[LOGO] DIGITAL
PRODUCTS
CORPORATION
1995 ANNUAL REPORT
800 N.W. 33rd Street
Pompano Beach, Florida 33064
(305) 783-9600
THE ATTACHED ANNUAL REPORT ON FORM 10-K ACCOMPANYING THE PROXY STATEMENT
CONTAINING FINANCIAL AND OTHER RELEVANT INFORMATION FOR THE FISCAL YEAR ENDED
MARCH 31, 1995, IS SUBMITTED TO THE SHARHOLDERS AS AN ANNUAL REPORT PURSUANT
TO THE RULE 14a-3 OF THE SECURITIES EXCHANGE ACT OF 1934.
<PAGE>
PRESIDENT'S MESSAGE
To the Shareholders of Digital Products Corporation: February 23, 1996
With the support of shareholders like you, DPC is tackling one of the
toughest problems facing the country today. Growth in the community
corrections population continues to outpace available resources. Agencies
responsible for corrections are up against budget cuts and tight restrictions.
They are trying to do more with less. At DPC, we saw this problem coming and
we planned for it. DPC leads the field in providing sophisticated electronic
monitoring and case management systems that actually help agencies do more with
less, and agencies are responding.
The burden on the community corrections market is growing exponentially,
agencies are under pressure to respond, yet they are restricted financially.
Because of the shift toward funding the building of prisons rather than
community corrections programs, some agencies have postponed their buying
decisions while others have decided to buy low cost, low function systems.
This has negatively impacted the financial results of DPC. However a number of
agencies realized that higher function electronic monitoring systems with
sophisticated information management systems, while more expensive, offer the
best value in the long run and these agencies chose DPC.
DPC has identified this niche market and is filling it with technically
superior products and services. In this regard, DPC's manufacturing and
engineering partner, KBS, has been ISO9001 Certified. This means DPC is now in
the position to raise industry standards and that's exactly what we intend to
do.
Financial results have been mixed with lower than expected sales and DPC
continues to operate at a net loss; however, it is significant to note that
gross profit margins are up and are expected to continue to improve. The third
and fourth quarters of Fiscal 1996 have also been affected by the costs
relating to the litigation with BI Incorporated and the now terminated merger
with Strategic Technologies Inc. discussed below. Looking forward we hope to
improve our results and to attain profitability for DPC and its shareholders.
Within the company, DPC has taken a hard line on expense and debt
reduction and doing it without any outside financial capitalization. DPC
employees are in touch with the real issues facing our customers. This is our
human capital. DPC customers represent the leaders and innovators in the
industry. This is our franchise capital. DPC customers see DPC as a strategic
partner working with them to achieve common goals. These forward-thinking
agencies understand that DPC's unique approach to performance based case
management provides the best long-term value, and they are beginning to buy DPC
products and services. Our marketing organization canvasses the market to
identify those prospects in our niche. Our sales efforts focus on those
prospects willing to recognize and pay for added value.
A recent Texas Appellate Court ruling in favor of DPC's equipment is one
example of this added value. The court concluded that because DPC's computer
printout did not rely upon the assistance, observations or reports of a human
declarant, it did not constitute hearsay. Further, the court ruled that the
DPC equipment was reliable, accurate and trustworthy and that the state proved
the reliability of the computer printout. We are proud of the fact that Harris
County Pretrial had the confidence in our technology to pursue this matter
through the courts. We believe the facts speak for themselves. It remains our
opinion that the integrated technology incorporated in our random calling and
radio frequency monitoring units and the manner in which the information is
processed and managed is what has led to DPC's system remaining the only one,
that we are aware of, whose information has been admissible as evidence without
the need of a human declarant.
<PAGE>
The proposed merger between DPC and Strategic Technologies Inc. announced
in October 1996 was mutually terminated in December 1996 since the market
conditions made the financing aspects of the merger impractical for both
parties. Accordingly, DPC's Board of Directors determined that it was in the
best interest of the DPC shareholders to terminate the Merger Agreement. We
regret that the merger could not be realized under those circumstances. During
the merger process, DPC continued to implement strategies to strengthen the
company's performance. We look to continue on that course of improvement.
In January 1995, DPC commenced a lawsuit against its competitor BI
Incorporated for wrongfully interfering with the contract under which DPC was
to provide monitoring services during 1995 to the State of New Jersey and
wrongfully interfering with DPC's business opportunities in New Jersey. The
suit centered around DPC's claim of misuse by BI of certain information
regarding DPC's monitoring unit which was generated in a field test which DPC
believes was performed in a subjective manner. The field test done by the
State of New Jersey prior to awarding the new contract to DPC, which DPC
believes was a more thorough objective test, resolved those products concerns.
In December 1995 DPC was awarded a new three year contract with the State of
New Jersey Department of Corrections for the provision of electronic monitoring
services and monitoring units. In light of this contract award, DPC decided to
no longer pursue its claim against BI in New Jersey, although the company
believes that its claim against BI had substantial merit. We believe that the
suit brought against BI has had a positive impact on the methods that companies
are now using to compete for new contracts in the electronic monitoring field.
In addition, we believe that the suit illustrated the damage to the industry
which is done by companies which focus on disparaging competitors and their
products.
The software groups performance and drain on corporate resources led to
the decision by the Board of Directors to discontinue the operations of
DPC/International Business Solutions Inc. and pursue finding a buyer for BGIS
Systems Co. This will allow the company to focus its energy on the Criminal
Justice market and the application of those technologies used in the Criminal
Justice market in the other markets.
Over the last two years, DPC has seen a turnaround. There has been a
trend of stable gross profit margins and reduced product and operating cost.
The DPC management team expects this trend to continue and will keep working as
hard as possible to reward our shareholders for their faith in DPC. Thank you
for this opportunity.
Very Truly Yours,
/s/ Richard A. Angulo
Richard A. Angulo
President and Chief Executive Officer
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 1995
0-9503
(COMMISSION FILE NUMBER)
DIGITAL PRODUCTS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-1141879
(State or Other Jurisdiction (I.R.S. Employer I.D. Number)
of Incorporation or Organization)
800 N.W. 33RD STREET
POMPANO BEACH, FLORIDA 33064
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(305) 783-9600
(Registrant's Telephone Number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.025 PER SHARE
(Title of class)
CLASS B COMMON STOCK PURCHASE WARRANT
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ______
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of May 15, 1995, was approximately $1,180,649.
The number of shares of Common Stock, $.025 par value, of the Registrant issued
as of May 15, 1995, was 10,989,267 shares. The Company has 40,061 shares in
treasury.
<PAGE>
PART I
ITEM 1: BUSINESS.
GENERAL DESCRIPTION AND HISTORY OF THE COMPANY
Digital Products Corporation and its subsidiaries (collectively, the
"Company") provide information management solutions to the criminal justice and
corrections industry, the construction trade and multi-national corporations.
Digital Products Corporation, the parent corporation, provides strategic
planning, guidance and administrative support to three operating subsidiaries,
DPC Monitoring Services, Inc., DPC/International Business Solutions, Inc. and
the Company's BLR, Inc. subsidiary, which conducts its business under the trade
name BGIS Systems, Co., thereby allowing the operating subsidiaries to focus on
their customers and day-to-day responsibilities.
DPC Monitoring Services, Inc. ("DPCMSI") provides electronic supervision
and case management solutions for community corrections applications (the
"Criminal Justice Segment"). Within the construction industry, BGIS Systems, Co.
("BGIS"), develops, distributes and supports computer software application
programs for the highway and heavy/utility construction and materials production
industry. Through its DPC/International Business Solutions, Inc. subsidiary
("IBS"), the Company develops, distributes and supports financial and accounting
computer software programs for multi-national corporations requiring concurrent,
multi-national, multi-currency, and multi-lingual capabilities. The BGIS and IBS
operations together comprise the Company's Computer Software Segment. The
Company's executive offices are located at 800 N.W. 33rd Street, Pompano Beach,
Florida 33064, and its telephone number is (305) 783-9600.
The Company was incorporated in 1966 under the laws of the State of Florida
for the purpose of developing various digital electronic devices for military
and commercial applications. Since 1972, the Company has concentrated its
efforts primarily in the non-military telecommunications, computer hardware and
software, and electronic monitoring fields. In 1978, the Company developed an
automatic telephone dialer called the "Telsol" capable of dialing preprogrammed
telephone numbers, delivering different prerecorded messages and recording the
responses to such messages. In 1984, the Company developed and commenced
marketing automated offender monitoring equipment for offender house arrest
programs and thereafter redirected its marketing emphasis toward the Criminal
Justice Segment. In an effort to diversify and in order to complement and expand
its software expertise, the Company acquired IBS in May 1992 and BGIS in
December 1992. In June 1994, the Company sold its DPC/Metroplex Mobile Data,
Inc. ("Metroplex") subsidiary.
During the Company's fiscal year ended March 31, 1995 (the "1995 Fiscal
Year"), revenues generated by the Company within the Criminal Justice Segment
and Computer Software Segment accounted for approximately 70% and 30%,
respectively, of the Company's total revenues. For the Company's fiscal year
ended March 31, 1994 (the "1994 Fiscal Year"), revenues derived from the
Criminal Justice Segment and the Computer Software Segment accounted for 70% and
30%, respectively, of the Company's total revenues; and for the Company's fiscal
year ended March 31, 1993 (the "1993 Fiscal Year") revenues derived from the
Criminal Justice Segment and the Computer Software Segment accounted for 82% and
18%, respectively, of the Company's total revenues.
1
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Set forth below is summary financial information, for the Company's last
three fiscal years, with respect to the amounts of revenue generated from
unaffiliated customers by each of the Company's industry segments, each
segment's operating profit or loss and identifiable assets. During such
three-year period, there were no inter-segment sales.
FISCAL YEAR ENDED MARCH 31
(IN THOUSANDS)
--------------------------
1995 1994 1993
Sales to Unaffiliated Customers:
Criminal Justice Segment $7,544 $6299 $7,297(1)
Computer Software Segment $3,293 2,631 1,618
Operating Profit (Loss):
Criminal Justice Segment 469 (7,100) (6,683)(1)
Computer Software Segment (1,872) (2,295) (13)
General Corporate Expenses (229) (555) (388)
Identifiable Assets:
Criminal Justice Segment 5,901 6,010 13,014(1)
Computer Software Segment 1,534 1,875 2,221
Other 0 2,500 4,000
- ----------------------------
(1) Includes Metroplex which was sold in June 1994. Metroplex had no revenues
in the fiscal years ended March 31, 1994 or March 31, 1995.
2
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CRIMINAL JUSTICE SEGMENT
PRODUCTS AND SERVICES
DPC Monitoring Services, Inc. ("DPCMSI") provides electronic supervision
and case management solutions for community corrections applications. DPCMSI's
information management software, computer systems network, monitoring facility,
electronic monitoring equipment, and customer services form the foundation from
which DPCMSI offers a variety of integrated products and services for offender
supervision, caseload management and program performance analysis. The solutions
offered by DPCMSI focus on value added features to help agencies access
pertinent information in a timely manner. These solutions serve as tools of
analysis to aid agencies in case management decision-making, and provide
automated performance measurement tools. Set forth below is a description of the
products and services provided by DPCMSI.
ELECTRONIC MONITORING EQUIPMENT
HMU 4. The "HMU 4" is the Company's flagship electronic supervision
-----
product. The HMU 4 home monitoring unit incorporates multiple unique
monitoring technologies. These include: advanced radio frequency (RF)
technology for active continuous monitoring of the presence or absence of
an offender from a prescribed location; DPCMSI's patented offender
identification technology for passive verification of the presence or
absence of an offender (anklet and recorded voice verification); and breath
alcohol detection. This integrated approach allows an agency to use a
combination of monitoring technologies to match the risk profile of the
offender by activating the necessary features through DPCMSI's software
systems. The Company's electronic monitoring equipment is controlled by the
Company's information management software described below. See "Information
Management Software."
The HMU 4 consists of a radio frequency transmitter and identification
module which is worn on the offender's ankle (the "Anklet") and an
integrated telephone handset verifier/monitor unit which contains a radio
receiver and communications modem. The verifier/monitor unit is installed
in the offender's home and connected to a telephone line and A/C power. The
Anklet acts as a short-range radio transmitter which emits a coded
continuous signal to the radio receiver incorporated in the
verifier/monitor unit. The Anklet may also be inserted into the verifier
attached to the monitor/verifier unit to verify the presence or absence of
the offender. Additionally, the HMU4 contains a discrete mechanism with the
ability to detect the relative measure of alcohol usage by the offender.
Using standard telephone lines, the verifier/monitor unit relays the
information to a central computer system. See "Central Computer System
Network."
If the offender goes beyond the range of the programmable transmission
area, the radio contact between the Anklet transmitter and the
verifier/monitor unit is broken. A number of natural and man-made
occurrences can cause the radio signal of products using the RF method to
be broken. DPCMSI is the only company to integrate an automated call-back
system as a standard feature in each of its monitoring units. The system
calls the offender whose radio link has been interrupted to confirm
compliance with such person's house arrest schedule. By recording a
offender's voice and having the Anklet inserted into the
verifier/monitoring unit, DPCMSI can accurately confirm offender compliance
before alerting the supervising personnel.
Drive By II. Complementing the main monitoring devices, the Company also
-----------
markets a mobile RF device, "Drive By II," which enables officers to detect
the presence of any DPCMSI-transmitter worn by a offender within the area.
The Drive By II has the ability to scan for a specific transmitter or for
all transmitters within its range. This product is useful for verifying an
offender's presence at home without personal contact and at locations other
than the home (e.g., place of employment, community service, etc.).
Officers
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can use the Drive By II while driving in their car, using the car's battery
and a roof mounted antenna. It can also be easily carried and has an
internal battery for use when outside power sources are unavailable.
Cellulert. The "Cellulert" is a peripheral device, which utilizes cellular
---------
telephone technology to transmit voice and data. The Cellulert can be used
in conjunction with the On Guard Plus, the HMU 4 and the Alert line of
products described below. The Company believes that the use of wireless
technology will make its monitoring equipment more attractive within the
Criminal Justice Segment since such technology will increase program
eligibility requirements for offenders without a home telephone or in rural
areas and in foreign markets where telephone services may be less available
or reliable and/or more costly.
On Guard Wristlet/Verifier. The Company's first generation monitoring
--------------------------
device is the On Guard Wristlet Verifier. This device works in conjunction
with a computer system which is programmed with the offender's curfew
schedule and random calling frequency. At specific times or at randomly
computer generated intervals, the offender is called to confirm his
presence. The offender is required to respond to computer generated
questions and then requested to insert the Wristlet into the verifier
connected to a telephone. Each Wristlet/Verifier assigned to an offender is
coded to only work as a set. The offender's responses are recorded along
with the time and date of each call.
On Guard Plus. In 1989, the Company began marketing an integrated house
-------------
arrest electronic monitoring device called the On Guard Plus which utilized
RF technologies, as well as verification by the insertion of the Anklet
into the verifier attached to the monitor/verifier unit. The Company no
longer manufactures the On Guard Plus unit, which has been replaced by the
HMU 4. However, service and support are being provided along with
incentives to transition to the HMU4 and Alert Unit.
Alert Product Line. DPCMSI is committed to continually increasing the
------------------
quality and reliability of its entire product line. DPCMSI, together with
its manufacturing partner, KBS Incorporated ("KBS"), is in the process of
completing the development of a new model in the DPCMSI line of electronic
monitoring equipment. The new unit has been re-engineered to facilitate the
production of a more reliable unit at a lower manufacturing cost with
increased functionality. The new Alert unit will utilize active and passive
technologies similar to the HMU 4 unit, including the breath alcohol
testing feature. The new line will also feature new tamper detection
technologies, increased internal memory storage capacity, extended battery
life and an "officer panic alert" feature - which is being added to address
the need for officer safety. The Anklets and verifier/monitor units will be
interchangeable, thereby facilitating the ability for replacement of
individual unit components. In addition, one verifier/monitor unit may be
used to monitor multiple offenders which will make the unit attractive for
group homes and similar settings with multiple offenders. The Company
expects to have the first unit in the Alert line available for distribution
in the Fall of 1995.
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INFORMATION MANAGEMENT SOFTWARE
The Company's electronic monitoring equipment is controlled by the
Company's information management software which is described below.
AVAIL (Automated Value-Added Information Link) Software. AVAIL is an
-------------------------------------------------------
advanced computer software application designed specifically for electronic
offender supervision and caseload management applications. The Company
believes that AVAIL is the most advanced monitoring system software
available today. AVAIL was designed to manage an unlimited number of
offenders, officers and programs. Among some of the features that allow
AVAIL to support and automate individual offender-specific monitoring
include:
- multi-lingual capability
- multiple, customized types and levels of supervision
- incident processing module (including confirmation procedures and
notification to agency personnel)
- analysis reports to gauge offender compliance and ability to make
adjustments to monitoring parameters
based upon the offender's incident rate
- expansion capability to monitor an infinite number of offenders on
one network database
- automatic and simultaneous support monitoring for all time zones
- optional report modules for Statistical Analysis and Custom
Reports
The Statistical Analysis module assists in effective caseload management
and in gauging officer productivity. The Custom Reports module allows
reports to be generated in narrative format in laymen's terms for review by
untrained individuals, including the offenders, prosecutors and judges.
