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: June 30, 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 July 12, 1995: 10,989,267 shares of common stock, par value
$.025 per share.
<PAGE>
PART I - FINANCIAL INFORMATION
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
PERIOD ENDED JUNE 30, 1995
Item Page
----
Introductory Comment . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements:
Consolidated Balance Sheets -
June 30, 1995 and March 31, 1995 . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations and Deficit -
For the Three Months Ended June 30, 1995 and 1994 . . . . . . . . . . 6
Consolidated Statements of Changes in Shareholders' Equity -
For the Three Months Ended June 30, 1995 . . . . . . . . . . . . . . . 7
Consolidated Statements of Cash Flows -
For the Three Months Ended June 30, 1995 and 1994 . . . . . . . . . . 8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . 16
2
<PAGE>
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 months ended
June 30, 1995 are not necessarily indicative of the results to be expected for
the full fiscal year.
3
<PAGE>
<TABLE><CAPTION>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND MARCH 31, 1995
June 30, 1995 March 31, 1995
------------- --------------
(Unaudited)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 457,577 $1,087,707
Marketable securities -0- 8,911
Accounts receivable - net 2,383,804 1,928,925
Inventory (Note 2) 312,413 442,840
Sales contracts receivable (Note 3) 38,622 50,161
Sales type lease receivable (Note 4) 226,862 434,685
Other current assets (Note 5) 318,755 201,997
------- -------
Total Current Assets 3,738,033 4,155,226
RENTAL EQUIPMENT - NET (Note 6) 1,118,973 1,252,977
PROPERTY, PLANT AND EQUIPMENT - Net (Note 7) 657,741 741,080
SOFTWARE DEVELOPMENT COSTS - Net 861,544 911,732
SALES CONTRACTS RECEIVABLE - LONG TERM (Note 3) 36,288 26,222
SALES TYPE LEASES - LONG TERM (Note 4) 310,728 257,780
OTHER ASSETS (Note 8) 98,839 90,358
------ ------
TOTAL ASSETS $6,822,146 $7,435,375
========= =========
See Notes to Financial Statements
</TABLE>
4
<PAGE>
<TABLE><CAPTION>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND MARCH 31, 1995
June 30, 1995 March 31, 1995
------------- --------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Capitalized lease obligations - current $ 132,690 $ 132,037
Accounts payable (Note 9) 1,396,997 1,947,623
Accrued expenses (Note 9) 1,653,136 1,838,939
Deferred revenue (Note 11) 439,737 288,775
------------ ----------
Total Current Liabilities 3,622,560 4,207,374
CAPITALIZED LEASE OBLIGATIONS 130,142 164,466
SUBORDINATED CONVERTIBLE NOTE 463,574 457,145
OTHER LONG TERM LIABILITIES (Note 10) 680,244 833,864
------- -------
TOTAL LIABILITIES 4,896,520 5,662,849
========= =========
CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Common Stock, par value $.025
50,000,000 authorized, 11,029,328 Issued 275,733 275,733
Additional paid-in capital 31,454,854 31,454,854
Accumulated deficit (29,705,845) (29,858,945)
------------ ------------
2,024,742 1,871,642
Less: Treasury stock (at cost) (99,116) (99,116)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 1,925,626 1,772,526
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 6,822,146 $ 7,435,375
========= =========
See Notes to Financial Statements
</TABLE>
5
<PAGE>
<TABLE><CAPTION>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
FOR THREE MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
June 30, 1995 June 30, 1994
------------- -------------
<S> <C> <C>
REVENUES:
Sales of products and software $ 1,150,634 $ 878,600
Rental and monitoring revenues 945,052 1,194,864
Service and other revenue 396,018 341,917
----------- -----------
Total Revenues 2,491,704 2,415,381
--------- ---------
COST AND EXPENSES:
Cost of revenues -
Sales of products and software 317,600 343,277
Rental and monitoring revenues 489,238 645,781
Service and other revenue 167,619 478,985
Operating expenses 1,420,369 1,328,528
Research and development 55,473 135,542
------ -------
Total Costs and Expenses 2,450,299 2,932,113
--------- ---------
INCOME (LOSS) FROM OPERATIONS 41,405 (516,732)
------ ---------
OTHER INCOME (EXPENSE):
Interest income 14,690 15,729
Interest (expense) (56,617) (51,306)
Other - net 153,622 (250,000)
