(m) 10(f) 1991 Incentive Stock Option Plan . . . . . . . . . . . . *8, Ex. 10(o) 10(g) Agreement, dated as of November 22, 1993, between the Company and Acorn Venture Capital Corporation . . . . . . *9, Ex. 4.1 10(h) Third Amendment Lease Agreement dated May 8, 1995 for premises at 800 Northwest 33rd Street, Pompano Beach, Florida *10 Ex. 10(j) 10(i) Employment Agreement dated July 3, 1995 between the Company and Richard A. Angulo . . . . . . . . . . . . . . . . . . *10 Ex. 10(k) 10(j) Consulting Agreement dated August 1, 1995 between the Company and Jell . . . . . . . . . . . . . . . . . . . . *11 Ex. 10(j) 10(k) Consulting Agreement dated August 1, 1995 between the Company and Clinton L. Pagano . . . . . . . . . . . . . . *11 Ex. 10(k)
29 - - ---------- *1 Incorporated herein by reference to the Exhibit indicated above in Amendment No. 1 to the Company's Registration Statement on Form S-2 (File No. 33-44566), filed on January 29, 1992. *2 Incorporated herein by reference to the Exhibit indicated above in the Company's Registration Statement on Form S-2 (File No. 33-62296), filed on May 6, 1993. *3 Incorporated herein by reference to the Exhibit indicated above in Amendment No. 2 to the Company's Registration Statement On Form S-2 (File No. 33-44566), filed on February 7, 1992. *4 Incorporated herein by reference to the Exhibit indicated above in the Company's Registration Statement on Form S-1 (File No. 33-6303), filed on June 9, 1986. *5 Incorporated herein by reference to the Exhibit indicated above in the Company's Annual Report on Form 10-K, for the year ended March 31, 1988 (File No. 0-9503), filed on June 29, 1988. *6 Incorporated herein by reference to the Exhibit indicated above in the Company's Registration Statement on Form S-2 (file No. 33-44566), filed on December 16, 1991. *7 Incorporated herein by reference to the Exhibit indicated above in the Company's Current Report on Form 8-K (Date of Report: January 18, 1991) (File No. 0-9503), filed on February 26, 1991. *8 Incorporated herein by reference to the Exhibit indicated above in the Company's Quarterly Report on Form 10-Q, for the quarter ended June 30, 1993 (File No. 0-9503), filed on August 16, 1993. *9 Incorporated herein by reference to the Exhibit indicated above in the Company's Current Report on Form 8-K (Date of Report: November 19, 1993) (File No. 0-9503), filed on December 23, 1993. *10 Incorporated herein by reference to the Exhibit indicated above in the Company's Annual Report on Form 10-K, for the year ended March 31, 1995 (File No. 0-9503), filed on July 14, 1995. *11 Incorporated herein by reference to the Exhibit indicated above in the Company's Quarterly Report on Form 10-Q, for the quarter ended September 30, 1995 (File No. 0-9503), filed on November 20, 1995. EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND RELATED NOTES. 1 3-MOS MAR-31-1996 DEC-31-1995 119,479 0 1,525,799 0 320,619 2,588,998 625,060 0 5,616,387 3,576,298 476,432 290,733 0 0 0 5,616,387 168,528 1,292,840 518,926 2,024,309 0 0 44,299 (775,768) 0 (775,768) 0 0 0 (775,768) (0.06) (0.06)
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