AVAIL was installed in the Company's national monitoring center (the
"Monitoring Center") in September 1992 to automate the Company's monitoring
services. Currently the monitoring center supports twelve remote terminals
or notebook computers. The first AVAIL software package was installed at a
customer site in January, 1993. As of March 31, 1995, the AVAIL software
package has been installed at twelve customer locations supporting eleven
remote terminals or portable notebook computers. The AVAIL software
application replaced DPCMSI's OnGuard software, which was DPCMSI's initial
electronic supervision software. There are 43 customers currently using the
On Guard software.
AVAIL includes one standard and four optional modules:
Offender Monitoring (Standard)
------------------------------
This module, which is standard with each AVAIL package, accommodates
multiple supervision technologies including integrated and stand alone
radio frequency, Wristlet/Verifier, recorded voice verification and breath
alcohol testing from one database. It offers flexibility in violation
reporting and processing, as well as sophisticated curfew scheduling.
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Automated Caseload Check-In System (ACCSYS) (Optional)
------------------------------------------------------
This optional module is an automated system for community corrections
applications requiring scheduled check-ins and status updates. ACCSYS
utilizes "800" and "900" telephone services for offenders to make scheduled
report check-ins and update their personal records. ACCSYS also
incorporates a message system which enables officers to send messages to
offenders, and offenders to send messages to their officers. With "900"
telephone service, the offender is billed directly, with payment of phone
charges being a condition of continued participation in this method of low
level monitoring supervision. ACCSYS also operates as a stand alone
application.
Remote Terminal Access (Optional)
---------------------------------
This optional module provides access to AVAIL's many features through a
remote terminal located at the agency's office or through an officer's
notebook computers in the field. This module allows the agency to have more
control and immediate access to the offender and program data.
Custom Reports (Optional)
-------------------------
This optional module provides an easy-to-use report writer which provides
query and sorting of the information stored in AVAIL. This allows officers
and agencies to create their own customized reports.
Statistical Analysis (Optional)
-------------------------------
This optional module provides advanced statistical capabilities which
allows agencies to evaluate their overall program performance by
identifying areas where improvement is required and to properly manage
available resources.
CENTRAL COMPUTER SYSTEM NETWORK
Required for each AVAIL installation, the AVAIL Central Computer System
Network is a local and wide area computer network composed of the necessary
computer hardware to perform the various multi-user, multi-tasking
processes of the AVAIL software. These processes include the analysis of
data transmissions from the home monitoring equipment, comparing such data
with the supervised individual's assigned schedule, noting violations of
such schedule, making the agency-specific prescribed notifications of
schedule violations, generating required reports and, when optional modules
of AVAIL software package are being utilized, analyzing such information on
an offender, officer or entire agency basis. The AVAIL Central Computer
System Network in conjunction with the AVAIL software offers many advanced
features including:
- Network based architecture with the expansion capability to monitor an
infinite number of offenders on one network database, with the ability
to support an unlimited number of local and remote workstations.
- Optional integrated fax server for automatic and paperless faxing via
modem.
- Optional mirrored disk infrastructure to insure against data loss and
provide immediate on-line back-up in the event of disk failure.
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- Digital voice message processor to present the offender with
prerecorded instruction messages and to store offender verbal
responses to verification calls for later retrieval and analysis.
- Central control for all products and services including equipment,
custom report, statistical analysis modules, and peripheral devices
such as the Drive-By, Cellulert and remote terminal/ notebook computer
access.
SERVICES
Monitoring Services. The services provided by the Company's Monitoring
-------------------
Center are available in a range of monitoring intensity levels, violation
verification and notification procedures, and response methods and report
types. This enables the agency to specify monitoring intensity levels based
on the offender's behavior and program guidelines. The Monitoring Center
utilizes the AVAIL software to perform a majority of its services. As an
option, random calls can be placed to the offender's home. During these
calls, the individual is required to insert the Anklet into the verifier
and state the individual's name and time of day. Their speech is recorded
with a speech tag number, so officers can review the offender's recorded
response. Breath alcohol testing services are available in coordination
with the HMU 4 units.
The Monitoring Center is operational 24 hours a day, seven days a week, 365
days a year. The Monitoring Center is equipped with a complete back-up
computer network to ensure against interruptions due to potential hardware
failure, as well as back-up diesel generator in the event of electrical
failure. The Company maintains a high level of security for the Monitoring
Center by limiting access to authorized staff and by taking other security
measures.
At March 31, 1995, the Monitoring Center was monitoring approximately 1,800
individuals, compared to monitoring 2,400 and 2,500 persons at March 31,
1994 and 1993, respectively. At March 31, 1995, the Monitoring Center was
staffed by 15 full-time employees. The reduced numbers of monitored
individuals is the result of management's decision not to pursue certain
low bid contracts as well as the success of the AVAIL software within
agencies wanting to perform their own monitoring. Due to the concentration
of monitored individuals in a few large accounts and that a number of such
accounts have terms of one year (with some having optional renewal terms)
and conditions often unfavorable to the service provider while being
subject to competitive bidding for each new term, the number of monitored
individuals is subject to volatility from one period to another.
Customer Training. DPCMSI's Customer Service Department provides
-----------------
comprehensive training for each of its product lines and services at the
customer's location or the Company's headquarters located in Pompano Beach,
Florida. Training consists of the proper product use, operating procedures
and equipment maintenance terms and conditions.
Consulting Services. DPCMSI also provides consulting services to its
-------------------
customers whereby it will observe how an agency utilizes its software
programs and then make suggestions to the customer on more efficient and
complete utilization of the AVAIL software program. Such suggestions not
only improve customer relations but also may result in additional sales.
Telephone Support. DPCMSI's customer service department serves as a call
-----------------
center for all customers and provides technical assistance, equipment
trouble shooting, and responses to general inquiry. Telephone support
contracts are tailored to each program for the specific number of hours of
telephone support required per month.
7
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Software Support and Licensing. DPCMSI's technical support department
------------------------------
provides custom programming and support for the AVAIL monitoring software.
A software license is issued to each user of the AVAIL monitoring software
and DPCMSI provides contracted software support to such users.
Warranties. DPCMSI generally provides a product warranty on electronic
----------
monitoring systems and central computer system networks for a period of one
year from the date of sale. For a fee DPCMSI also offers annual extended
service contracts which provide the same coverage.
SALES, MARKETING AND DISTRIBUTION
The Company's primary distribution of its monitoring devices and services
is to end-user governmental authorities. These entities may be subject to
competitive bidding requirements. The Company also sells a segment of its
equipment, licenses its monitoring software and provides monitoring services to
third parties "resellers", who contract with government agencies. Most of these
resellers market to jurisdictions in which it would not be economically
desirable for the Company to directly market its products and services. The
extent of potential revenues (and any profit potential) from resellers cannot be
accurately determined at this time.
The Company markets its Criminal Justice Segment products and services
through in-house sales staff, resellers and consultants or through its exclusive
licensees, by means of brochures and other sales materials and participation at
industry exhibitions. The Company also maintains an active education and
government affairs program, targeting legislators, judicial authorities and
other governmental authorities. The Company advertises its monitoring products
and services in various industry magazines and periodicals. Exclusive licensing
arrangements are currently in place for New Jersey, Australia and the United
Kingdom.
The Company is presently pursuing foreign markets. However, no assurances
can be given that such markets will develop, accept the Company's products and
services or that the Company will be able to so market its products and services
profitability.
The monitoring equipment is either sold outright, purchased through a
municipal lease or rented with the Company retaining proprietary interests to
the equipment. Payments by governmental entities under lease and lease purchase
arrangements are contingent upon annual appropriations. The Company believes
that the incidence of nonpayment due to nonappropriation is not material.
However, the Company has recently been impacted by the bankruptcy filing of
Orange County, California, one of the Company's customers. To the extent the
Orange County situation makes it more difficult for local governing bodies to
obtain financing for new projects, or makes bankruptcy an acceptable alternative
for local governments, the Company may be adversely affected.
The Company recognizes the substantial cash investment it makes in leased,
rented and pay-per-day equipment and the fact that, in the case of pay-per-day
units, a significant number of such units may be idle and not generating
revenues for a portion of the time such units are in the possession of
customers. Accordingly, management has refocused its marketing and sales
strategy to balance the outright purchase, lease/purchase, fixed term lease or
rental agreements with shorter term contracts of monitoring equipment. Further,
in recognition of the need to increase liquidity, the Company has expanded its
use of third party financing sources to finance customer acquisition of
equipment. This is done to enable the Company to expedite the recapture of its
cash investments in equipment acquired by the users. See "Item 7. Management's
--------------------
Discussion and Analysis of Financial Condition and Results of Operations" below.
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STRATEGIC ALLIANCES
Prior to June 1994, the monitoring equipment was manufactured and assembled
by the Company. In June 1994, the Company entered into an arrangement with an
independent, third party electronics contract manufacturer, KBS Incorporated of
Deerfield Beach, Florida, (the "Manufacturer"), for the manufacture, assembly
and servicing of the Company's electronic monitoring devices. The Manufacturer
is responsible for component acquisition and warranting its workmanship.
Additionally, the Manufacturer performs engineering and research and development
services for the Company on a per-project basis. The Company is charged at
specific rates for labor actually performed on its behalf and at specific
mark-up rates from the costs for component parts. As a result, the Company is no
longer burdened with a large fixed overhead expense related to its former
manufacturing functions. In connection with the entering into of this
arrangement, the Manufacturer has been utilizing certain of the Company's
manufacturing equipment and inventory. The Manufacturer, with its manufacturing
expertise, has been able to reduce the cost of producing the monitoring devices
on a per unit basis, with such product cost (and without overhead and down-time
expense) being the sole cost to be passed onto the Company.
Certain components incorporated in the Company's final monitoring equipment
products are manufactured or assembled by contractors. The raw materials used in
the production of components and the final monitoring devices are readily
available from a number of metal, plastic and electronics suppliers. Neither the
Company nor the Manufacturer has been dependent upon any one or small group of
suppliers and the Manufacturer has the ability to change the suppliers should it
so desire based upon price and quality considerations. For component parts,
neither the Company nor the Manufacturer have in effect any written long-term
agreements; purchases are made by open purchase orders which contain no quantity
or long-term commitments.
COMPETITION
A number of other entities market equipment, similar in the scope of
overall monitoring functions, to the Company's Criminal Justice Segment
products. Certain of such competitors have substantially greater financial
resources and numbers of personnel and no assurances can be given that the
Company will be able to compete successfully. There is also the possibility that
additional manufacturers with considerably more manufacturing and financial
resources will begin the manufacture of equipment which will compete with the
Company's monitoring devices. The Company believes, based on revenue, that it is
the second largest suppliers of offender monitoring systems.
Competition in the marketing of monitoring equipment is often on the basis
of price, rather than the types of functions performed, the efficiency and
manner in which the functions are performed, the quality of the product and the
services, and warranty coverage and overall value.
The Company believes it offers a more versatile line of monitoring
equipment than those marketed by its primary competitors, all of whom rely
primarily on the RF method. Certain of such competitors offer lower cost
products with reduced functionality and performance which generally do not have
additional functionality such as a back-up method of verification. The Company
believes that its technologically advanced line of monitoring equipment and its
AVAIL software are superior to equipment and software offered by its competitors
and that its complete systems of equipment and software will provide the Company
with a competitive advantage in terms of cost efficiency, functionality and
performance compared with systems offered by its competitors.
The Company also competes with a number of entities in the supply of
monitoring services to the government agencies operating electronic monitoring
programs who do not manufacture their own monitoring devices. There is also the
possibility that other entities may enter the monitoring services market.
Certain service supplier competitors utilize the Company's equipment while
others use devices marketed by other manufacturers.
9
<PAGE>
Competition is primarily conducted in the areas of price (usually a per
diem charge) rather than the type of services provided. In a number of
situations, the customer may request that bids be submitted as a package of
equipment and monitoring services, with the overall cost being the determining
factor in the customer's selection of equipment and service provider. Service
competition is on the basis of cost more than quality and types of services
provided, and the availability and adequacy of telecommunication and computer
back-up systems.
COMPUTER SOFTWARE SEGMENT
BGIS and IBS (together, the "Software Companies") are developers and
marketers of computer software applications programs. Each of the Software
Companies offers their customers support services for their respective software
programs and may, in the process of selling end user licenses, also act as
dealers of computer hardware and other software products.
BGIS SYSTEMS, CO.
BGIS Systems, Co. ("BGIS") markets financial accounting, crew, equipment
and materials information management systems directed at the highway and heavy
utility sector of the construction and materials production industry. With over
130 installations of its products, including some of the largest highway/paving
contractors and quarry/excavation companies in the United States and England,
BGIS offers quality solutions directed to the distinct needs of this market.
The comprehensive set of management information software modules marketed
by BGIS have been designed specifically for use by construction companies
operating in the specialized fields of highway, road and bridge building,
utility construction (water, electric, gas pipeline, etc.) and other heavy
construction projects. These construction companies have different demands and
needs from the general construction business.
BGIS's software programs were designed by individuals with experience in
the financial accounting, crew, equipment and materials management aspects of
highway and heavy civic/utility construction companies with a view toward the
problems and issues which are confronted on a day-to-day basis by the financial
accounting personnel and management of such companies. The Company's latest
program, titled "StreetSmarts," has been developed by a third party to the
specifications of BGIS and is exclusively licensed to BGIS. StreetSmarts is a
material advancement from the previously marketed program of BGIS, ManageMateTM,
adding new features and functions, including popular pop-up windows and menus,
color screens, on-line help and graphics. Additionally, StreetSmarts has been
designed to be simpler to use than ManageMate and is capable of being run on
most personal computers.
Products and Services StreetSmarts is modular in design, allowing customers
---------------------
to choose which modules to acquire based upon their specific needs and to add
additional modules based upon growth and/or changing work requirements. A
typical customer in the course of a construction project must be involved with
the bidding process, acquisition and location of materials and equipment
(including purchasing, leveraging and amortizing), arrangements to have such
materials delivered on a timely basis, various union rules regarding functions
and payment scales for employees, making of proper multi-union,
multi-jurisdictional deductions and benefit contributions/deductions, allocation
of job costs and equipment and product costs, verification of purchase orders,
payments and receipt of funds and the correct posting to the general ledger, and
other matters, all with various individuals entering or retrieving data.
StreetSmarts is designed to carry out such functions in a "user-friendly"
manner.
When selling licenses to the software, BGIS also enters into an annual
support agreement with the customer. Under this arrangement, the customer is
entitled to a specified monthly amount in telephone support/inquiry time, an
annual amount of training time and free warranty software repairs and updates.
Under the support agreement,
10
<PAGE>
the customer agrees to keep current, through releases/updates, its software
acquired from BGIS (which releases/updates are separately invoiced to the
customer) and pays, at the published rate, for all support and training time
above the specified monthly/annual quotas (the monthly/annual quotas cannot be
accumulated and rolled-over from one period to the next). All support agreements
provide for automatic renewal. BGIS currently provides active support services
for approximately 120 customers. For the 1995 Fiscal Year and 1994 Fiscal Year,
BGIS derived approximately $679,980 and $629,000, respectively, from its support
services.
BGIS also provides consulting services to its customers whereby it will
observe how a customer utilizes its software programs and then make suggestions
to the customer on more efficient and complete utilization of the customer's
software program. Such suggestions not only improve customer relations but also
may result in additional sales.
BGIS holds all rights to market and sell end user licenses to StreetSmarts
and ManageMate. However, the estimating module of ManageMate was created by a
third party and is licensed to BGIS on an exclusive basis with BGIS paying a
royalty for each such module licensed to an end user. StreetSmarts was written
for BGIS by an affiliate of the entity which owns the estimating module.
StreetSmarts is being licensed to BGIS on an exclusive basis with BGIS paying a
royalty for each end user license sold.
BGIS acts as an authorized dealer of computer hardware and other software
programs (e.g., IBM RISC System 6000, operating systems, database management
systems, spread sheet and word processing programs, etc.) for use in connection
with or ancillary to its software programs. However, gross margins on hardware
have been reduced significantly in the past two years, and a number of customers
have found it less expensive to acquire hardware directly. Due to such factors,
BGIS has seen its revenues from hardware sales reduced and expects such revenues
and gross margins to further decline in the current fiscal year. BGIS relocated
in October 1994 from Chicago and operates from the Company's headquarters in
Pompano Beach, Florida.
DPC/INTERNATIONAL BUSINESS SOLUTIONS, INC.
DPC/International Business Solutions, Inc. ("IBS") markets B.A.B.I., a
computer software applications program, which is capable of processing
multi-lingual, multi-currency financial, accounting and tax information. IBS has
developed a global reputation in multi-national accounting and financial
software, as evidenced by the installation of B.A.B.I. in twenty countries and
by its growing list of customers, including several Fortune 100 companies.