------- ---------
Total Other Income (Expense) 111,695 (285,577)
------- ---------
NET INCOME (LOSS) $ 153,100 $ (802,309)
DEFICIT - BEGINNING $(29,858,945) $(27,312,132)
------------ ------------
DEFICIT - ENDING $(29,705,845) $(28,114,441)
============= =============
NET INCOME (LOSS) PER SHARE $ 0.014 $ (0.073)
===== =======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,989,267 11,019,999
</TABLE>
See Notes to Financial Statements
6
<PAGE>
<TABLE><CAPTION>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
Common Stock Treasury Shares
------------ ---------------
Additional Total
Paid In Accumulated Shareholders'
Shares Amount Capital Deficit Shares Amount Equity
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - 11,029,328 $275,733 $31,454,854 $(29,858,945) 40,061 $(99,116) $1,772,526
April 1, 1995
ACQUISITION OF
TREASURY SHARES
NET INCOME $153,100 $153,100
------------------------------------------------------------------------------------------------------------------------
BALANCE -
June 30, 1995 11,029,328 $275,733 $31,454,854 $(29,705,845) 40,061 $(99,116) $1,925,626
========== ======= ========== ============ ====== ======== =========
See Notes to Financial Statements
</TABLE>
7
<PAGE>
<TABLE><CAPTION>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
June 30, 1995 June 30, 1994
------------- -------------
<S> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
(USED IN) OPERATING ACTIVITIES:
Net Income (Loss) $ 153,100 $ (802,309)
------- ---------
Operating activities
Depreciation and amortization 358,423 400,724
(Increase) Decrease in sale contracts 156,348 39,994
and sales type leases
(Increase) decrease in accounts receivable (454,879) (654,302)
(Increase) decrease in inventory 130,427 111
(Increase) decrease in rental inventory (82,620) 25,042
Increase in software development costs (4,100) (4,555)
Increase in other assets (125,239) (300,365)
Increase (decrease) in accounts payable (883,620) (780,928)
and accrued liabilities
Increase in deferred revenue 150,962 342,819
------- --------
Total Adjustment (754,298) (931,460)
--------- ---------
Net Cash (Used In) Operating Activities $ (601,198) $ (1,733,769)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,173) - 0 -
Sale of marketable securities - 0 - 2,500,000
----- ---------
Net Cash Provided By (Used In) Investing Activities (4,173) 2,500,000
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capitalized lease obligation (33,671) (25,048)
-------- --------
NET INCREASE (DECREASE) IN CASH (639,041) 741,183
Cash at beginning of period 1,096,618 866,927
--------- -------
CASH AT END OF PERIOD $457,577 $1,608,110
======= =========
See Notes to Financial Statements
</TABLE>
8
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 these revenues principally from
sales and rentals to governmental agencies and entities which provide services
to government agencies. The Company is also 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:
June 30, 1995 March 31, 1995
------------- --------------
(Unaudited)
Supplies $ 58,373 $ 65,436
Finished goods 254,040 377,404
------- -------
Total Inventory $ 312,413 $ 442,840
======= =======
Note 3. Sales Contracts Receivable.
-----------------------------------
Sales contracts receivable consists of the following:
June 30, 1995 March 31, 1995
------------- --------------
(Unaudited)
Gross sales contracts receivables $ 216,318 $ 242,383
Less: Unearned revenue (141,408) (166,000)
--------- ---------
Net sales contract receivables 74,910 76,383
Current portion of sales contract 38,622 50,161
receivables ------ ------
Long term portion of $ 36,288 $ 26,222
sales contract ====== ======
receivables
9
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
Note 4. Net Investments in Sales Type Leases.
---------------------------------------------
Net investments in sales type leases consist of the following:
June 30, 1995 March 31, 1995
------------- --------------
(Unaudited)
Total minimum lease payments to be $ 752,560 $ 833,465
received
Less: unearned income (214,970) (141,000)
--------- ---------
Net investment in sales type leases 537,590 692,465
Amounts due within one year 226,862 434,685
------- -------
Net long term portion $ 310,728 $ 257,780
======= =======
Note 5. Other Current Assets.
-----------------------------
Other current assets consist of the following:
June 30, 1995 March 31, 1995
------------- --------------
(Unaudited)
Prepaid royalties $ 141,763 $ 76,949
Deposits on bids 25,400 26,100
Prepaid expenses 94,002 66,621
Note receivable 26,778 20,000
Other 30,812 12,327
------ ------
$ 318,755 $ 201,997
======= =======
10
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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:
June 30, 1995 March 31, 1995
------------- --------------
(Unaudited)
Rental equipment at cost $ 3,815,354 $ 3,732,734
Less: Accumulated depreciation (2,696,381) (2,479,757)
----------- -----------
$ 1,118,973 $ 1,252,977
========= =========
Note 7. Property, Plant and Equipment.
--------------------------------------
Property, plant and equipment consists of the following:
June 30, 1995 March 31, 1995
------------- --------------
(Unaudited)
Office and computer equipment $ 1,634,459 $ 1,634,459
Production equipment 46,428 46,428
Leasehold Improvements 7,067 2,894
--------- ------------
1,687,954 1,683,781
Less: Accumulated depreciation (1,030,213) (942,701)
--------- ---------
Net property, plant and
equipment $ 657,741 $ 741,080
======= =======
11
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
Note 8. Other Assets.
---------------------
Other assets consist of the following:
June 30, 1995 March 31, 1995
------------- --------------
(Unaudited)
Pre-paid royalties $ 19,500 $ 21,600
Fixed asset purchases in progress 14,678 4,100
Security deposits 45,902 45,902
Other 18,759 18,756
------ ------
$ 98,839 $ 90,358
====== ======
Note 9. Accounts Payable and Accrued Expenses.
----------------------------------------------
Included in accounts payable at June 30, 1995 and March 31, 1995 is a
liability of $389,563 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:
June 30, 1995 March 31, 1995
------------- ----------------
(Unaudited)
Payroll, payroll taxes and benefits $ 219,994 $ 235,276
Commissions 105,680 105,696
Sales tax payable 170,115 184,392
Warranty and repairs 236,142 223,737
Accrued rent settlement - current portion 27,182 27,182
Current portion of litigation settlement 65,000 318,000
Other 829,023 744,656
------- -------
$ 1,653,136 $ 1,838,939
========= =========
12
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
Note 10. Other Liabilities - Long-Term
---------------------------------------
Other long-term liabilities at June 30, 1995 and March 31, 1995 are
comprised of the following:
June 30, 1995 March 31, 1995
------------- --------------
(Unaudited)
Long-term portion of rent settlement $ 230,000 $ 383,622
Long-term portion of litigation settlement 150,000 150,000
Long-term portion of warranty reserve 148,800 148,800
Other 151,444 151,442
------- -------
$ 680,244 $ 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.
13
<PAGE>
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
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.
Note 14. 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 15. Segment Information
-----------------------------
The Company's operations are classified into two business segments:
Criminal Justice and Computer Software. The following table sets forth selected
items from the Company's Statements of Operations with respect to such segments
for the quarters ended June 30, 1995 and 1994.
June 30, 1995 June 30, 1994
% of % of
Amount Segment Amount Segment
---------------------------------------------------------------------------
Revenues:
Criminal Justice Segment 1,937,710 77.8 1,567,489 64.9
Software Segment 553,994 22.2 847,892 35.1
--------- ---------
Total Revenue 2,491,704 2,415,381
Cost of Sales:
Criminal Justice Segment 843,091 86.5 828,087 56.4
Software Segment 131,366 13.5 639,956 43.6
--------- ---------
Total Cost of Sales 974,457 1,468,043
Gross Margin:
Criminal Justice Segment 1,094,619 72.1 739,402 78.1
Software Segment 422,628 27.9 207,936 21.9
--------- ---------
Total Cost of Sales 1,517,247 947,338
Operating Expenses:
Criminal Justice Segment 976,983 66.2 925,158 63.2
Software Segment 498,859 33.8 538,914 36.8
--------- ---------
Total Operating Expenses 1,475,842 1,464,072
Net Income:
Criminal Justice Segment 233,402 152.5 (469,844) 58.6
Software Segment (80,302) (52.5) (332,466) 41.4
--------- ---------
Total Net Income 153,100 (802,310)
========= =========
14
<PAGE>
Note 16. Subsequent Events
---------------------------
On August 1, 1995, the Company and Strategic Technologies Inc.