Products and Services The B.A.B.I. proprietary software (the trade name
---------------------
which was derived from an abbreviation of "Boolean Algorithm Business
Interpreter") has the flexibility required to handle multiple languages,
currencies, statutory rules and regulations, throughout the different financial
modules of the programs. This capability allows B.A.B.I.'s multi-national users
to have their subsidiaries/divisions report or otherwise account for their
respective operations in the local language and currency (e.g., German
subsidiary/division would input information in German utilizing Deutsche Marks,
while a French subsidiary/division would input information in French utilizing
French Francs). Local tax and other laws and regulations, as well as such
country's accepted accounting policies and procedures (including Value Added
Taxes and the ability to depreciate and amortize assets), are capable of being
incorporated into the customer's software program. The user could then readily
display and print data in either the originally inputted language and currency
or another previously customer-programmed language and currency. Thereafter, as
the need arises to provide consolidated information, all localized data can be
converted and combined in accordance with the language, currency statutory rules
and regulations specified. The computer processes data in the local language and
currency, as well as simultaneously creating "shadow" files in all other
programmed languages and currencies (with such other applicable laws and
requirements). By entering financial information once, a number of sets of
financial records are created in an extremely efficient manner with lower
computer hardware overhead. When needed, a shadow file (or portions thereof) can
be quickly brought onto
11
<PAGE>
the computer screen or printed by use of a few simple commands. For
example, with the use of B.A.B.I. software, a sale by a subsidiary in Italy to a
French customer can be noted in the local language, Italian, with the invoice
printed in French and with a simultaneous consolidation into its corporate
headquarters in England books in English with the use of British Pounds and
conforming to the tax laws and accounting principles of England.
The latest version of the software program includes "user-friendly"
functions such as pop-up menus, windows, field-level help screens, security
codes, as well as the latest international financial standards, and such
functions as allocations, statistical accounting, budgeting and hyperinflation
accounting.
IBS also licenses distribution modules (i.e., order entry, purchasing,
inventory and sales analysis) for use by its customers. IBS pays a third party a
royalty based upon revenues derived from IBS's distribution modules.
IBS does not provide the local tax and other laws or specific countries'
accounting requirements. Rather, during the initial installation (and at later
dates as may be necessary due to changes in such laws and requirements), the
user follows step-by-step instructions to install such data. Accordingly, IBS
does not give tax, legal or accounting advice, as it is the customer who
determines which laws and requirements are applicable to them.
IBS usually enters into a software maintenance and support agreement with
its customers, providing for specified levels and amounts of support and
maintenance services. There have been approximately 38 installations of the
B.A.B.I. programs. IBS currently provides active support services for
approximately 25 customers. For the 1995 Fiscal Year and 1994 Fiscal Year, IBS
derived approximately $394,440 and $240,000, respectively, from its support
services.
In an effort to reduce operating costs, IBS no longer maintains a satellite
office in Brussels, Belguim and operates directly from the Company's
headquarters in Pompano Beach, Florida.
SALES, MARKETING AND DISTRIBUTION
The Software Companies market their software through in-house staff,
consultants/agents and dealers and by advertising in trade publications,
telemarketing campaigns and participation at industry trade shows. A Software
Company employee will meet with a potential customer to ascertain their needs
and explain the functions of each program and how the modules interface with
other modules of the subject program. Each software program is capable of being
customized to perform specified functions in the manner required by the
customer. Thus, rather than being generally available, off-the-shelf, mass
marketed software where the functions are fixed and the user works within the
parameters of the software, the software can be tailored to each customer's
unique needs and requirements.
Due to the nature of the Software Companies' products, no software
inventory is maintained, rather the individual programs are generated at the
time of licensing from a master tape maintained by each of the Software
Companies and such generated program is then customized to meet the requirements
of the customer (e.g., industry specific tasks, corporate specific methods and
functions, etc.). Price of an individual program is based upon such
customization requirements, other services performed, the number of sites where
the program will be installed/licensed and other competitive factors.
12
<PAGE>
STRATEGIC ALLIANCES
The Software Companies are building strategic alliances with other
companies, such as Systems Builder Technologies, Cheetah Integrated Systems,
Sarte Teodoro & Associates, UniData, VMark, Pick Systems and others to allow IBS
and BGIS, to utilize the expertise of the Software Companies in bundling
applications programs and interfacing multiple databases for the specific needs
of its customers.
COMPETITION
The Software Companies compete with a vast number of software producers,
from companies with mass appeal, general business and accounting programs that
can be purchased at retail stores to programs specifically directed to the
intended StreetSmarts and B.A.B.I end users, the highway and heavy civic/utility
construction industry and multi-national corporations. The Software Companies
compete with respect to price of their initial systems (both software and
hardware), ability and functions of their programs, the types of computer
hardware on which the programs will operate, and the price and quality of
support services. Many of such competitors are much larger than the Software
Companies, have greater marketing apparatus available to them, have larger sales
staffs and market a number of different accounting programs, of which one or two
of their respective programs may compete directly with StreetSmarts and B.A.B.I.
software.
As the entry barriers to the accounting software industry are generally
easy to overcome, the Software Companies are continuously competing with new
companies. However, the Software Companies focus their resources into specific
markets which management believes will help the companies to achieve greater
market acceptance, leadership recognition, and client satisfaction.
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
The Company has a number of United States and foreign patents primarily for
telephony related devices and their application to the home monitoring business.
These patents expire between 1997 and 2008. In addition, in settlement of patent
litigation, the Company has entered into a license agreement for the
use of certain patents related to its home monitoring device.
The Company's ability to compete effectively may be materially dependent
upon its existing patents and the issuance of additional patents in the future.
Further, there can be no assurance that any of the Company's present or future
patents, if any, would be upheld or found to be infringed upon if litigated.
Furthermore, the fact that the Company's present patents may cover certain of
its products may not avoid duplication of such products by third parties without
infringement of such patents by designing around the patented
aspects thereof.
The Company uses proprietary and copyrighted software which it has
developed or licensed in its hardware and software products including its AVAIL
software and the products of its software companies. Such software is protected
by trade secret and/or copyright rules. Despite such protection it may be
possible for competitors or end users to copy aspects of the software or
duplicate the functionality of the software or otherwise obtain information
which the Company regards as a trade secret.
Because of the rapid pace of technological changes in the industries in
which it competes, the Company believes that trade secret and copyright
protection are less significant to its competitive positions than factors such
as the knowledge, ability and experience of the Company's personnel, new product
development, frequent product
13
<PAGE>
enhancements, name recognition and the quality of its support services. However,
any infringement upon the Company's proprietary rights in its software could
adversely affect the amount of revenues derived from such software programs.
The Company believes that its proprietary rights with respect to its
software do not infringe upon the proprietary rights of third parties. There can
be no assurance, however, that third parties will not assert infringement claims
in the future. If such third party infringement claims were upheld, the Company
could be held liable for damages, be required to license such rights on terms
unfavorable to the Company and/or be prohibited from marketing the programs
utilizing such infringed rights. Additionally, there can be no assurance that
the Company's current or future intellectual property rights would be upheld or
would such rights protect the Company from others who design around the
copyrighted aspects of its software.
EMPLOYEES
At June 1, 1995, the Company employed a total of 65 persons, none of whom
are represented by a union. Of these employees, 9 were employees of Digital
Products Corporation, 32 of DPCMSI and 24 of the Software Companies.
ITEM 2: PROPERTIES.
In July 1991, the Company executed a ten-year lease with an unrelated third
party for an approximately 43,600 square foot free-standing, one story building
in Pompano Beach, Florida, to serve as its corporate headquarters and
production, warehouse and service bureau facility. As a result of staff
reductions and management's decision to sub-contract the manufacture of the
Company's monitoring equipment, the Company and the landlord agreed in May 1995
to amend the terms of the lease to reduce the amount of the leased premises to
approximately 18,300 square feet. The rental payments for the facility were
reduced in connection with such agreement. The present monthly base rent under
the lease is approximately $9,529. The base rent increases annually up to
$11,434 per month during years nine and ten of the lease. In addition to the
base rent, the Company pays approximately $3,638 per month for tenant
improvements, $405 per month for reimbursement of a demising wall and a monthly
amount of $4,538 representing the unpaid rental arrearage accrued during the
negotiation of the reduction in the leased premises. In addition, the Company
pays all operating expenses of the building, including real estate taxes,
insurance and maintenance, as well as a proportion of the common charges
assessed on properties within the commercial development in which the building
is situated. Such real estate taxes, insurance, maintenance and common charges
presently approximate $4,500 per month.
ITEM 3: LEGAL PROCEEDINGS.
Except as set forth below, the Company and its property are not a party or
subject to any other material pending legal proceedings other than ordinary
routine litigation incidental to its business:
(a) As previously reported, the Company was a party to an action commenced
in the United States District Court, Southern District of Florida, titled Bank
----
of Ohio and Leasing Services, Inc. v. Digital Products Corporation, Ron Cochran,
- --------------------------------------------------------------------------------
Broward County, Florida, Nick Navarro and Samuel A. Price. On June 16, 1995, the
- ----------------------------------------------------------
matter was settled by the parties and mutual releases were signed.
14
<PAGE>
(b) On March 23, 1994, the Company was served with a complaint in an action
brought in the Passaic County (New Jersey) Superior Court, titled Patricia
--------
Major, individually and as Administratrix, v. Aarguard International Detective
- ------------------------------------------------------------------------------
Agency, Inc.; Computerized Surveillance System, Inc.; Digital Products
- ----------------------------------------------------------------------
Corporation; New Jersey Department of Corrections; New Jersey Bureau of Parole;
- -------------------------------------------------------------------------------
Riverview Towers Settlement II, Inc.; State of New Jersey, et al. pending in the
- ----------------------------------------------------------------
Superior Court, Passaic County, New Jersey, Docket No. L-1283-94. This action
relates to an offender, under house arrest in New Jersey and wearing one of the
Company's RF monitoring devices, who apparently tampered with and then removed
the device. The offender has been charged with then leaving his house and
committing an act that resulted in the death of an individual whose mother and
estate are the plaintiffs in the action. Defendant Computerized Surveillance
Systems, Inc. is a distributor of certain of the Company's electronic monitoring
products and services. The plaintiff's claim against the Company is that the
Company's equipment was defectively designed and manufactured and negligently
installed. It is the Company's contention that the subject monitoring equipment
functioned properly. The parties have exchanged written discovery and it is
anticipated that depositions will begin shortly. There can be no assurance that
the Company's defenses will prevail in this action; or, despite such defenses
prevailing, the court will not find the Company otherwise liable for the damages
caused by the monitored individual's act.
(c) The Company has been named as a party in two lawsuits commenced in the
Broward (Florida) County Circuit Court, the first on December 3, 1990 and titled
Janet Vickers and Lester Vickers v. Hitek Community Control Corporation, and the
- -----------------------------------------------------------------------
second on July 9, 1992 and titled Eileen C. George and Larry George v. Hitek
------------------------------------------
Community Control Corporation and State of Florida Department of Corrections, in
- ----------------------------------------------------------------------------
which it is alleged that an individual being monitored under a house arrest
program by the Company's equipment was able to remove or otherwise avoid the
control of the monitoring device, resulting in his ability to deceive
authorities as to his whereabouts and allowing him to commit crimes against
certain of the Plaintiffs in such actions. In each action, the amount of damages
claimed (including those for loss of consortium) are not specified. These
actions have been referred to the Company's insurance carrier. It is the
Company's contention that the subject device performed as required. The George
case has been set for trial in September 1995. Discovery is continuing to
progress in the Vickers matter.
(d) On July 2, 1993, an action was commenced against the Company in the
Santa Clara County (California) Superior Court, titled Diablo Research
---------------
Corporation v. Digital Products Corporation, for $250,503.29 plus interest, for
- -------------------------------------------
an alleged breach of contract and for work, labor and service performed. In
August 1994, this action was settled and the action was dismissed without
prejudice.
While the Company believes it has adequate coverage for any adverse
verdict(s) rendered in the lawsuits discussed in (b) and (c), there can be no
guarantee that a verdict will not exceed available insurance coverage. Further,
an adverse verdict in any of these pending actions could produce negative
publicity regarding the Company's monitoring equipment and services, which
adverse publicity could affect future revenues.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of its security holders
during the quarter ended March 31, 1995.
15
<PAGE>
PART II
ITEM 5: MARKET PRICE FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Market Information
- ------------------
The Company's Common Stock and the Class B Warrants are currently traded on
the OTC Bulletin Board under the symbols "DIPC" and "DIPCZ", respectively. In
October 1994, the Company's Common Stock, Class A Warrants and Class B Warrants
were removed from The Nasdaq National Market. The Company's Class A Warrants
expired by their terms on February 7, 1995.
Set forth below is the range of high and low bid prices for shares of
Common Stock for each full quarterly period within the Company's two most recent
fiscal years, as derived from reports furnished by the National Association of
Securities Dealers, Inc. The information reflects interdealer prices, without
retail markups, markdowns, or commissions, and may not necessarily represent
actual transactions.
BID PRICES
-------------------
QUARTERS ENDED HIGH LOW
June 30, 1993 $5 $2-7/8
September 30, 1993 $3-5/8 $1
December 31, 1993 $2-5/8 $1-3/8
March 31, 1994 $1-7/8 $1-1/8
June 30, 1994 $1-3/8 $5/8
September 30, 1994 $7/8 $7/16
December 31, 1994 $3/4 $1/8
March 31, 1995 $7/16 $1/16
Holders
- -------
As of the close of business on May 15, 1995, there were 2,536 holders of
record of Common Stock. The Company believes that there are 10,164 beneficial
shareholders of the Common Stock.
Dividends
- ---------
Since its inception in 1966, the Company has not paid any cash dividends on
its Common Stock. However, the Company has, in the past, declared certain stock
dividends. The Company has no present plans to pay any dividends, and it is
unlikely that the Company will pay any dividends to its shareholders
in the foreseeable future.
16
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA.
The following table sets forth a summary of selected financial information
regarding the Company and its subsidiaries, consolidated, for its last five
fiscal years ended March 31, 1995.
STATEMENT OF OPERATIONS DATA:
<TABLE><CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
---------------------------------------------------------
YEAR ENDED MARCH 31
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $10,837 $8,930 $8,915 $8,688 $4,107
Cost of revenues 5,712 10,03,994 6,9832,195
Net (loss) (2,547) (11,908) (6,716) (767) (1,906)
(Loss) per share (.23) (1.17) (.70) (.11) (.48)
Weighted average number
of shares outstanding 10,995,498 10,146,026 9,530,319 6,755,624 3,994,605
Cash dividend per share - 0 - - 0 - - 0 - - 0 - - 0 -
</TABLE>
BALANCE SHEET DATA
March 31
-------------------------------------------
1995 1994 1993 1992 1991
Working capital (deficiency) $ (52) $ 129 $ 3,260 $21,593 $1,432
Total assets 7,435 10,385 19,235 29,085 6,098
Long-term debt 1,455 621 294 301 1,444*
Shareholders' equity 1,773 4,346 14,872 27,154 3,498
* Includes $1,444,000 of subordinated convertible debentures converted into
Common Stock in June 1991.
17
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth selected items from the Company's audited
Statements of Operations for the years ended March 31, 1995, 1994, and 1993, as
percentages of corresponding revenues and percentage increases
(decreases) in each such item from the prior periods.
Years Ended March 31,
----------------------------------------------------
Percent of Total Revenues Increase/(Decrease)
------------------------- -------------------
1995 vs 1994 vs
1995 1994 1993 1994 1993
---- ---- ---- ---- -----
Revenues:
Sales: 45.7% 32.2% 47.9% 72.3% (32.7)%
Rental: 38.9 55.1 46.2 (14.5) 19.7
Service and other: 15.4 12.7 5.9 (47.7) 114.1
-------- ---- --- ------ -----
Total: 100.0 100.0 100.0 21.4 0.2
Costs and expenses*:
Sales: 30.7 78.5 54.2 (32.6) (2.6)
Rental and other: 71.2 129.1 100.6 (46.4) 67.4
----- ----- ----- ------ ----
Total: 52.7 112.8 78.3 (43.3) 44.2
Gross margins*:
Sales: 69.3 21.5 45.8 453.9 (68.4)
Rental and other: 28.7 (29.5) (0.6) 196.0 (6553.8)
----- ------ ----- ----- --------
Total: 47.3 (12.8) 21.7 549.9 (159.0)
Operating expenses: 58.4 90.7 91.7 (21.9) (0.9)
Research and development: 3.9 7.9 9.5 (39.5) (16.0)
Operating (loss) (15.1) (111.4) (79.5) (83.6) 40.4
Other income (expense) (8.4) (21.9) 4.1 (53.3) (631.0)
Net (loss) (23.5) (133.3) (75.3) (78.6) 77.3
- -------------------
* Percentages within the costs and expenses and gross margins categories
have been computed based upon corresponding revenues.
18
<PAGE>
1995 FISCAL YEAR COMPARED TO 1994 FISCAL YEAR
- ---------------------------------------------
The net loss in the 1995 Fiscal Year is primarily attributable to the
Company's Software Segment and non-operating expenses resulting from settlement
of litigation within the Criminal Justice Segment and loss on the Company's
investment in Primedex. Revenues in the 1995 Fiscal Year for the Criminal
Justice Segment increased by approximately $1,245,000 a 20% increase, compared
to the previous year and product related and operating costs decreased by
approximately $3,742,000 over similar costs incurred in the 1994 Fiscal Year.