("Strategic"), signed a letter agreement between the companies which proposes a
merger whereby the Company will become a wholly-owned subsidiary of Strategic
and the Company's shareholders will receive approximately 4.4 million Strategic
shares in exchange for their Company stock. The letter agreement provides that
Strategic will be granted a staged interim share purchase warrant entitling
Strategic to acquire 500,000 shares of the Company, increasing on execution of
definitive agreements to 2 million shares at a price of $0.25 per share for a
one year period exercisable in the event the transaction does not consummate and
dependent on the timing of the termination. The merger is expected to close by
December 31, 1995 but still remains subject to execution of definitive
agreements, as well as the approval of shareholders and securities regulatory
authorities having jurisdiction.
15
<PAGE>
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 construction trade and to multi-national
corporations. For 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. Through its DPC/International Business Solutions, Inc. ("IBS")
subsidiary, the Company develops, distributes and supports financial accounting
computer software programs for multi-national corporations requiring concurrent,
multi-national, multi-currency, and multi-lingual capabilities. 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.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected items from the Company's
unaudited Consolidated Statements of Operations for the quarter ended June 30,
1995 and 1994, as percentages of corresponding revenues and percentage of
increase (decrease) in each such item from the prior periods.
<TABLE><CAPTION>
Percentage of Revenues
Three Months Ending
-------------------
% of Increase
June 30, 1995 June 30, 1994 (Decrease)
--------------- ------------- ----------
<S> <C> <C> <C>
Revenues:
Product 46.2% 36.4% 31.0%
Rental & Monitoring 37.9 49.5 (20.9)
Service 15.9 14.1 15.8
---- ----
Total 100.0 100.0 3.2
Cost of Revenues*
Product 27.6 39.1 (7.5)
Rental & Monitoring 51.8 54.1 (24.2)
Service 42.3 140.1 (65.0)
Total 39.1 60.8 (33.6)
Gross Margin*
Product 72.4 60.9 55.6
Rental & Monitoring 48.2 45.9 (17.0)
Service 57.7 (40.1) 266.6
Total 60.9 39.2 60.2
Operating Expenses 57.0 55.0 6.9
Research and Development 2.2 5.6 (59.1)
Operating Income (Loss) 1.7 (21.4) 108.0
Total Other Income
(Expense) 4.4 (11.8) 139.1
Net Income (Loss) 6.1 (33.2) 119.1
</TABLE>
* Percentage of revenues for Cost of Revenues and Gross Margin are expressed
as a percentage of corresponding revenues.
17
<PAGE>
QUARTER ENDED JUNE 30, 1995 COMPARED TO QUARTER ENDED JUNE 30, 1994
-------------------------------------------------------------------
The Company generated income from operations of approximately $41,400
during the first quarter of the Company's fiscal year ending March 31, 1996 (the
"1996 Fiscal Year"), compared to a loss from operations of approximately
$516,700 for the first quarter of the fiscal year ended March 31, 1995 (the
"1995 Fiscal Year"). The Company's net income for the first quarter of the 1996
Fiscal Year totaled approximately $153,100 compared to a loss of $802,300 for
the first quarter of the 1995 Fiscal Year. The favorable results achieved in
the first quarter of the 1996 Fiscal Year are primarily due to lower cost of
sales in the service category and other income of approximately $111,600.
Revenues
The Company's total revenue for the first quarter of the 1996 Fiscal
Year totaled approximately $2,491,700 with an increase of $76,300 or 3.2%
compared to the first quarter of the 1995 Fiscal Year. Revenues for the
Criminal Justice Segment totaled approximately $1,937,700 or 77.8% of total
revenue, while the Software Segment contributed approximately $553,900 or 22.2%.