Revenues in the 1995 Fiscal Year for the Software Segment increased by
approximately $662,000 a 25% increase compared to the previous year and related
costs and operating expenses increased by approximately $688,000 over similar
costs incurred in the 1994 Fiscal Year.
REVENUES
The Company's total revenues for the 1995 Fiscal Year were approximately
$10,837,000 compared to $8,930,000 for the prior year, an increase of $1,907,000
or 21.4%. Revenues for the Criminal Justice Segment totaled $7,544,000 and 69.6%
of total revenue, while the Company's Software Segment totaled $3,293 and 30.4%.
Revenues generated by the Criminal Justice Segment increased $1,245,000 over the
prior year, an increase of 19.8%. The increase in revenues is due to the
Company's 1995 marketing and sales strategy to emphasize the outright purchase
or lease/purchase of equipment. The Company intends to balance these purchases
with specified term rental or rental agreements with shorter term contracts (pay
per day) of monitoring equipment, which would ultimately benefit the recurring
revenue stream in the future. The Software Segment also improved with an
increase in revenues of $662,000 or 25.2%. The two Software Companies, BGIS and
IBS, experienced increases in revenue over the previous fiscal year. BGIS's
revenue totaled $2,178,000 with an increase of $227,000 or 11.6%, while IBS's
revenue totaled $1,115,000 with an increase of $435,000 or 64.0%. Contributing
to the overall increase in the Software Segment was the addition of installation
of the B.A.B.I. software by major international and domestic customers of IBS in
connection with the expansion of their international operations.
Product Revenue. Product sales for the 1995 Fiscal Year totaled $4,954,000
---------------
with an increase over the prior year of $2,080,000 or 72.4%. The Criminal
Justice Segment totaled $2,735,000 and represented 55.2% of the total product
sales category. The Criminal Justice Segment showed gains compared to the
previous years sales of $1,001,000 or an increase of $1,734,000 and 173.2%. 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. Contributing to the increase
in the product sales category were revenue increases in both companies making up
the Software Segment. BGIS's product sales totaled $1,498,000 with an increase
of $175,000 or an improvement of 13.2%. IBS also improved, with total product
sales of $721,000, an increase of $171,000 and 31.1%. Together, the two Software
Companies's revenues of $2,219,000 represented 44.8% of the total product sales
for the 1995 Fiscal Year compared to 65.2% for the previous year.
Rental & Monitoring Revenue. The combined categories of rental and
---------------------------
monitoring revenue totaled $4,212,000 for the 1995 Fiscal Year, decreasing from
the previous year's sales of $4,924,000 or a variance of $712,000 and 14.5%.
Rental and monitoring revenue represented 38.9% of the 1995 Fiscal Year total
revenue compared to 55.1% for the prior year. Rental revenue for 1995 Fiscal
Year totaled $2,128,000 compared to $2,259,000 for the previous year or a
decrease of $131,000 and 5.8%. The Monitoring Center's revenue was also lower.
Total monitoring revenue for the period totaled $2,084,000 compared to the prior
year of $2,665,000 or a decrease of $581,000 and 21.8%. 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.
19
<PAGE>
Service Revenue. Service Revenue increased significantly for the year.
---------------
Revenues for the 1995 Fiscal Year totaled $1,671,000 versus the prior year of
$1,132,000 or an increase of $539,000 and 47.6%. The Criminal Justice Segment
posted revenues of $597,000 compared to a previous $374,000, resulting in a
improvement of $223,000 for the year and an increase of 59.6%. The Company's
position on low bid contracts and use of the AVAIL Software to provide agencies
with additional information management data has helped increase the average
price per day. The Software Segment also posted higher service revenues for the
year with a total of $1,074,000, an increase of $316,000 and 41.7%. Both
Software Companies also increased service revenues for the year. BGIS service
revenue increased to $680,000 over the prior year's $629,000 or an increase of
$51,000. IBS's total service revenue of $394,000 also exceeded the previous
year's revenue of $129,000, an increase of $265,000 and 205.4%. Contributing to
this increase was the addition of installation of the B.A.B.I software by major
international and domestic customers of IBS in connection with the expansion of
their international operations.
COSTS AND EXPENSES
Product Costs. Total product costs for the 1995 Fiscal Year were $1,520,000
-------------
compared to $2,255,000 for the previous year or a decrease of $735,000. As a
percentage of product sales, product costs continued to decrease and ended the
1995 Fiscal Year at 30.7% versus 78.5% for the 1994 Fiscal Year. With product
revenues increasing by $2,080,000 and product costs decreasing by $735,000 the
true impact on the 1995 Fiscal Year net operating results was an
improvement of $2,815,000. This is primarily the result of the charges
recognized in 1994 pertaining to the inventory write-offs and the reserve for
obsolescence. The Criminal Justice Segment product costs totaled $652,000 versus
the previous year's cost of $1,193,000. Also affecting the reduction in costs
was the Company's decision to move the manufacturing process to an outside
vendor. Within the Software Segment, BGIS has seen its revenues from hardware
sales reduced, decreasing costs as a percentage of sales. Total product cost for
the Software Segment totaled $868,000 and 39.1% for the 1995 Fiscal Year
compared to $1,062,000 and 56.7% for last year.
Rental and Monitoring Costs. The total cost of the rental and monitoring
---------------------------
category approximated $1,858,000 and 44.1% of sales for the 1995 Fiscal Year,
versus $6,133,000 and 124.6% for Fiscal 1994. The decrease in costs is due to
reduction of maintenance cost and the retirement of Company owned devices in the
rental inventory. Costs incurred during the 1994 Fiscal Year period for these
issues were approximately $3,729,000. For the current year, the Company believes
it has adequate reserves to cover costs of maintaining and retiring the balance
of the certain devices over the next eighteen to twenty four months. The rental
costs for the 1995 Fiscal Year totaled $753,000 and 35.4% compared to $4,503,000
and 199.3%.
The monitoring costs for the 1995 Fiscal Year totaled 1,105,000 and 53.0%
of sales, versus a cost of $1,630,000 and 61.2% for the 1994 Fiscal Year.
Although monitoring revenues have declined for the current year, the
efficiencies of management and the use of the AVAIL software placed in service
contributed to the Company's ability to maintain the net results of the
Monitoring Center.
Gross Margin. Gross margins for the 1995 Fiscal Year improved
------------
significantly. The total gross margin for the Company approximated $5,125,000
and 47.3% of total revenue, compared to a negative ($1,141,000) and (12.8%). The
Criminal Justice Segment contributed the majority of the increase with
$4,698,000 and 62.3% Compared to the previous years loss or negative gross
margin, resulting in an improvement of $6,087,000. This is a result of the
benefits obtained by the Company transitioning out of the manufacturing process.
The Software Segment was mixed with IBS continuing a loss of margin for the 1995
Fiscal Year at ($250,000) versus the prior year of ($122,000). BGIS improved its
margin and reported $677,000 and 31.1% of revenue compared to $370,000 and 19.0%
for the prior year.
20
<PAGE>
Operating Costs. Total operating expenses for the 1995 Fiscal Year were
---------------
$6,329,000 or 58.4% of revenue, compared to the 1994 Fiscal Year
total of $8,102,000 and 90.7%. The Criminal Justice Segment totaled $4,498,000
and 59.6% compared to the previous year of $5,478,000 and 87.0%. The decline in
operating costs reflect reductions in personnel and personnel related expenses.
Operating expenses for the Software Segment also decreased during the 1995
Fiscal Year. Expenses totaled $2,299,000 or 69.8% of total revenue compared with
$2,504,000 and 95.2% for the previous fiscal year. Operational charges for the
Fiscal year 1995 include a write down of $466,000 for the amortization of
software.
Research and Development. Research and development expenses for the 1995
------------------------
Fiscal Year totaled $428,000 and 3.9% of total revenue, compared to the prior
year's expenses of $708,000 and 7.9%. Included in the prior year's expenses was
a settlement of $150,000 research and development work to a vendor. The 1995
Fiscal Year expenses relate to developmental work associated with new product
and the Company's new manufacturing alliance. The Company's research and
development focus continues towards providing state of the art software
solutions and electronic personal monitoring devices within the Criminal Justice
Segment. The research and developmental expenses by the Software Segment were
immaterial.
Other Income and Expense. Other expenses for the 1995 Fiscal Year totaled
------------------------
$915,000 or 8.4% of revenue as compared to $1,958,000 or 21.9% of revenue for
the 1994 Fiscal Year. Contributing to these expenses were: $468,000 relating to
the settlement of the Bank of Ohio litigation and related costs and expenses,
interest expense of $199,000 offset by interest income of $37,000 and a write
off for the sale of the Company's investment in Primedex shares of $250,000. The
1994 Fiscal Year was comprised of net interest income of $140,000 offset by
expenses associated with the disposal of the Company's Metroplex subsidiary of
$500,000, and the realization of the loss on Primedex Shares of $1,500,000.
Other. At March 31, 1995, the Company had net operating loss carry
-----
forwards of approximately $24,000,000 available to offset future income taxes
payable expiring through the year 2010. The utilization of these loss carry
forwards is limited under Section 382 of the Internal Revenue Code due to
changes in the ownership of the Company, and is subject to an annual limitation
based on a long-term tax exempt rate (see Note N to the Consolidated Financial
Statements).
21
<PAGE>
1994 FISCAL YEAR COMPARED TO 1993 FISCAL YEAR
- ---------------------------------------------
The net loss in the 1994 Fiscal Year is primarily attributable to the
Company's Criminal Justice Segment. As of March 31, 1994, the Company made a
determination to dispose of its Metroplex subsidiary and had recorded an
estimated loss on disposal of the subsidiary of approximately $500,000 in the
1994 Fiscal Year. Revenues in the 1994 Fiscal Year for the Criminal Justice
Segment declined approximately $998,000, compared to the previous year, and
product related and operating costs decreased approximately $253,000 over
similar costs incurred in the 1993 Fiscal Year.
REVENUES
The Company's total revenues for the 1994 Fiscal Year were approximately
$8,930,000, compared to $8,915,000 for the 1993 Fiscal Year. Revenues for the
Company's Criminal Justice Segment totaled approximately $6,299,000 for the 1994
Fiscal Year, a decline of $998,000 from the 1993 Fiscal Year. Metroplex, which
was disposed of in June 1994, contributed no revenues in the 1994 Fiscal Year
and insignificant revenues in the 1993 Fiscal Year. The overall decline in
revenues in the Criminal Justice Segment in The 1994 Fiscal Year was
attributable to intense price competition in the industry, budgetary constraints
of governmental agencies adversely affecting the availability of funds for
electronic monitoring equipment and services, as well as customers demanding
terms which unfavorably impacted the Company's ability to record sales revenues.
Revenues from the Company's Software Companies segment, comprised of BGIS and
IBS, totaled approximately $2,631,000 in the 1994 Fiscal Year, compared to
$1,618,000 in the 1993 Fiscal Year. IBS and BGIS, contributed approximately
$680,000 and 1,951,000, respectively in revenue in the 1994 Fiscal Year.
Product Revenue. Product sales for the Company's Criminal Justice Segment
---------------
totaled approximately $1,001,000 in the 1994 Fiscal Year, compared to product
sales totaling $3,042,000 in the 1993 Fiscal Year, a decrease of $2,041,000, or
67.1%. The decline in product sales was primarily due to the Company recording
approximately $440,000 in sales contract and sales type lease revenues in the
1994 Fiscal Year, compared with approximately $1,813,000 in the 1993 Fiscal
Year. This segment continued to experience intense price competition, budgetary
constraints of government agencies adversely impacting available funds for
electronic monitoring, as well as customers demanding terms which unfavorably
impact the Company's ability to recognize sales contract and sales type lease
revenues and to accelerate the collection of cash through its use of third party
financing sources.
Product sales in the Company's Software Companies segment totaled
approximately $1,873,000 in the 1994 Fiscal Year, compared to $1,231,000 in the
1993 Fiscal Year. IBS contributed approximately $550,000 in the sale of end user
licenses of its B.A.B.I. financial software, and approximately $1,323,000 was
contributed in product sales associated with BGIS' software and computer
hardware.
Rental and Monitoring Revenue. Rental Revenues in the 1994 Fiscal Year
-----------------------------
totaled approximately $4,924,000, compared to $4,113,000 in the 1993 Fiscal
Year, an increase of $811,000, or 19.7%. Revenues derived from the Monitoring
Center totaled approximately $2,665,000 in the 1994 Fiscal Year, compared to
$2,115,000 in the 1993 Fiscal Year, an increase of $550,000, or 26.0%. Rental
Revenues derived from the Company's monitoring equipment totaled approximately
$2,259,000 in the 1994 Fiscal Year, compared to $1,998,000 in the 1993 Fiscal
Year, an increase of $261,000, or 13.1%.
22
<PAGE>
Service Revenue. In the 1994 Fiscal Year, Service Revenues totaled
---------------
approximately $1,132,000, compared to $529,000 in the 1993 Fiscal Year, an
increase of approximately $603,000, or 113.9%. Service Revenues for the Criminal
Justice Segment totaled approximately $374,000 in the 1994 Fiscal Year, compared
to $142,000 in the 1993 Fiscal Year, an increase of $232,000, or 163.4%. Service
Revenues from the Software Companies totaled approximately $758,000 in the 1994
Fiscal Year, compared to $387,000 in the 1993 Fiscal Year, an increase of
$371,000, or 95.9%. Service Revenues associated with BGIS' software totaled
approximately $629,000 in the 1994 Fiscal Year, compared to $270,000 in the 1993
Fiscal Year, an increase of $359,000, or 133.0%. Service Revenues in the 1993
Fiscal Year for BGIS, which was acquired in the 1993 Fiscal Year, third quarter,
do not represent a full fiscal year. Service Revenues associated with IBS'
financial software applications program totaled approximately $129,000 in the
1994 Fiscal Year, compared to $117,000 in the 1993 Fiscal Year.
COSTS AND EXPENSES
Product Costs. Total product costs in the 1994 Fiscal Year totaled
-------------
approximately $2,255,000, compared to $2,315,000 in the 1993 Fiscal Year. As a
percentage of total revenue, total product costs represents 78.4% and 54.2% for
such two fiscal years, respectively. Product costs for the Criminal Justice
Segment totaled approximately $1,193,000, or 119.2%, of the segment's product
sales in the 1994 Fiscal Year, compared to $1,999,000, or 65.7% of the segment's
product sales in the 1993 Fiscal Year. The Company estimates that in the 1994
Fiscal Year it incurred approximately $625,000 charged to product costs in which
costs were associated primarily with inventory write-offs totaling approximately
$342,000, and product repair and warranty totaling approximately $283,000. The
write-off of certain inventories as excess and/or obsolete resulted primarily
from the Company's formal introduction of its more technologically advanced line
of monitoring equipment in January 1994. Product costs for the Software
Companies Segment, which includes costs for software applications programs and
computer hardware sold in conjunction with the software programs, totaled
approximately $1,062,000 in the 1994 Fiscal Year. As a percentage of revenue for
this segment, corresponding product cost represents 56.7%. Product costs are
affected by the mix of computer hardware sold along with applications software.
Computer hardware typically carries a higher cost as a percentage of sales than
does software applications programs.
Rental, and Monitoring Costs. The total cost of rental, service and other
-----------------------------
revenues in the 1994 Fiscal Year totaled approximately $7,815,000, compared to
$4,668,000 in the 1993 Fiscal Year. As a percentage of total revenue for rental,
service and other revenues, corresponding costs represented 129.1% and 100.6%
for such two fiscal years, respectively.
The Company incurred significant costs in its Criminal Justice Segment to
maintain and retire certain Company-owned devices in its rental inventory. The
Company incurred expenses of approximately $3,729,000 which were charged to cost
of rental, service and other revenues, including the costs associated with the
retirement of certain On Guard Plus monitoring devices totaling $1,173,000, the
write-off of certain inventories originally purchased to build and maintain
rental inventory totaling $1,045,000, and expenses incurred to repair and
maintain the rental inventory totaling $1,511,000.
The cost of operating the Company's Monitoring Center in the 1994 Fiscal
Year totaled approximately $1,630,000, compared to $1,454,000 in the 1993 Fiscal
Year, an increase of $176,000, or 12.1%. The increased costs were due primarily
to increased amortization expenses associated with the capitalized AVAIL
software used by the Monitoring Center placed in service in the fourth quarter
of the 1993 Fiscal Year, and increased professional expenses primarily
associated with maintaining the Monitoring Center network. Such increased costs
were partially offset by lower employee related expenses primarily resulting
from efficiencies gained from the Company's utilization of AVAIL.
23
<PAGE>
Gross Margins. Overall gross margins decreased to (12.8%) of revenues in
-------------
the 1994 Fiscal Year, compared to 21.7% of revenues for the 1993 Fiscal Year.
Gross margins on product sales were 21.5% in the 1994 Fiscal Year, compared to
45.8% in the 1993 Fiscal Year. Gross margins on rental, service and other
revenues decreased significantly to (29.1%) of revenues in the 1994 Fiscal Year,
compared to (0.6%) in the 1993 Fiscal Year. Gross margins in the 1994 Fiscal
Year were adversely impacted by significant costs incurred by the Company in the
Criminal Justice Segment to maintain and retire certain Company-owned monitoring
devices in its rental inventory (see "Product Cost" and "Cost of Rental, Service
and Other Revenue" above). Gross margins have also been affected by competitive
selling prices and by the mix of products sold. Competitive factors may continue
to affect future selling prices and margins in the future.
Operating Costs. Total operating expenses for the 1994 Fiscal Year were
---------------
approximately $8,102,000, compared to $8,174,000 in the 1993 Fiscal Year, a
decrease of $72,000, or 0.1%. Operating expenses for the Criminal Justice
Segment totaled approximately $5,598,000 in the 1994 Fiscal Year, compared to
$7,203,000 in the 1993 Fiscal Year, a decrease of $1,605,000, or 22.3%. In the
1994 Fiscal Year, this segment incurred approximately $120,000 in bad debt
expense, compared to $1,972,000 in the 1993 Fiscal Year, a decrease of
$1,852,000.
The Company's Criminal Justice Segment incurred operating expenses in the
1994 Fiscal Year, net of bad debt expense, totaling approximately $5,478,000,
compared to $5,231,000 in the 1993 Fiscal Year, an increase of $247,000, or
4.7%. Metroplex, which was acquired in the second quarter of the 1993 Fiscal
Year (and, as of March 31, 1994, the Company made a determination to dispose
of), incurred operating expenses of approximately $534,000 in the 1994 Fiscal
Year. The Company incurred increases in professional services totaling
approximately $397,000, a substantial portion of which were for legal expenses
associated with defending a lawsuit initiated by a financial institution and a
leasing company against the Company (see "Item 3. Legal Proceedings" above).
The Company incurred a $100,000 expense associated with settling a patent
infringement suit. The Company also incurred increased amortization expense of
approximately $63,000 associated primarily with the amortization of capitalized
software. The Company benefited from reduced telephone expenses of approximately
$267,000 (including one time discounts) as a result of negotiating a long-term
agreement with its long distance carrier. The Company benefited from reduced
employee-related expenses (salary, benefits and expense reimbursement) of
approximately $214,000 as the Company continued to "right-size" its work force
in relation to its revenue opportunities. The Company benefited from reduced
other operating expenses of approximately $85,000 primarily related to lower
insurance costs, including one-time reductions.
Operating expenses for the Software Companies totaled approximately
$2,504,000 in the 1994 Fiscal Year, compared to approximately $971,000 in the
1993 Fiscal Year, an increase of $1,533,000. Operating expenses for the segment
in the 1994 Fiscal Year are not directly comparable to such expenses in the
prior year because the 1993 Fiscal Year expenses do not represent a full year's
activity, as IBS was acquired in the first quarter and BGIS was acquired in the
third quarter of the 1993 Fiscal Year.
Research and Development. Research and development ("R&D") expenses for the
------------------------
Criminal Justice Segment in the 1994 Fiscal Year totaled approximately $708,000,
compared to $832,000 in the 1993 Fiscal Year, a decrease of $124,000, or 14.9%.
Included in R&D expenses in the 1994 Fiscal Year is a charge of approximately
$150,000 related to the settlement of an action initiated by a vendor of the
Company. As part of the settlement, the vendor agreed to supply certain
technologies and component parts to the Company under certain conditions. R&D
expenses for the Software Companies were insignificant in the 1994 Fiscal Year
and 1993 Fiscal Year.
24
<PAGE>
Other Income and Expenses. The Company earned interest income of
-------------------------
approximately $167,000 in the 1994 Fiscal Year, compared to $546,000 in the 1993
Fiscal Year, a decrease of $379,000. The decline in interest income is due
primarily to the reduction in excess cash available to invest in interest
bearing accounts. The Company incurred interest expense of approximately $27,000
in the 1994 Fiscal Year, compared to interest expense of $97,000 in the 1993
Fiscal Year.
In the 1994 Fiscal Year, the Company recorded a loss of $1,500,000 on its
equity investment in 1,000,000 Primedex Shares and a loss of approximately
$500,000 on the disposal of its Metroplex subsidiary which was sold in the first
quarter of the 1995 Fiscal Year.
Other. At March 31, 1994, the Company had net operating loss carry forwards
-----
of approximately $20,000,000 available to offset future income taxes payable
expiring through the year 2008. The utilization of these loss carry forwards is
limited under Section 382 of the Internal Revenue Code due to changes in the
ownership of the Company, and is subject to an annual limitation based on a
long-term tax exempt rate (see Note N to the Consolidated Financial Statements).
The Company's total non-domestically generated revenues, aggregated
approximately $883,000 in the 1994 Fiscal Year, compared to $660,000 in the 1993
Fiscal Year, including $650,000 from the Software Companies Segment and $10,000
from the Company's Australian licensee. Such non-domestic revenues were not
significant in the 1992 Fiscal Year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 1995, the Company had a working capital deficiency of $52,000
as compared with working capital of $129,000 at March 31, 1994, a decrease of
$181,000. In the past, the Company has obtained capital from various private
equity placements, the public sale of its equity securities and various private
debt placements. In February 1992, the Company sold in a public offering
1,995,000 Units, each Unit consisting of one share of Common Stock and two
Warrants, resulting in net proceeds of $20,600,000 to the Company. In November
1993, the Company consummated a private placement of an aggregate 1,375,000
shares of its Common Stock for $1.00 per share providing $1,375,000 of equity.
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 will be amortized ratably over
the term of the Note.
In April 1994, the Company realized approximately $2,250,000 from the sale
of its entire investment in Primedex Health Services, Inc. At the time of the
sale the Company recorded a loss on the sale of $250,000. (See Note H to the
Consolidated Financial Statements.)
25
<PAGE>
Management believes that it will meet its working capital requirements in
Fiscal 1996 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 March 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 March 31, 1995, the
Company has recorded a liability of approximately $399,000 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. In the 1994 Fiscal Year, the
Company utilized the services of three 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
1994 Fiscal Year, the Company sold approximately $1,340,000 of sales type lease
and long-term sales contract receivables to three 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 will amortize this liability over the original payment terms (see Note J 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.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Set forth below is a list of the consolidated financial statements being
furnished in this Annual Report on Form 10-K, and their respective locations
herein.
BEGINS ON
ITEM PAGE
Report of Independent Auditors..........................................F-1*
Consolidated Financial Statements
Consolidated Balance Sheets...........................................F-2
Consolidated Statements of Operations.................................F-3
Consolidated Statements of Changes in Shareholders' Equity............F-4
Consolidated Statements of Cash Flows.................................F-5
Notes to Consolidated Financial Statements............................F-7
- -----------------------------
* Page F-1 follows page 41 to this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company are as follows:
Principal Positions Director
Name Age with the Company Since
---- --- ---------------- -----
Richard A. Angulo 41 Director, President, Chief Executive 1993
Officer
David J. Dell 49 Director, Vice President of Technology
and Organizational Development 1993
J.L. Winn 34 Executive Vice President and
Director of Sales and Marketing
of BLR, Inc. n/a
John E. Dell 47 Director 1990
Michael F. Marino 48 Director 1992
Clinton L. Pagano, Sr. 67 Director 1992
RICHARD A. ANGULO was named President and Chief Executive Officer of the
Company in September 1993. Mr. Angulo first joined the Company in 1983 and was,
since 1989, its National Director of Sales and Marketing. In the Company's
fiscal year ended March 31, 1989, Mr. Angulo served as General Manager of the
Company and made significant reductions in the Company's expenses. During his
employment with the Company, Mr. Angulo was the leading force in the development
of the Company's line of products and services directed to the house arrest
industry, and has assisted hundreds of government agencies in implementing
electronic monitoring programs.
DAVID J. DELL, PH.D. has acted as the Company's Vice President of
Technology and Organizational Development since October 1, 1994. For the prior
twelve month period, Mr. D. Dell acted as a consultant to the Company. From 1989
to 1993, he was employed by F.N. Wolf & Company, investment bankers. In 1985,
Mr. D. Dell founded Information Interface Institute, a publishing and management
consulting firm serving the information industry. From 1980 through 1985, he was
Director for Research Services for the Diebold Group, Inc., providing strategic
planning assistance to hundreds of the world's largest users and vendors of
information technology. While completing his doctorate, Mr. D. Dell ran an
office for the State of New York promoting the global activities and awareness
of the State's educational, non-profit and business institutions. He has written
and edited numerous published articles and book-length studies on information
technology and on international technology and business issues. Since 1984, he
has served as Technology Advisor to the Information Management Committee of the
Financial Executives Institute, an association of over 15,000 senior executives
in North America. Mr. D. Dell served in the Peace Corps in India in 1967 and
1968, and received his Doctorate from the Department of Middle East Languages
and Cultures at Columbia University. Mr. D. Dell is the brother of John E. Dell.
28
<PAGE>
J.L. WINN has acted as the Executive Vice President and Director of Sales
and Marketing of the Company's BLR, Inc. subsidiary since September 1994. Mr.
Winn first joined the BLR, Inc. subsidiary in 1983. During the early
organizational stages, he served in sales, client services, and administrative
roles. His most recent position was as National Sales Manager since 1989. In his
dual roles, Mr. Winn is charged with directing the anticipated sales growth and
managing the product development and administrative functions. Mr. Winn received
his Bachelor's degree in Finance from Illinois State University.
JOHN E. DELL is presently the Chairman of the Board of Beyond Design
Corporation of Southern California. Beyond Design is presently in the business
of designing, developing and marketing toys and games. Mr. J. Dell previously
served as the Chairman of the Board of Directors of Capital Gaming
International, Inc., which is a multi- jurisdictional gaming company with
interests in various gaming projects, including Native American gaming
management in several states and riverboat-dockside gaming developments on the
New Orleans riverfront. Mr. J. Dell also served as a consultant to Capital
Gaming until July 1993. From May 1992 through January 1994, Mr. J. Dell was
Chairman of the Board of Directors of First Chesapeake, a publicly-held
corporation engaged in the residential mortgage banking business. Mr. J. Dell
has been an independent real estate investor since 1987, and is also active in
providing merchant banking, venture capital and advisory services to various
individuals and corporate entities. Mr. J. Dell is the brother of David J. Dell.
MICHAEL F. MARINO, ESQUIRE is a partner in the law firm of Reed Smith Shaw
& McClay, located in McLean, Virginia. Mr. Marino also serves as a director of
Beyond Design Corporation and First Chesapeake Financial Corporation.
COLONEL CLINTON L. PAGANO, SR. (retired), was the Superintendent of the New
Jersey State Police from 1975 to 1990, during the tenures of two New Jersey
Governors. During 1990 and 1991, Col. Pagano was Director of the New Jersey
Division of Motor Vehicles, a position he was appointed to by a third New Jersey
Governor. Col. Pagano has over 35 years of law enforcement experience, including
the implementation in New Jersey of a coordinated state and Federal organized
crime control program. During his tenure as Superintendent of the New Jersey
State Police, Col. Pagano was the State Director of Emergency Management, a
Federal crisis management program and was also responsible for developing and
implementing various security programs for the New Jersey Sports and Exposition
Authority. Col. Pagano serves as a director and Executive Vice-President for
Compliance of Capital Gaming International, Inc.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely on a review of Forms 3 and 4, and any amendments thereto,
furnished to the Company pursuant to Rule 16a-3(e) promulgated under the
Securities Exchange Act of 1934, as amended, and written representations that no
Forms 5 were required, the Company believes that, with respect to the 1994
Fiscal Year, all Section 16(a) filing requirements applicable to its executive
officers and directors and those beneficial owners of more than ten percent of
any class of the Company equity securities were timely complied with.
29
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation paid
by the Company during the three years ended on March 31, 1995, to the Chief
Executive Officer of the Company, and all other executive officers of the
Company, or any of its subsidiaries, at March 31, 1995, who received total
annual salary and bonus in excess of $100,000 during the 1994 Fiscal Year
(collectively, "Named Executive Officers").
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------- ------------
Name and Year Ended Other Annual Stock All Other
Principal Position March 31 Salary Bonus Compensation Options Compensation
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Angulo, 1995 $112,500 -0- $15,958(2) 500,000(3) -0-
President and Chief 1994 $ 80,385 $45,153(4) $15,958(2) 500,000(5) -0-
Executive Officer(1) 1993 n/a n/a n/a n/a n/a
David J. Dell, 1995 $120,000 -0- -0- 100,000(7) -0-
Vice President 1994 n/a n/a n/a n/a n/a
of Technology and 1993 n/a n/a n/a n/a n/a
Organizational Development(6)
- -------------------------------
</TABLE>
(1) Mr. Angulo was appointed as the Company's President and Chief
Executive Officer on September 30, 1993.
(2) Consists of car expenses and payment of medical insurance premium for
immediate family members not afforded other employees.
(3) In August 1994, options to purchase an aggregate 500,000 shares of
Common Stock, all with a per share exercise price of $4.00, were
repriced with options to purchase an aggregate 500,000 shares of
Common Stock all with a per share exercise price of $1.50.
(4) Consists of sales commissions earned while serving as the Company's
National Director of Sales and Marketing.
(5) In September 1993, options to purchase an aggregate 282,000 shares of
Common Stock (including options to purchase 200,000 shares granted in
June 1993), at a weighted average per share exercise price of $8.661,
were repriced with options to purchase an aggregate 130,284 shares of
Common Stock, all with a per share exercise price of $4.00. These
repriced options are included in the options to purchase 500,000
shares so listed in the Summary Compensation Table.
(6) Mr. Dell was appointed as the Company's Vice President of Technology
and Organizational Development on October 1, 1994.
(7) In August 1994, options to purchase an aggregate 100,000 shares of
Common Stock, all with a per share exercise price of $4.00, were
repriced with options to purchase an aggregate 100,000 shares of
Common Stock all with a per share exercise price of $1.50. In December
1994, these same options to purchase an aggregate 100,000 shares
Common Stock, all with a per share exercise price of $1.50, were
repriced with options to purchase an aggregate 100,000 shares of
Common Stock all with a per share exercise price of $1.00.
30
<PAGE>
OPTION GRANTS IN THE 1994 FISCAL YEAR
The following table sets forth information with respect to options granted
to each of the Named Executive Officers during the 1994 Fiscal Year (including
options repriced during the 1994 Fiscal Year).
<TABLE>
<CAPTION>
Number of Percentage of
Shares Total Options Potential Realized Value At
Underlying Granted to Assumed Rates of Stock Price
Options Employees In Exercise Expiration Appreciation for Option Term(1)
-------------------------------
Name Granted Fiscal Year Price Date 5% 10%
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Angulo 4,620(2) .77% $1.50 3/1/97 $0 $0
924(2) .15% $1.50 3/1/01 $0 $0
9,240(2) 1.54% $1.50 10/15/01 $0 $0
92,400(2) 15.40% $1.50 6/3/97 $0 $0
23,100(2) 3.85% $1.50 6/8/99 $0 $0
369,716(2) 61.62% $1.50 9/29/98 $0 $0
David J. Dell 50,000(2)(3) 8.335% $1.00 12/12/99 $0 $0
50,000(3) 8.335% $1.00 12/12/99 $0 $0
</TABLE>
- ---------------------
(1) Calculated as the product of (a) the difference between (i) the product
of the per-share market price at the time of grant and the sum of 1
plus the adjusted stock price appreciation rate (the assumed rate of
appreciation compounded annually over the term of the option and (ii)
the per-share price of the option, and (b) the number of securities
underlying the grant at fiscal year-end.
(2) The options indicated were repriced on August 19, 1994 from an exercise
price of $4.00 per share to an exercise price of $1.50 per share. On
August 19, 1994, the per share market price (i.e. closing sale price)
was $.5625.
(3) The options indicated were repriced on December 13, 1994 from
an exercise price of $1.50 per share to an exercise price of $1.00 per
share. On December 13, 1994, the per share market price (i.e. closing
sale price) was $40625.
OPTIONS EXERCISED AND REMAINING OUTSTANDING
The following table sets forth information with respect to options
exercised by each of the Named Executive Officers during the 1994 Fiscal Year.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-The-Money
Options at March 31, 1995 at March 31, 1995
------------------------- -----------------
Shares Acquired
Name On Exercise Value Realized Exercisable Unexercisable Exercisable Unexerciseable
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Angulo 0 0 481,520 18,480 $0 $0
David J. Dell 0 0 100,000 0 $0 $0
</TABLE>
31
<PAGE>
DIRECTORS' REMUNERATION
Each director not otherwise a full-time employee of the Company, receives
$500.00 for each meeting of the Board of Directors, or committee thereof, which
they attend, along with the reimbursement of their reasonable expenses incurred
on the Company's behalf.