Revenues generated by the Criminal Justice Segment increased by approximately
$370,300 or 23.6% over the first quarter of the 1995 Fiscal Year. The increase
in revenues for the Criminal Justice Segment are the result of the Company's
marketing and sales strategy to emphasize the outright purchase or
lease/purchase of equipment. The Software Segment's revenues declined during
the first quarter of the 1996 Fiscal Year by approximately $293,800 or 34.7%.
Both companies experienced decreased revenues in the product sales categories
while the service component remained constant. BGIS' total revenues of $399,400
decreased by approximately $99,800 or 20.0%. IBS' total revenues of $154,500
decreased by approximately $194,000 or 55.7%.
Product Sales. Product sales for the first quarter of the 1996 Fiscal Year
-------------
totaled approximately $1,150,600 compared to approximately $878,600, an increase
of $272,000 or 31.0%. The Criminal Justice Segment totaled approximately
$837,600 or 72.8% of the product sales category. Compared to the first quarter
of the 1995 Fiscal Year, sales for the Criminal Justice Segment increased by
$559,900 or 201.7%. The increase in performance by the Criminal Justice
Segment was the result of the marketing efforts to focus on obtaining accounts
whose procurement practices balance price and technology rather than low bids.
The Software Segment's product sales totaled approximately $312,900 or 27.2% of
the total product sales category compared to approximately $600,900 or 68.4% for
the first quarter of the 1995 Fiscal Year. Sales for the first quarter of the
1996 Fiscal Year declined by almost $287,900 or 47.9%. Product sales for BGIS
totaled approximately $223,700 or a decline of approximately $124,500 or 35.8%.
The product sales volume was the result of lowered hardware sales to the
industry. IBS also experienced lower product sales in the first quarter of the
1996 Fiscal Year.
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 $945,000 for the first quarter of the
1996 Fiscal Year, representing 48.8% of the revenue for the Criminal Justice
Segment and 37.9% of the total Company revenue. Compared to the first quarter
of the 1995 Fiscal Year, revenue decreased from $1,194,800, a decline of
$249,800 or 20.9%. Due to 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 accepted a smaller market
share in exchange for a higher average price per day. In the first quarter of
the 1996 Fiscal Year, the Monitoring Center had approximately 1,800 clients as
compared to 2,240 clients during the first quarter 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 Software Companies. Service revenues for the first
quarter of the 1996 Fiscal Year totaled approximately $396,000 compared to
approximately $341,900 during the first quarter of the 1995 Fiscal Year or an
increase of approximately $54,100 or 15.8%. Within this category, the Criminal
Justice Segment accounted for
18
<PAGE>
approximately $154,900 of the total or 39.1% during the first quarter of the
1996 Fiscal Year, an increase over the first quarter of the 1995 Fiscal
Year of approximately $60,000 or 63.3%. The Software Companies contributed
approximately $241,000 or 61.9% of the total service revenue of the first
quarter of the 1996 Fiscal Year as compared to approximately $246,900 or a
decrease of approximately $5,900 during the first quarter of the 1995 Fiscal
Year. Within the Computer Software segment, BGIS's service revenue was
approximately $175,700 during the first quarter of the 1996 Fiscal Year, an
increase of approximately $24,600 or 16.3% ahead of the first quarter of the
1995 Fiscal Year. IBS's service revenue declined $65,300 for the first
quarter of the 1996 Fiscal Year compared to approximately $95,800 for the
first quarter of the 1995 Fiscal Year, a decrease of 31.9%.
Costs and Expenses
Product Costs. Total product costs for the first quarter of the 1996 Fiscal
-------------
Year totaled $317,600 or 27.6% of corresponding revenues compared to
approximately $343,200 and 39.0% for the first quarter of the 1995 Fiscal Year,
a decrease in costs of approximately $25,600 and 7.5%. The Criminal Justice
Segment's product costs increased to approximately $264,100 or 31.5% of
corresponding revenues as a result of increased sales for the first quarter of
the 1996 Fiscal Year. The costs were impacted favorably by the contracting of
the manufacturing to KBS, Inc. The Software Companies product costs decreased
to $53,400 or 17.1% of product revenue for the segment, compared to $251,200 and
41.8% of product revenue during the first quarter of the 1995 Fiscal Year.