EMPLOYMENT CONTRACTS
As of July 3, 1995, Richard A. Angulo, President and Chief Executive
Officer of the Company, entered into a five year employment agreement with the
Company providing for an annual salary of $150,000. Mr. Angulo is eligible to
receive an annual bonus, payable quarterly in cash or shares of Common Stock of
the Company, based on the net profit of the Company. Under the terms of the
agreement, Mr. Angulo is entitled to receive 200,000 shares of Common Stock of
the Company. Pursuant to the terms of the agreement, Mr. Angulo is required to
obtain a $1 million key man life insurance policy payable to the Company as a
beneficiary and Mr. Angulo is permitted to obtain a separate life insurance
policy payable to his designated beneficiaries. The Company is obligated to pay
the premium expenses for both life insurance policies. Mr. Angulo's employment
agreement provides that it may only be terminated for cause as defined in the
agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company's Executive Compensation Committee consists of John E. Dell and
Michael F. Marino, with one seat on the Committee currently vacant. Neither
Messrs. J. Dell or Marino are officers or employees of the Company, nor have
they served in such capacities in the past. No executive officer of the Company
served as a director or member of the compensation committee (or group
performing similar functions) of another entity, one of whose executive officers
served on the Executive Compensation Committee or as a director of the Company.
Set forth below is a description of transactions or relationships involving
the Company and either such present Executive Compensation Committee members or
entities in which such Executive Compensation Committee members or their
respective family members were officers, directors or beneficial holders of 5%
or more of such entities' voting securities since April 1, 1994:
(a) On August 19, 1994, the Board of Directors approved a replacement of
stock options held by certain executive officers and directors of the Company
having a per share exercise price of $4.00 per share, which were in excess of
the market value of the Company's Common Stock at that time, and replaced such
options with new options having an exercise price of $1.50. The vesting
provisions and expiration dates of the replacement options remained the same as
the original options. The closing sale price for a share of common stock on
August 19, 1994 was $.5625. Set forth below is information with respect to the
options held by Messrs. John Dell and Michael Marino which were repriced.
32
<PAGE>
Number of Shares Expiration Date of
Name of Optionee Underlying Option Repriced Option at Time of Repricing
- ---------------- -------------------------- ---------------------------
John E. Dell 138,600 8/1/95
346,500 6/3/97
50,000 9/29/98
Michael F. Marino 20,250 6/3/97
50,000 9/29/98
(b) On August 19, 1994, options to purchase 50,000 shares of Common Stock
were granted to Michael F. Marino. All such options were granted at the exercise
price of $1.50 per share, exercisable during the period from August 19, 1995
through August 18, 1999. On August 18, 1994, the closing sale price of a share
of Common Stock was $.5625.
(c) On December 13, 1994, the Board of Directors approved a further
repricing of certain stock options held by certain executive officers and
directors of the Company having an exercise price of $1.50 per share, which were
in excess of the market value of the Company's Common Stock at that time, and
replaced such options with new options having an exercise price of $1.00. The
vesting provisions of the replacement options remained the same as the original
options and the expiration dates were amended to five years from the replacement
date. The closing sale price for a share of Common Stock on December 13, 1994
was $.40625. Set forth below is information with respect to the options held by
Michael F. Marino which were repriced.
Expiration Date of New
Number of Shares Option at Time Expiration
Name of Optionee Underlying Option Repriced of Repricing Date
- ---------------- -------------------------- ---------------- ----------
Michael F. Marino 20,250 6/3/97 12/12/99
50,000 9/29/98 12/12/99
50,000 8/18/99 12/12/99
33
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Set forth in the table below is information concerning the ownership,
as of the close of business on June 20, 1995, of the Common Stock by (i) each
person who was known by the Company to be a beneficial owner of more than 5% of
the Common Stock; (ii) by all directors; (iii) by each of the Named Executive
Officers, and (iv) by all directors and executive officers of the Company as a
group.
Amount and Nature of Percent of
Name Beneficial Ownership Class(1)
- ------------------------------------------------------------------------------
Hibbard Brown & Company, Inc. 1,338,517(2) 12.18
50 Broadway
New York, NY 10004
Richard A. Angulo 1,136,140(3) 9.90
David J. Dell 100,000(4) 0
J.L. Winn 10,000 *
John E. Dell 1,025,627(5) 8.90
Michael F. Marino 120,250(6) 1.08
Clinton L. Pagano, Sr. 132,340(7) 1.19
All Directors and Executive
Officers As A Group (5 persons) 2,524,357(8) 20.42
- -----------------------
* Less than 1%.
(1) Percentages do not take into account the Company's 40,061 treasury
shares.
(2) Based upon a Schedule 13G filed by Hibbard Brown & Company, Inc.
("Hibbard") in September 1993. Includes 836,043 shares underlying
options held by Hibbard, which options are exercisable within the next
60 days.
(3) Includes 486,140 shares which Mr. Angulo has the option to acquire
within the next 60 days. Does not include 13,860 shares underlying
options held by Mr. Angulo which are not exercisable within the next
60 days.
(4) Includes 100,000 shares which Mr. D. Dell has the option to acquire
within the next 60 days.
(5) Includes 535,100 shares which Mr. J. Dell has the option to acquire
within the next 60 days. The address for Mr. J. Dell is c/o Digital
Products Corporation, 800 N.W. 33rd Street, Pompano Beach, Florida
33064.
(6) Includes 120,250 shares which Mr. Marino has the option to acquire
within the next 60 days.
(7) Includes 132,340 shares which Col. Pagano has the option to acquire
within the next 60 days.
(8) Includes the 1,373,830 shares underlying the options set forth in
notes (2), (3), (4), (5), and (6) above, all of which are exercisable
within the next 60 days. Does not include the 13,860 shares underlying
the options set forth in note (3) above.
34
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Set forth below is a description of certain transactions since April 1,
1994 between the Company and its directors, executive officers and beneficial
owners of five percent or more of the outstanding Common Stock, as well as
certain business relationships between the Company and its director.
(a) On August 19, 1994, the Board of Directors approved a replacement of
stock options held by certain executive officers and directors of the Company
having a per share exercise price of $4.00 per share, which were in excess of
the market value of the Company's Common Stock at that time, and replaced such
options with new options having an exercise price of $1.50. The vesting
provisions and expiration dates of the replacement options remained the same as
the original options. The closing sale price for a share of common stock on
August 19, 1994 was $.5625. Set forth below is information with respect to the
directors and executive officers whose options were so repriced.
Number of Shares Expiration Date of
Name of Optionee Underlying Option Repriced Option at Time of Repricing
- ---------------- -------------------------- ---------------------------
Richard A. Angulo 4,620 3/1/97
924 3/1/01
9,240 10/15/01
92,400 6/3/97
23,100 6/8/99
369,716 9/29/98
David J. Dell 50,000 9/29/98
John E. Dell 138,600 8/1/95
346,500 6/3/97
50,000 9/29/98
Michael F. Marino 20,250 6/3/97
50,000 9/29/98
Col. Clinton L. Pagano 9,240 2/3/02
23,100 6/3/97
50,000 9/29/98
(b) On August 19, 1994, options to purchase shares of Common Stock were
granted to the directors listed below, in the amounts set forth opposite their
respective names. All such options were granted at the exercise price of $1.50
per share, exercisable during the period from August 19, 1995 through August 18,
1999. On August 18, 1994, the closing sale price of a share of Common Stock was
$.5625.
Number of Shares
Name of Optionee Underlying Option
- ---------------- -----------------
David J. Dell 50,000
Michael F. Marino 50,000
Col. Clinton L. Pagano 50,000
35
<PAGE>
(c) On December 13, 1994, the Board of Directors approved a further
repricing of certain stock options held by certain executive officers and
directors of the Company having an exercise price of $1.50 per share, which were
in excess of the market value of the Company's Common Stock at that time, and
replaced such options with new options having an exercise price of $1.00. The
vesting provisions of the replacement options remained the same as the original
options and the expiration dates were amended to five years from the replacement
date. The closing sale price for a share of Common Stock on December 13, 1994
was $.40625. Set forth below is information with respect to the directors and
executive officers whose options were so repriced.
<TABLE><CAPTION>
Expiration Date of
Number of Shares Option
Name of Optionee Underlying Option Repriced at Time of Repricing New Expiration Date
- ---------------- -------------------------- -------------------- -------------------
<S> <C> <C> <C>
David J. Dell 50,000 9/29/98 12/12/99
50,000 8/18/99 12/12/99
Michael F. Marino 20,250 6/3/97 12/12/99
50,000 9/29/98 12/12/99
50,000 8/18/99 12/12/99
Col. Clinton L. Pagano 9,240 2/3/02 2/3/02
23,100 6/3/97 12/12/99
50,000 9/29/98 12/12/99
50,000 8/18/99 12/12/99
</TABLE>
The Company believes that the transactions described in this Item 13 were
fair to the Company and were as favorable to the Company as those which it might
have obtained from non-affiliated third parties, given the circumstances under
which such transactions were proposed and effectuated.
36
<PAGE>
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements and supplementary financial
information are filed as part of this Annual Report on Form 10-K:
1. Financial Documents Location
----------------------------------------------------------------
Report of Independent
Auditors....................................................F-1*
Consolidated Balance
Sheets......................................................F-2
Consolidated Statements of
Operations..................................................F-3
Consolidated Statements of Shareholders'
Equity......................................................F-4
Consolidated Statement of Cash
Flows.......................................................F-5
Notes to Consolidated Financial
Statements..................................................F-7
2. Financial Statement Schedules** Location
--------------------------------------------------------------
Report of Independent Auditors
with Respect to Schedules................................F-23
VII - Valuation and Qualifying Accounts.....................F-24
- ----------------
* Page F-1 follows page 41 to this Annual Report on Form 10-K.
** All other schedules are either inapplicable or not required under the
instructions to Form 10-K's Item 14.
(b) The Company did not file any Current Reports on Form 8-K during its
fourth fiscal quarter ended March 31, 1995.
37
<PAGE>
(c) The following list sets forth the applicable exhibits (numbered in
accordance with Item 601 of Regulation S-K) required to be filed with this
Annual Report on Form 10-K:
Exhibit
Number Title Location
- -------------------------------------------------------------------------------
3(a) Articles of Incorporation, as amended1 Ex. 3(a)
3(b) By-Laws, as amended1 Ex. 3(b)
4(a) Form of Common Stock Certificate, $.025 par value2 Ex. 4(a)
4(b) Form of Class B Public Warrant1 Ex. 4(d)
4(c) Form of Warrant Agreement with American Stock
Transfer and Trust Company, with respect to
the Class B Warrants3 Ex. 4(k)
10(a) On Guard Telecomputer System Licensing Agreement
for New Jersey4 Ex. 10(a)
10(b) On Guard Telecomputer System Licensing Agreement
for Australia5 Ex. 10(n)
10(c) Lease Agreement for premises at 800 N.W. 33rd Street,
Pompano Beach, Florida6 Ex. 10(c)
10(d) Registration Rights Agreement, dated January 18, 19917 Ex. 28(e)
10(e) Agreement of Purchase and Sale among the Company,
John El Rabchuk and Rosa Sabato,
dated December 4, 19928 Ex. 28.1
10(f) Registration Rights Agreement, dated June 4, 19921 Ex. 10(m)
10(g) Letter Agreement, dated June 13, 1994, among the Company,
Metroplex and others (minus schedules thereto)9 Ex. 10(l)
10(h) 1991 Incentive Stock Option Plan10 Ex. 10(o)
10(i) Agreement, dated as of November 22, 1993, between
the Company and Acorn Venture Capital Corporation11 Ex. 4.1
10(j) Third Amendment Lease Agreement dated May 8, 1995
for premises at 800 Northwest 33rd Street,
Pompano Beach, Florida
10(k) Employment Agreement dated July 3, 1995 between the
Company and Richard A. Angulo
- --------
1 Incorporated 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.
2 Incorporated 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.
3 Incorporated 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 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 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 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 by reference to the Exhibit indicated above in the Company's
Current Report on Form 8-K (Date of Report January 18, 1991) filed on February
26, 1991.
8 Incorporated by reference to the Exhibit indicated above in the Company's
Current Report Form 8-K (Date of Report: December 16, 1992) (File No. 0-9503),
filed on December 22, 1992.
9 Incorporated by reference to the Exhibit indicated above in the Company's
Annual Report on Form 10-K for the year ended March 31, 1994 (File No. 0-9503),
filed on July 14, 1994.
10 Incorporated by reference to the Exhibit indicated above in the
Company's Quarterly Report on From 10-Q for the quarter ended June 30, 1993
(File No. 0-9503), filed on August 16, 1993. 11Incorporated by reference to
the Exhibit indicated above in the Company's Current Report on Form 8-K (Date
of Report; November 19, 1993), filed on December 23, 1993.
11 Incorporated by reference to the Exhibit indicated above in the
Company's Current Report on Form 8-K (Date of Report; November 19, 1993), filed
on December 23, 1993.
38
<PAGE>
21 Statement regarding computation of earning per share
22 Subsidiaries:
Jurisdiction
Name of Subsidiary of Incorporation
----------------------------------------------------------------------
BLR, Inc. Illinois
DPC International, Inc. U.S. Virgin Islands
DPC/International Business Solutions, Inc. Florida
DPC Monitoring, Inc. Delaware
DPC Monitoring Services, Inc. Florida
Hitek Community Control Corp. Florida
23 Consents:
(a) Consent of Richard A. Eisner & Company
39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Digital Products Corporation
Pompano Beach, Florida
We have audited the accompanying consolidated balance sheets of
Digital Products Corporation and subsidiaries as at March 31, 1995 and
March 31, 1994, and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the years in the
three-year period ended March 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated
above, present fairly, in all material respects, the consolidated financial
position of Digital Products Corporation and subsidiaries at March 31, 1995
and March 31, 1994 and the results of their operations and their cash flows
for each of the years in the three-year period ended March 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note L[2] of the notes to financial statements,
the Company is the subject of various product liability litigation. The
outcome of such matters cannot be determined at this time.