Cost of Rental and Monitoring. Costs of rental and monitoring for the first
-----------------------------
quarter of the 1996 Fiscal Year totaled approximately $489,200 or 51.8% of
related revenues. Compared to the first quarter of the 1995 Fiscal Year, costs
have declined by approximately $156,500 or 24.2%. Costs for the first quarter
of the 1995 Fiscal Year totaled $645,700 or 54.1% of related revenues. 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 first
--------------------------
quarter of the 1996 Fiscal Year totaled approximately $167,600 or 42.3%,
compared to $478,900 for the first quarter of the 1995 Fiscal Year, a decrease
of approximately $311,300 or 65%. Contributing to the improvement was the
benefit derived from the discontinuance of the European support operations for
IBS which is now being handled domestically.
Operating Expenses. Operating expenses for the first quarter of the 1996 Fiscal
------------------
Year totaled approximately $1,420,300 representing 56.9% of total revenue and
compares to the first quarter of the 1995 Fiscal Year costs of approximately
$1,328,500 or 55.0%, or a correlating increase in costs of $91,800 or 6.9%.
Operating expenses for the Criminal Justice Segment totaled approximately
$928,100 or 48.0% of revenue for the segment compared to $789,600 or 50.4%
during the first quarter of the 1995 Fiscal Year. Although the total costs have
increased, costs as a percentage of segment revenue decreased. Decrease in
compensation and building expenses were offset by higher costs in professional
services. The operating expenses for the Software Companies totaled $492,200
compared to $538,900 or a reduction of $46,600 or 8.7% from the first quarter of
the 1995 Fiscal Year. With decreasing revenues the associated costs have
increased as a percentage of total revenue with 88.7% for the first quarter of
the 1996 Fiscal Year, compared to 63.6% for the first quarter of the 1995 Fiscal
Year.
Research and Development. Research and development ("R&D") costs for the first
------------------------
quarter of the 1996 Fiscal Year totaled $55,400 or 2.2% of total revenue for the
Company compared to $135,500 or 5.6% for the first quarter of the 1995 Fiscal
Year. The Criminal Justice Segment comprised the majority of the expenditures
as the R&D costs for the Software Companies' major upgrade and product
development had been completed by the end of the 1995 Fiscal Year.
19
<PAGE>
Other Income and Expenses. In the first quarter of the 1996 Fiscal Year total
-------------------------
other income totaled approximately $111,600 compared to other expense of
approximately $285,500 for the first quarter in the 1995 Fiscal Year. The
Company earned interest income for the first quarter of the 1996 Fiscal Year of
approximately $14,700 and offset by interest expense of $56,600. The Company
recognized $153,600 of income associated with the renegotiation of the building
lease after vacating the portion of the premises relating to the manufacturing
process. In the 1995 Fiscal Year, the majority of other expenses related to the
loss on the sale of the Primedex Shares of approximately $250,000.
Gross Margins
Overall gross margins for the first quarter of the 1996 Fiscal Year
were $1,517,200 or 60.9% of revenue compared to the first quarter of the 1995
Fiscal Year of $947,300 or 39.2%. Of the gross margin total, the Criminal
Justice segment accounted for 72.1% and the Software Companies contributed 27.9%
as compared to 78.1% and 21.9% respectively during the first quarter of the 1995
Fiscal Year. On an overall basis, gross margins increased in both the product
and service categories. Gross margin percentages on product sales for the first
quarter of the 1996 Fiscal Year were 72.4% versus a previous 60.9% for the first
quarter of the 1995 Fiscal Year. Service margins for the first quarter of the
1996 Fiscal Year were 57.7% versus (40.1%) for the first quarter of the 1995
Fiscal Year.
Overall gross margins for the Criminal Justice Segment for the first
quarter of the 1996 Fiscal Year totaled $1,094,600 or 56.6% versus $739,400 or
47.0% during the first quarter of the 1995 Fiscal Year or an increase of
$355,200 or 48.0%. Increased margins were experienced in all categories of the
Criminal Justice Segment. The Software Companies margins for the first quarter
of the 1996 Fiscal Year totaled $422,600 or 76.2% versus the first quarter of
the 1995 Fiscal Year of $207,900 or 24.5%, an increase of $214,600 or 103.2%
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the Company had working capital of approximately
$116,000, as compared with a working capital deficiency of $52,000 at March 31,
1995, an increase of approximately $168,000. This increase is primarily
attributable to the Company's net income of approximately $153,100.
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 1996 Fiscal Year through cash flow from operations and the use of
various debt facilities. Described below are transactions that the Company
expects will provide working capital to the Company.
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 June 30, 1995 the FC has
committed a line of credit to the
20
<PAGE>
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 June 30,
1995, the Company has recorded a liability of approximately $272,000 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 sources to finance the sale and rental of equipment to its
customers as a means to increase cash flow. In the first quarter of the 1996
Fiscal Year, the Company sold approximately $284,000 of sales type lease and
long-term sales contract receivables to unrelated third party finance sources.
All of such receivables were financed on a non-recourse basis. In the past
years the Company has financed many transactions on a full recourse basis.
Accordingly, the Company has recorded a liability for these full recourse sales
and amortizes this liability over the original payment terms (see Note 3 to the
Consolidated Financial Statements.)
As discussed, it is management's intent to continue to use third parties to
finance additional lease receivables, however, no assurance can be given that
such negotiations or other efforts of the Company will result in future sales of
its receivables. The Company does not believe it is reliant upon any one source
for future sales 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.
On August 1, 1995, the Company and Strategic Technologies Inc.
("Strategic"), signed a letter agreement between the companies which proposes a
merger whereby the Company will become a wholly-owned subsidiary of Strategic
and the Company's shareholders will receive approximately 4.4 million Strategic
shares in exchange for their Company stock. The letter agreement provides that
Strategic will be granted a staged interim share purchase warrant entitling
Strategic to acquire 500,000 shares of the Company, increasing on execution of
definitive agreements to 2 million shares at a price of $0.25 per share for a
one year period exercisable in the event the transaction does not consummate and
dependent on the timing of the termination. The merger is expected to close by
December 31, 1995 but still remains subject to execution of definitive
agreements, as well as the approval of shareholders and securities regulatory
authorities having jurisdiction. The Company expects to incur significant
professional and administrative costs in connection with the merger, and there
can be no assurance that the merger with Strategic will be consummated.
Strategic has agreed to fund the Company's transaction costs relative to the
merger, provided however, after Strategic has paid $60,000 of such costs
Strategic may elect to terminate the merger process by August 30, 1995, and have
no further liability to fund the Company's transaction costs. In the event of
the termination of the merger process after August 30, 1995, the costs incurred
by Strategic and the Company will be shared equally, provided however Strategic
may only recover amounts from Digital by exercise of the warrant to purchase
500,000 shares of the Company.
21
<PAGE>
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.
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
-----------------
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*
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*
------------
* Incorporated by reference. See Exhibit Index.
-----------
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on August 1, 1995.
22
<PAGE>
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: August 14, 1995 By:/s/ Richard A. Angulo
-------------------------
Richard A. Angulo, President and
Chief Executive Officer
(Duly Authorized Officer)
By: /s/ Gerald Parsons
----------------------------------
Gerald Parsons, Controller
(Chief Accounting Officer)
23
<PAGE>
DIGITAL PRODUCTS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
Fiscal Quarter Ended December 31, 1994
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... *3,
to the Class B Warrants Ex. 4(k)
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)
24
<PAGE>
----------
*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.
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> JUN-30-1995
<CASH> 457,577
<SECURITIES> 0
<RECEIVABLES> 2,383,804
<ALLOWANCES> 0
<INVENTORY> 312,413
<CURRENT-ASSETS> 3,738,033
<PP&E> 657,741
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,822,146
<CURRENT-LIABILITIES> 3,622,560
<BONDS> 463,574
<COMMON> 275,733
0
0
<OTHER-SE> 31,454,854
<TOTAL-LIABILITY-AND-EQUITY> 6,822,146
<SALES> 1,150,634
<TOTAL-REVENUES> 2,491,704
<CGS> 317,600
<TOTAL-COSTS> 2,450,299
<OTHER-EXPENSES> 111,695
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,617
<INCOME-PRETAX> 153,100
<INCOME-TAX> 0
<INCOME-CONTINUING> 153,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153,100
<EPS-PRIMARY> .014
<EPS-DILUTED> .014
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