Richard A. Eisner & Company, LLP
New York, New York
July 7, 1995
F-1
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE><CAPTION>
March31,
--------------------------
A S S E T S 1995 1994
----------- ------------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note B) . . . . . . . . . . . . . . . . . . . . . . . . $ 1,087,707 $ 866,927
Marketable securities (Note B) . . . . . . . . . . . . . . . . . . . . . . . . . . 8,911 8,562
Investment in Primedex Health Services Inc. - (Note H) . . . . . . . . . . . . . . 2,500,000
Accounts receivable (net of allowances of $410,338 and $452,096, respectively) . . 1,928,925 999,046
Sales contracts receivable (Note F). . . . . . . . . . . . . . . . . . . . . . . . 50,161 141,845
Current portion of net investment in sales type lease (Note G) . . . . . . . . . . 434,685 147,263
Inventory (Notes A and C). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442,840 501,742
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,997 381,704
------------- ------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,155,226 5,547,089
Rental equipment (net of accumulated depreciation of $2,479,757 and $1,591,071,
respectively) (Notes A and D). . . . . . . . . . . . . . . . . . . . . . . . . . . 1,252,977 1,713,694
Property and equipment - net (Notes A and E). . . . . . . . . . . . . . . . . . . . . 741,080 1,069,702
Sales contracts receivable - long-term (Note F) . . . . . . . . . . . . . . . . . . . 26,222 53,970
Net investment in sales type lease - long-term (Note G) . . . . . . . . . . . . . . . 257,780 271,567
Software development costs (net of accumulated amortization of $789,949 and
$527,264, respectively) (Notes A and P). . . . . . . . . . . . . . . . . . . . . . 911,732 1,254,090
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,358 474,906
------------- -------------
T O T A L . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,435,375 $10,385,018
============= ==========
L I A B I L I T I E S
---------------------
Current liabilities:
Capitalized lease obligations - current portion (Note L[1]). . . . . . . . . . . . $ 132,037 $ 104,846
Accounts payable (Note J). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,947,623 2,148,683
Accrued expenses (Note J). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,838,939 2,617,722
Customer deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,134
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,775 425,363
------------- ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 4,207,374 5,417,748
Subordinated convertible note (Note I[1]) . . . . . . . . . . . . . . . . . . . . . . 457,145 431,429
Capitalized lease obligations (Note L[1]) . . . . . . . . . . . . . . . . . . . . . . 164,466 189,611
Other long-term liabilities (Note K). . . . . . . . . . . . . . . . . . . . . . . . . 833,864
------------- ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,662,849 6,038,788
------------- ------------
Commitments and contingencies (Note L)
SHAREHOLDERS' EQUITY
(Notes A, I, M and P)
---------------------
Common stock - par value $.025; shares issued 11,029,328. . . . . . . . . . . . . . . 275,733 275,733
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,454,854 31,454,854
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,858,945)
-------------
1,871,642 4,418,455
Less treasury stock (at cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . (99,116) (72,225)
------------- ------------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . 1,772,526 4,346,230
------------- ------------
T O T A L . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,435,375 $10,385,018
============= ============
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
</TABLE>
F-2
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31,
-----------------------------------------
1995 1994 1993
----------- ------------- -----------
Revenues (Note A):
Sales of products . . . . . $ 4,953,515 $ 2,874,600 $ 4,273,416
Rental and monitoring
revenues. . . . . . . . . 4,212,033 4,924,165 4,113,443
Service and other revenue . 1,671,798 1,131,600 528,566
------------ ------------- -----------
10,837,346 8,930,365 8,915,425
------------ ------------- -----------
Costs and expenses:
Cost of products sold . . . 1,519,951 2,255,308 2,314,812
Cost of rental, monitoring
and other revenue . . . . 4,192,331 7,815,417 4,668,455
Operating expenses. . . . . 6,329,049 8,101,812 8,174,006
Research and development. . 427,649 708,221 843,260
------------ ------------- -----------
12,468,980 18,880,758 16,000,533
------------ ------------- -----------
(Loss) from operations . . . . (1,631,634) (9,950,393) (7,085,108)
------------ ------------- -----------
Other income (expense):
Interest income . . . . . . 36,678 167,125 545,997
Interest (expense). . . . . (199,234) (26,873) (96,583)
Loss on investment in
Primedex Health
Services Inc. (Note H). . (250,008) (1,500,000)
Estimated loss on disposal
of subsidiary (Note P). . (488,000)
Other, net. . . . . . . . . (34,613) (109,913) (80,706)
Litigation settlement . . . (468,000)
------------ ------------- -----------
(915,177) (1,957,661) 368,708
------------ ------------- -----------
NET (LOSS) . . . . . . . . . . $(2,546,811) $(11,908,054) $(6,716,400
============ ============= ===========
NET (LOSS) PER SHARE . . . . . $(.23) $(1.17) $(.70)
====== ======= ======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES (NOTE A). . . 10,995,498 10,146,026 9,530,319
=========== =========== ==========
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-3
<PAGE>
<TABLE><CAPTION>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Additional Total
Common Stock Paid-in (Accumulated Treasury Stock Shareholders'
---------------------- ------------------
Shares Amount Capital Deficit) Shares Amount Equity
----------- --------- ----------- ------------ ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - April 1, 1992. 9,443,001 $236,075 $35,677,428 $ (8,687,678) 9,329 $(72,225) $ 27,153,600
Year ended March 31,
1993:
Net (loss). . . . . (6,716,400) (6,716,400)
Issuance of stock
for businesses
acquired (Note P) 140,732 3,518 365,317 368,835
Issuance of stock
upon exercise of
employee stock
option. . . . . . 70,595 1,765 142,440 144,205
Registration
expenses. . . . . (45,217) (45,217)
Acquisition of
outstanding
warrants, net
(Note I[2]) . . . (6,033,498) (6,033,498)
----------- --------- ------------ ------------- ------- --------- -------------
Balance - March 31,
1993. . . . . . . . . 9,654,328 241,358 30,106,470 (15,404,078) 9,329 (72,225) 14,871,525
Year ended March 31,
1994:
Net (loss). . . . . (11,908,054) (11,908,054)
Issuance of common
stock net of
related expenses
(Note M[1]) . . . 1,375,000 34,375 1,278,184 1,312,559
Acquisition of
outstanding
warrant . . . . . (4,800) (4,800)
Issuance of common
stock warrant
(Note I[1]) . . . 75,000 75,000
----------- --------- ------------ ------------- ------- --------- ------------
Balance - March 31,
1994. . . . . . . . . 11,029,328 275,733 31,454,854 (27,312,132) 9,329 (72,225) 4,346,230
Net (loss) . . . . . . . (2,546,813) (2,546,813)
Acquisition of common
stock (Note P). . . . 30,732 (26,891) (26,891)
----------- --------- ------------ ------------- ------- --------- -------------
BALANCE - MARCH 31,
1995. . . . . . . . . 11,029,328 $275,733 $31,454,854 $ 29,858,945 40,061 $(99,116) $ 1,772,526
=========== ========= ============ ============= ======= ========= ============
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
</TABLE>
F-4
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE><CAPTION>
Year Ended March 31,
-------------------------------------------------
1995 1994 1993
------------- ------------- ----------
<S> <C> <C> <C>
Reconciliation of net (loss) to net cash (used in) operating activiti
Net (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,546,811) $(11,908,054) $(6,716,400)
------------ ------------- -----------
Adjustments to reconcile net (loss) to net cash (used in)
operating activities net of effects from purchase of subsidiarie
Depreciation and amortization . . . . . . . . . . . . . . . . 1,382,537 1,743,468 1,349,183
Write-off of software . . . . . . . . . . . . . . . . . . . . 466,000 307,000
Write-off of rental inventory . . . . . . . . . . . . . . . . 30,439 1,172,891
Write-off of equipment. . . . . . . . . . . . . . . . . . . . 135,281
Provision for loss on sublease of facility. . . . . . . . . . 200,000
Provision for loss on disposal of subsidiary. . . . . . . . . 488,000
Loss on investment in Primedex. . . . . . . . . . . . . . . . 250,008 1,500,000
Provision for losses on receivables . . . . . . . . . . . . . 90,000 247,000 477,027
Write-off of sales contracts receivable . . . . . . . . . . . 1,572,449
Write-off of inventory. . . . . . . . . . . . . . . . . . . . 1,387,627 326,338
Provision for warranty repairs. . . . . . . . . . . . . . . . 56,290 100,000 545,157
(Increase) decrease in sales contracts and sales-type leases. (154,203) 317,751 700,537
(Increase) decrease in accounts receivable. . . . . . . . . . (1,019,879) 78,915 (732,814)
Decrease (increase) in inventory . . . . . . . . . . . . . . 58,902 30,965 (1,194,078)
Decrease (increase) in rental inventory . . . . . . . . . . . 39,089 (101,981)
(Increase) in software development costs. . . . . . . . . . . (190,145) (166,294) (506,419)
Decrease (increase) in other assets . . . . . . . . . . . . . 266,755 (224,942) (82,907)
(Decrease) increase in accounts payable and accrued liabilitie (629,085) (228,181) 479,858
(Decrease) increase in customer deposits. . . . . . . . . . . (121,134) (7,611) 128,745
(Decrease) increase in deferred revenue . . . . . . . . . . . (136,588) 305,028 (118,454)
------------ ------------ ------------
Total adjustment . . . . . . . . . . . . . . . . . . . . . 485,178 7,290,706 2,842,641
------------ ------------ ------------
Net cash (used in) operating activities. . . . . . . . . . (2,061,633) (4,617,348) (3,873,759)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . (40,022) (152,113) (689,568)
Additions to rental equipment . . . . . . . . . . . . . . . . . . (205,293) (195,598) (1,287,104)
Sale (purchase) of marketable securities. . . . . . . . . . . . . 1,378,525 (4,323,939)
Purchase of subsidiaries, net of cash acquired. . . . . . . . . . (381,777)
Sale of Primedex. . . . . . . . . . . . . . . . . . . . . . . . . 2,250,000
------------ ------------- ------------
Net cash provided by (used in) investing activities. . . . 2,004,685 1,030,814 (6,682,388)
------------ ------------- ------------
Cash flows from financing activities:
Reacquisition and issuance of warrants. . . . . . . . . . . . . . (4,800) (6,033,498)
Proceeds from issuance of common stock, net and exercise of option 1,312,559 144,205
Proceeds from sale of receivables with recourse . . . . . . . . . 399,923 753,330 319,157
Proceeds from borrowings. . . . . . . . . . . . . . . . . . . . . 500,000
(Repayments of) capitalized lease obligations . . . . . . . . . . (122,195) (93,046) (116,530)
Deferred registration costs . . . . . . . . . . . . . . . . . . . (45,217)
------------ ------------- ------------
Net cash provided by (used in) financing activities. . . . 277,728 2,468,043 (5,731,883)
------------ ------------- ------------
</TABLE>
(continued)
F-5
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE><CAPTION>
Year Ended March 31,
---------------------------------------------------
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . $ 220,780 $ (1,118,491) $(16,288,030)
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . 866,927 1,985,418 18,273,448
------------ ------------- ------------
CASH AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,087,707 $ 866,927 $ 1,985,418
============ ============= =============
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock and options for purchase of subsidiaries. . $ 368,835
Increase in capitalized lease obligations. . . . . . . . . . . . . . $ 124,241 137,446
Issuance of warrant. . . . . . . . . . . . . . . . . . . . . . . . . $ 75,000
Acquisition of treasury stock. . . . . . . . . . . . . . . . . . . . 26,891
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,539
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-6
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Summary of Significant Accounting Policies:
- -----------------------------------------------------
[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.
The Company has incurred significant losses in 1995, 1994 and
1993 and has a working capital deficit of $52,000 at March 31, 1995.
Subsequent to March 31, 1995, the Company has obtained a commitment for a
line of credit from a finance company, for up to $800,000 for equipment
financing. Borrowings under the line of credit will bear interest at
approximately 12% and will be collateralized by equipment and other assets.
The Company also has a commitment from one of its third party lenders to
provide up to $400,000 of working capital financing. In addition, the
Company has implemented certain plans to reduce operating expenses. In the
opinion of the management, the Company should have sufficient working
capital to sustain its operations through fiscal 1996.
[2] Basis of consolidation
----------------------
The consolidated financial statements include the accounts of
Digital Products Corporation and its subsidiaries. All material
intercompany transactions and accounts are eliminated in consolidation.
[3] 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.
[4] Rental equipment:
----------------
Rental equipment is stated at cost and is depreciated on a
straight-line basis over estimated useful lives of three and five years.
Depreciation commences as the units are placed into inventory for rent.
(continued)
F-7
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Summary of Significant Accounting Policies: (continued)
- -----------------------------------------------------
[5] Property and equipment:
----------------------
Property and equipment is recorded at cost. Depreciation is
provided using the straight-line method, over estimated useful lives of
five to seven years.
[6] Software development:
--------------------
Costs associated with software development are capitalized and
amortized in accordance with Statement of Financial Accounting Standards
No. 86. Amortization is on a product-by-product basis, based on the
straight-line method over the estimated useful life of the product, sixty
months, or using the ratio of current revenues to total anticipated future
revenues, whichever is greater. Management periodically evaluates the
recoverability of capitalized software development costs and write-downs
are taken if required.
[7] Warranties:
----------
The Company generally provides a product warranty on its sales of
correctional services systems and other electronic systems for a period of
one year from the date of sale. The Company has recorded a liability for
these anticipated future warranty costs. Costs connected with the
maintenance of rental inventory are charged to operations as incurred.
[8] 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.
(continued)
F-8
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Summary of Significant Accounting Policies: (continued)
- -----------------------------------------------------
[8] Revenue recognition: (continued)
-------------------
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.
[9] Per share data:
--------------
Net (loss) per share is computed based on the weighted average
number of shares outstanding for each period. Common stock equivalents
have not been considered as they would be antidilutive.
[10] Recently issued accounting pronouncements:
-----------------------------------------
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 is effective for the Company's
fiscal year commencing April 1, 1997. The Company believes adoption of
SFAS No. 121 will not have a material impact on its financial statements.
(NOTE B) - Cash Equivalents and Marketable Securities:
- -----------------------------------------------------
For the purposes of the statement of cash flows, the Company considers
all highly liquid investment instruments purchased with a maturity of three
months or less to be cash equivalents. Cash equivalents include
investments in government securities. Effective April 1, 1994 the Company
adopted Statement of Financial Accounting Standards No. 115 ("SFAS
No. 115"), "Accounting for Certain Investments in Debt and Equity
Securities." The adoption of the statement did not have a material impact
on the financial statements. Marketable securities consist of federal and
state government bonds. At March 31, 1995 and March 31, 1994 the aggregate
market value of the Company's marketable securities was approximately
$9,000.
(continued)
F-9
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE C) - Inventory:
- --------------------
Inventory consists of the following:
March 31,
--------------------
1995 1994
--------- ---------
Raw materials. . . . . . . . . . . $ 65,436 $313,749
Work in process and finished
goods . . . . . . . . . . . . . 377,404 187,993
--------- ---------
T o t a l. . . . . . . . $442,840 $501,742
========= =========
(NOTE D) - Rental Equipment:
- ---------------------------
Rental equipment consists of electronic systems held for rental to
correctional services customers as well as certain other electronic
devices.
(NOTE E) - Property and Equipment:
- ---------------------------------
Property and equipment consists of the following:
March 31,
------------------------
1995 1994
----------- -----------
Office and computer equipment
(Note L[1]). . . . . . . . . . $1,634,459 $1,474,644
Production equipment. . . . . . . 46,428 488,855
Leasehold improvements. . . . . . 2,894
----------- -----------
1,683,781 1,963,499
Less accumulated depreciation
and amortization . . . . . . . 942,701 893,797
----------- -----------
T o t a l . . . . . . . $ 741,080 $1,069,702
=========== ===========
Fixed assets includes capitalized leases with an aggregate net book
value of approximately $318,000 (Note L[1]).
(continued)
F-10
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Sales Contracts:
- --------------------------
The Company sells certain correctional services systems under
contracts providing for payment terms over eighteen to sixty month periods.
Sales revenue recognized from these contracts approximated $374,000,
$90,000 and $1,220,000 for the years ended March 31, 1995, March 31, 1994
and March 31, 1993, respectively. In addition, extended service warranties
are also provided under some of these contracts. Revenue for the extended
service warranties is recognized during the periods in which they become
effective. Interest on these
contracts has been imputed at rates ranging from 11% to 18% and is being
amortized over the term of the contracts using the effective interest
method. Sales contracts receivable consist of the following:
March 31,
----------------------
1995 1994
---------- ----------
Gross sales contract receivable . $ 243,000 $ 474,000
Unearned revenue. . . . . . . . . (166,000) (278,000)
---------- ----------
77,000 196,000
Current portion of sales
contract receivable. . . . . . 50,000 142,000
---------- ----------
Long-term portion of sales
contract receivable. . . . . . $ 27,000 $ 54,000
========== ==========
(NOTE G) - Net Investment in Sales-Type Leases:
- ----------------------------------------------
The Company leases certain correctional service systems under sales-
type leases with payment terms over thirty-six to sixty months. Revenue
recognized from sales-type leases approximated $1,202,000, $350,000 and
$593,000 for the years ended March 31, 1995, March 31, 1994 and March 31,
1993, respectively. In some instances, extended service warranties were
also provided. Revenue for the extended service warranties is recognized
during the periods in which they become effective. Net investment in
sales-type leases receivable consists of the following:
March 31,
---------------------
1995 1994
---------- ---------
Total minimum lease payments to be
received . . . . . . . . . . . . . . $ 833,000 $461,000
Less unearned income. . . . . . . . . . (141,000) (42,000)
---------- ---------
Net investment in sales-type leases . . 692,000 419,000
Less amounts due within one year. . . . 435,000 147,000
---------- ---------
Net long-term portion . . . . . . . . . $ 257,000 $272,000
========== =========
(continued)
F-11
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Net Investment in Sales-Type Leases: (continued)
- ----------------------------------------------
Future lease payments to be received as at March 31, 1995 are as
follows:
Year Ending
March 31,
-----------
1996. . . . . . . . . . . . . . . . . $323,000
1997. . . . . . . . . . . . . . . . . 223,000
1998. . . . . . . . . . . . . . . . . 131,000
1999. . . . . . . . . . . . . . . . . 79,000
2000. . . . . . . . . . . . . . . . . 77,000
---------
Total minimum lease
payments to be received . $833,000
=========
(NOTE H) - Investment in Primedex Health Services, Inc.:
- -------------------------------------------------------
The investment in Primedex Health Services, Inc. ("Primedex") was
acquired in June 1992 as part of the transaction discussed in Note I[2].
The estimated fair value of the investment at the date of acquisition was
$4,000,000 (which approximated market at March 31, 1993). During the year
ended March 31, 1994, the Company exercised its registration rights and
reclassified its investment as a current asset, recognizing a loss of
$500,000 based on the then market value of Primedex of $3.50 per share.
The market value of Primedex at March 31, 1994 was $2.50 per share, or
$2,500,000 in the aggregate. Based on this, the Company established a
valuation allowance of $1,000,000 at March 31, 1994, recognizing a
corresponding loss. In April and May 1994, the Company sold the entire
investment for net proceeds of approximately $2,250,000, realizing an
additional loss of $250,000 during the year ended March 31, 1995.
(NOTE I) - Debt:
- ---------------
[1] Subordinated convertible note - 1994:
------------------------------------
In November 1993, the Company issued a 10% subordinated
convertible note (the "Note"), to Acorn Venture Capital Corporation for
$500,000. The note is due in November 1996 and is convertible into shares
of the Company's common stock at a price of $1.50 per share. In connection
with the Note, the Company issued a warrant to purchase up to 750,000
shares of the Company's common stock at $2.00 per share. The warrant
expires in November 1996. The value assigned to the warrant ($75,000) has
been accounted for as debt discount and is being amortized over the term of
the note, resulting in an effective interest rate of 15%.
(continued)
F-12
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Debt: (continued)
- ---------------
[2] Exchange of debentures for common stock:
---------------------------------------
In January and March 1991, the Company sold to Primedex 12%
convertible subordinated debentures and warrants to purchase common stock
for total proceeds of $1,500,000. The debentures were due in July and
September 1991 and were convertible into common stock at $2.125 per share
for a $500,000 debenture and $1.875 per share for a $1,000,000 debenture.
On June 7, 1991, pursuant to a series of negotiated related transactions,
the Company sold 560,000 shares of its common stock to Primedex for
$1,000,000, exchanged the debentures for 1,200,000 shares of the Company's
common stock and exchanged the warrants held by Primedex for a new warrant
to purchase 1,500,000 shares of the Company's common stock at $1.20 per
share.
In March 1992, the Company filed a registration statement with
the Securities and Exchange Commission to allow Primedex to register and
sell 2,586,066 shares of common stock held by Primedex. The sale of such
shares was restricted pursuant to an agreement between Primedex, the
Company and the underwriter of the public offering (Note L[2]). In
consideration for the Company agreeing to the registration and possible
sale of such shares, the Company received from Primedex warrants to
purchase 500,000 shares of Primedex common stock ("the Primedex warrants")
at a purchase price of $8.00 per share through March 10, 1997.
In June 1992, the Company acquired from Primedex the following:
(a) 1,000,000 shares of the common stock of Primedex (Note H) and (b) the
remaining common stock purchase warrant, originally issued June 7, 1991, to
purchase up to 1,100,000 shares of the common stock of the Company. The
aggregate consideration paid by the Company was $10,000,000 cash and the
issuance to Primedex of a new warrant ("the new warrant") to purchase up to
2,000,000 shares of the Company's common stock at $10.00 per share. In
addition, Primedex and the Company each granted to the other certain
registration rights. This transaction resulted in a charge to additional
paid-in capital of $6,033,498 representing the value of the warrant
acquired, net of the assigned value of the new warrant that was issued.
In October 1993, the Company and Primedex entered into an
agreement whereby Primedex surrendered to the Company the new warrant in
exchange for the Company's surrender of the Primedex warrants. At that
date the market value of the Company's and Primedex's common stock was
approximately $1.50 and $3.50 per share, respectively.
(continued)
F-13
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE J) - Accounts Payable and Accrued Expenses:
- ------------------------------------------------
Included in accounts payable at March 31, 1995 and March 31, 1994 is a
liability of $521,389 and $637,302, 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:
March 31,
------------------------
1995 1994
----------- -----------
Payroll, payroll taxes and benefits . . $ 235,276 $ 300,326
Commissions . . . . . . . . . . . . . . 105,696 121,765
Sales tax payable . . . . . . . . . . . 184,392 158,416
Warranty and repairs. . . . . . . . . . 223,737 570,310
Reserve for estimated losses on
disposal of subsidiary (Note P). . . 336,417
Estimated loss on sublease of facility
(Note L[1]). . . . . . . . . . . . . 200,000
Accrued rent settlement - current
portion. . . . . . . . . . . . . . . 27,182 137,432
Current portion of litigation
settlement . . . . . . . . . . . . . 318,000
Other . . . . . . . . . . . . . . . . . 744,656 793,056
----------- -----------
T o t a l . . . . . . . . . . $1,838,939 $2,617,722
=========== ===========
(NOTE K) - Other Liabilities - Long-Term:
- ----------------------------------------
Other long-term liabilities at March 31, 1995 are comprised of the
following:
Long-term portion of rent
settlement. . . . . . . . . . . . $383,622
Long-term portion of litigation
settlement. . . . . . . . . . . . 150,000
Long-term portion of warranty
reserve . . . . . . . . . . . . . 148,800
Other. . . . . . . . . . . . . . . . 151,442
---------
T o t a l. . . . . . . . . $833,864
=========
(continued)
F-14
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE L) - Commitments and Contingencies:
- ----------------------------------------
[1] Commitments:
-----------
(i) Leases:
------
The Company has operating leases for office and
warehousing facilities which expire through 2001 and provide for monthly
payments of rent, real estate taxes and operating expenses and are subject
to escalations. Rent expense for 1995, 1994 and 1993 approximated
$710,000, $637,000, and $387,000, respectively.
In February 1994 the Company vacated a portion of its
manufacturing facility. At March 31, 1995 the Company has accrued rent of
approximately $411,000 in connection with its rental obligations (Notes J
and K). Effective June 1, 1995 the Company renegotiated the terms of its
lease on the facility and, in connection with the rental settlement, will
record a gain of approximately $153,000 during the first quarter of fiscal
1996.
The Company has six capitalized leases for furniture,
fixtures, telephone and office equipment providing for aggregate monthly
payments of approximately $13,800 through May 1999. The related assets are
included in office and computer equipment.
Future minimum rentals under capital and operating leases
as of March 31, 1995 are as follows:
Year Ending Operating Capital
March 31, Leases Leases
----------- ----------- ---------
1996 . . . . . . . . . . . . . $ 215,000 $157,000
1997 . . . . . . . . . . . . . 194,000 102,000
1998 . . . . . . . . . . . . . 184,000 44,000
1999 . . . . . . . . . . . . . 180,000 30,000
2000 . . . . . . . . . . . . . 183,000 5,000
Thereafter . . . . . . . . . . 286,000
----------- ---------
Total minimum lease payments . $1,242,000 338,000
===========
Less amounts representing
interest. . . . . . . . . . 41,000
---------
Present value of minimum
lease payments at
March 31, 1995. . . . . . . 297,000
Less amounts due within one
year. . . . . . . . . . . . 132,000
---------
Amounts due after one year . . $165,000
=========
(continued)
F-15
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE L) - Commitments and Contingencies: (continued)
- ----------------------------------------
[1] Commitments: (continued)
-----------
(ii) License agreement:
-----------------
In settlement of patent litigation, the Company has
entered into a license agreement for the use of certain patents related to
its home monitoring device. During the year ended March 31, 1994, the
Company paid $100,000 and it is obligated to pay $50,000 per year through
March 1997 for the use of the license.
(iii) Manufacturing agreement:
-----------------------
The Company has entered into a manufacturing and
engineering services agreement with KBS, Inc. for its home monitoring
devices. Under the agreement, KBS, Inc. manufactures and repairs all of
the Company's monitoring equipment. There are no minimum production
quantities under the agreement.
[2] 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 its 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.
[3] Litigation settlement:
---------------------
In June 1995, the Company settled certain litigation commenced in
connection with an equipment lease with a customer that was sold to a
finance company. Pursuant to the settlement, the customer returned the
leased equipment to the Company and agreed to pay for the period during
which the equipment was used. In addition, the Company reimbursed the
finance company for all funds that were advanced to the Company. In
connection with such settlement, the Company incurred a charge of $468,000.
(continued)
F-16
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE M) - Common Stock:
- -----------------------
[1] Stock options:
-------------
In September 1991 the Company adopted the 1991 Incentive Stock
Option Plan (the "Plan") which provides for the granting of options to
purchase up to 800,000 shares of common stock as either incentive stock
options or nonqualified stock options. The exercise price of options
granted to employees can not be less than the fair market value on the date
of grant. The Company's three prior stock option plans have been
terminated; however, options granted under the plans are still outstanding.
The following is a summary of stock option activity for the years
ended March 31, 1995, March 31, 1994 and March 31, 1993:
Stock Option Plans Other Options
----------------------- -------------------------
Price Price
Shares Per Share Shares Per Share
--------- ------------ ----------- ------------
Balance
April 1, 1992 . 211,727 1,826,000
Granted. . . . . . 279,000 $9.25 2,350,000 $3.56-$9.88
Exercised. . . . . (70,595) $1.75-$2.43
Expired. . . . . . (24,800) $8.75
Terminated . . . . (57,332) $9.25-$10.00 (103,333) $5.63-$8.75
--------- -----------
Balance -
March 31, 1993 . 338,000 4,072,667
Granted. . . . . . 200,379 $4.00-$5.00 1,958,004 $4.00
Terminated . . . . (134,880) $3.75-$10.00 (2,818,667) $5.00-$9.88
--------- -----------
Balance -
March 31, 1994 . 403,499 $2.43-$10.00 3,212,004 $3.56-$9.88
Granted. . . . . . 37,884 $1.50 1,420,056 $1.00-$1.50
Terminated . . . . (134,659) $2.43-$10.00 (2,228,099) $5.025-$7.50
--------- -----------
Balance -
March 31, 1995 . 306,724 $1.50-$10.00 2,403,961 $1.00-$9.88
========= ===========
Exercisable at
March 31, 1995 . 193,579 2,253,961
========= ===========
(continued)
F-17
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE M) - Common Stock: (continued)
- -----------------------
[1] Stock options: (continued)
-------------
All of the above options were issued at or in excess of the
market price at the date of grant. At March 31, 1995 the outstanding
options consist of the following:
Stock Option Plans Other Plans
-------------------------------- ---------------------------------
Exercisable Exercisable
Price at March 31, Price at March 31,
Shares Per Share 1995 Shares Per Share 1995
-------- --------- ------------ ---------- ----------- ----------
37,884 $ 1.50 19,404 1,420,056 $1.00-$1.50 1,270,056
10,400 $ 2.43 10,400 50,000 $3.56 50,000
35,800 $ 4.00 35,800 671,905 $4.00-$4.38 671,905
72,500 $ 5.00 14,500 50,000 $5.00-$5.63 50,000
20,000 $ 6.40 20,000 32,000 $7.50 32,000
110,000 $ 9.25 73,335 80,000 $8.75 80,000
20,140 $10.00 20,140 100,000 $9.88 100,000
-------- -------- ---------- --------
306,724 193,579 2,403,961 2,253,961
======== ======== ========== ==========
Included in other options in the table are options to purchase
87,400 shares of the Company's common stock which were issued to the
Company's former president pursuant to an employment agreement and options
to purchase 138,600 shares of the Company's common stock which were issued
to a director and shareholder pursuant to a consulting agreement. The
options expire in August 1995 and contain registration rights for a portion
of the issuable shares.
In connection with extensions of the employment agreement and new
consulting agreement, the Company issued additional options to purchase
437,000 and 346,500 shares of its common stock to the former president and
director, respectively. Also, options to purchase an aggregate of 72,840
shares of common stock were issued to three other current directors. These
options expire between June 3, 1997 and February 3, 2002. These are also
included in the previous table.
The options discussed above were repriced in September 1993 and
have an exercise price of $4.00 per share (market price on that date was
$1.63). Concurrently, the number of options granted was reduced to the
number set forth above. In addition in September 1993, options to purchase
an aggregate of 697,221 shares of common stock were issued to the Company's
current president and five other directors at an exercise price of $4.00
per share (market price on the date of issuance was $1.63).
(continued)
F-18
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE M) - Common Stock: (continued)
- -----------------------
[1] Stock options: (continued)
-------------
Certain options issued to the current president and directors
were repriced in August 1994 and have an exercise price of $1.50 (market
price on that date was $.56). In addition, in August 1994 options to
purchase an aggregate of 150,000 shares of common stock were issued to the
Company's current president and two other directors at an exercise price of
$1.50 per share (market price on the date of issuance was $.56). Certain of
these options were repriced in December 1994 to $1.00 (market price on that
date was $.41.
In June 1995, in connection with the settlement of certain
litigation, options to purchase 87,400 shares of common stock and 437,000
shares of common stock, all exercisable at $4.00 per share, which were
issued to the former president of the Company were terminated.
See Note P with respect to other options.
[2] Warrants:
--------
The Company has the following common stock warrants outstanding
at March 31, 1995:
Exercise
Shares Price Expiration Date
---------- -------- -----------------
1,955,000 25.00 February 7, 1997
750,000 2.00 November 22, 1996
----------
2,705,000
==========
The warrants are redeemable at the option of the Company at a
redemption price of $.01 per warrant on 60 days prior written notice under
certain circumstances.
(NOTE N) - Income Taxes:
- -----------------------
The Company adopted Statement of Financial Accounting Standards No.
109 in 1992. There was no effect on financial position or results of
operations as a result of adopting this statement.
At March 31, 1995 the Company has net operating loss carryforwards for
tax purposes of approximately $24,000,000 available to offset future income
taxes payable expiring through the year 2010.
(continued)
F-19
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE N) - Income Taxes: (continued)
- -----------------------
Pursuant to Section 382 of the Internal Revenue Code, due to changes in the
ownership of the Company, the utilization of these loss carryforwards is
subject to an annual limitation based on a long-term tax exempt rate. The
Company has fully reserved for the income tax benefit of approximately
$9,500,000 for the net operating loss carryforwards. Temporary differences
resulting in deferred tax assets result from reserves not currently deductible
for income tax purposes which aggregate approximately $500,000 offset by a
deferred tax liability of approximately the same amount resulting from
accelerated depreciation. The change in the valuation reserves for the year
ended March 31, 1995 was approximately $1,000,000.
(NOTE O) - Significant Customers:
- --------------------------------
For the year ended March 31, 1993 one customer accounted for 11% of
total revenues.
(NOTE P) - Acquisitions:
- -----------------------
In May 1992, the Company acquired certain assets of CRC/ International
Business Solutions Inc. ("CRC"), a software company, for a cash purchase
price of approximately $350,000 plus $60,000 payable over six months and
10,000 shares of the Company's common stock, which was valued at $66,666.
In addition, the Company agreed to pay CRC commissions on certain future
license fees and sales of the acquired assets and to issue, under certain
circumstances, warrants to purchase 5% of the common stock of a subsidiary
of the Company which was formed to operate the acquired assets.
In September 1992 the Company acquired the stock of Gould/Ford
Technologies Group Inc., d/b/a Metroplex Mobile Data Systems,
("Metroplex"), a software company, for an initial purchase price of
approximately $77,500 in cash, 30,732 shares of the Company's common stock,
which was valued at $105,502 and options to purchase an additional 100,000
shares of common stock, expiring March 31, 1996 at $5.0125 per share, which
were valued at $5,000. The agreement called for additional consideration
(in cash or common stock or a combination thereof), based on the earnings
of Metroplex through March 31, 1996, as defined.
In March 1994, the Company made a determination to dispose of its
Metroplex subsidiary. In June 1994, the Company entered into an agreement
with the former shareholders of Metroplex to transfer to these shareholders
all of the issued and outstanding stock of Metroplex. As consideration,
the Company received back the 30,732 shares and options for 100,000 shares
of its common stock which were part of the initial purchase price above.
In connection with the
(continued)
F-20
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE P) - Acquisitions: (continued)
- -----------------------
disposal of Metroplex, the Company has recorded a charge of approximately
$500,000, which includes a provision for estimated operating losses through
the date of disposal and a provision for certain obligations the Company
has agreed to guarantee on behalf of Metroplex. Metroplex had no revenues
in the fiscal year ended March 31, 1994.
In December 1992, the Company acquired all of the outstanding shares
of BLR, Inc., an Illinois corporation doing business as "BGIS Systems Co."
("BLR"), for a purchase price of 100,000 shares of the Company's common
stock, which was valued at $191,667.
Each of these acquisitions has been accounted for as a purchase
transaction and the excess of the purchase price over the fair value of the
other assets acquired was allocated to the software assets of each company.
Accordingly, their results of operations are included in the Company's
consolidated statements of operations since their dates of acquisition.
As of March 31, 1995 and March 31, 1994, based on management's
evaluation of the recoverability of its software assets, the Company wrote-
down approximately $466,000 and $300,000 of the software assets of CRC and
BLR, respectively.
The combined operations of the acquired companies was not material to
the Company's operations for the year ended March 31, 1993.
(NOTE Q) - Segment Information:
- ------------------------------
The Company's operations are classified into two business segments:
criminal justice and computer software applications.
Year Ended March 31,
---------------------------
1995 1994
------------ -------------
Revenue:
Criminal justice. . . . . . . . . $ 7,543,924 $ 6,298,844
Software applications . . . . . . 3,293,422 2,631,521
------------ -------------
T o t a l. . . . . . . . . $10,837,346 $ 8,930,365
============ =============
(continued)
F-21
<PAGE>
DIGITAL PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE Q) - Segment Information: (continued)
- ------------------------------
Year Ended March 31,
---------------------------
1995 1994
------------ -------------
Operating income (loss):
Criminal justice. . . . . . . . . $ 468,843 $ (7,100,432)
Software applications . . . . . . (1,871,855) (2,295,391)
General corporate expense . . . . (228,622) (554,570)
------------ -------------
(Loss) from operations . . (1,631,634) (9,950,393)
Other income (expense), net . . . (915,177) (1,957,661)
------------ -------------
Net (loss) . . . . . . . . $(2,546,811) $(11,908,054)
============ =============
Identifiable assets as at March 31:
Criminal justice. . . . . . . . . $ 5,901,164 $ 6,009,874
Software applications . . . . . . 1,534,211 1,875,144
------------ -------------
7,435,375 7,885,018
Investment in Primedex Health
Services, Inc. . . . . . . . . 2,500,000
------------ -------------
T o t a l. . . . . . . . . $ 7,435,375 $ 10,385,018
============ =============
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
DIGITAL PRODUCTS CORPORATION
/s/ Richard A. Angulo
---------------------
Richard A. Angulo
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------------------------------------------------------------------------------
/s/ Richard A. Angulo Director, President and July 6, 1995
- --------------------------
Richard A. Angulo Chief Executive Officer
/s/ Gerald Parsons Controller July 6, 1995
- --------------------------
Gerald Parsons (Chief Accounting Officer)
/s/ David J. Dell Director, Vice President Technology July 6, 1995
- --------------------------
David J. Dell and Organizational Development
Director
- --------------------------
John E. Dell
/s/ Michael F. Marino Director July 6, 1995
- --------------------------
Michael F. Marino
/s/ Clinton L. Pagano, Sr. Director July 6, 1995
- --------------------------
Clinton L. Pagano, Sr.
