<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File number: 1-15810
OSICOM TECHNOLOGIES, INC.
(Exact name of Registrant as specified in charter)
New Jersey 22-2367234
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2800 28th Avenue, Suite 100
Santa Monica, California
90405
(Address of principal executive offices)
(Zip Code)
(310) 581-4030
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.10 par value per share, Outstanding: 18,843,014 shares
at December 1, 1997.
This Form 10-QSB, future filings of the registrant, and oral statements made
with the approval of an authorized executive officer of the Registrant may
contain forward looking statements. In connection therewith, please see the
cautionary statements and risk factors contained in Item 2. "Fluctuations in
Revenue and Operating Results" and "Forward Looking Statements - Cautionary
Statement", which identify important factors which could cause actual results to
differ materially from those in any such forward-looking statements.
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TABLE OF CONTENTS
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Page
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PART I: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheet at October 31, 1997 and Audited
Consolidated Balance Sheet at January 31, 1997 3
Unaudited Consolidated Statements of Operations for the Three and
Nine Months ended October 31, 1997 and 1996 4
Unaudited Consolidated Statements of Cash Flows for the Nine Months
ended October 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-28
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations/Comparison of the Three and Nine Months ended
October 31, 1997 and 1996 28
Liquidity and Capital Resources 30
Impact of Recent Accounting Pronouncements 31
Other Matters 31
Fluctuations in Revenue and Operating Results 31
Forward-Looking Statements - Cautionary Statement 31
PART II: OTHER INFORMATION 33
ITEM 1: LEGAL PROCEEDINGS
ITEM 2: CHANGES IN SECURITIES
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
ITEM 4: SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
ITEM 5: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE 34
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2
<PAGE> 3
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
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==================================================================================================================================
October 31, 1997 January 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
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ASSETS
CURRENT ASSETS
Cash and equivalents $ 1,263 $ 4,055
Restricted cash (Notes B and E) 2,121 1,744
Accounts receivable, net of reserve for doubtful accounts; $1,181 at
October 31, 1997; $1,141 at January 31, 1997 (Note E) 16,061 19,090
Inventory, net (Notes B and E) 21,249 21,835
Other receivables (Notes C and O) 2,891 985
Prepaid expenses and other current assets 1,269 1,239
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 44,854 48,948
- ----------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET (Notes B, D, E and F) 16,359 15,417
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Purchased technology, net (Notes A and B) 2,387 7,588
Excess of cost over net assets acquired, net (Notes A and B) 6,864 1,464
Capitalized software, net (Note B) 3,331 2,005
Other assets (Notes B, K and Q) 9,373 3,054
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 21,955 14,111
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 83,168 $ 78,476
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt (Note E) $ 11,172 $ 11,151
Current maturities of long term debt (Note F) 1,369 1,492
Accounts payable 16,608 18,706
Accrued liabilities 8,183 5,029
Other current liabilities (Note A) 610 2,737
Income taxes payable (Note M) 260 235
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 38,202 39,350
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations (Notes F, G, and H) 3,366 3,919
Deferred income taxes (Note M) 295 299
Other liabilities -- 44
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 41,863 43,612
- ----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes A, H and I)
Redeemable common stock (Note A) -- 1,994
STOCKHOLDERS' EQUITY (Note J)
Preferred stock, $.01 par value; 27 shares authorized; cumulative
dividends; 9 shares issued and outstanding, $11,094 liquidation
preference including accumulated dividends at October 31, 1997; 41
shares issued and outstanding,
$19,578 liquidation preference at January 31, 1997 1 1
Common stock, $.10 par value; 20,000 shares authorized; 18,640 shares issued
and 18,637 shares outstanding at October 31, 1997; 10,978 shares issued and
10,975 shares outstanding at January 31, 1997 1,864 1,098
Additional paid-in capital 73,357 49,246
Accumulated deficit (33,739) (17,297)
Treasury stock, 3 shares, at cost (178) (178)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 41,305 32,870
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,168 $ 78,476
==================================================================================================================================
See accompanying notes to consolidated financial statements.
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3
<PAGE> 4
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands, except per share amounts)
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==================================================================================================================
Three Months Ended Nine Months Ended
October 31 October 31
------------------ -----------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------
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NET SALES $ 23,350 $ 33,457 $ 88,631 $ 79,088
COST OF SALES 15,910 23,010 60,778 58,306
- ------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 7,440 10,447 27,853 20,782
- ------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and marketing 4,433 4,182 13,521 9,903
Engineering, research and development 1,944 2,298 5,317 5,074
General and administrative 4,912 1,999 12,849 6,076
Purchased in-process research and development (Note A) -- -- -- 13,653
Other operating expenses (Notes A and B) 349 326 11,842 1,508
- ------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 11,638 8,805 43,529 36,214
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (4,198) 1,642 (15,676) (15,432)
- ------------------------------------------------------------------------------------------------------------------
OTHER INCOME (CHARGES)
Investment income 115 155 368 292
Interest expense (567) (349) (1,531) (1,791)
Gain on disposal of assets (2) -- 424 --
Other income (charges) 46 1 (11) 85
- ------------------------------------------------------------------------------------------------------------------
TOTAL OTHER CHARGES (408) (193) (750) (1,414)
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (4,606) 1,449 (16,426) (16,846)
PROVISION FOR INCOME TAXES (Note M) -- 105 16 188
- ------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (4,606) $ 1,344 $(16,442) $(17,034)
==================================================================================================================
INCOME (LOSS) PER COMMON SHARE (Note N)
ACCRUED UNDECLARED DIVIDENDS 38 38 113 113
INTEREST EXPENSE ADJUSTMENT -- 117 -- --
NET INCOME (LOSS) APPLICABLE
TO COMMON SHARES $ (4,644) $ 1,423 $(16,555) $(17,147)
==================================================================================================================
PRIMARY
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 16,348 10,512 13,471 7,168
NET INCOME (LOSS) PER COMMON SHARE: $ (0.28) $ 0.14 $ (1.23) $ (2.39)
==================================================================================================================
FULLY DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) n/a 11,730 n/a n/a
NET INCOME (LOSS) PER COMMON SHARE: n/a $ 0.12 n/a n/a
==================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE> 5
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
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===============================================================================================================
Nine Months Ended
October 31
-----------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(16,442) $(17,034)
- ---------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash used in operating
activities:
Intangible assets valuation allowances (Notes A and B) 8,530 --
Purchased research and development (Note A) -- 12,320
Depreciation and amortization 3,365 1,670
Accounts receivable and inventory reserves (1,636) 2,837
Account and note receivable recoveries 157 131
Debt issuance costs reducing proceeds recorded as interest expense -- 582
Expenses paid through issuances of securities 859 144
Gain on disposals of fixed assets (419) (60)
Unrealized losses (gains) in investment securities -- (90)
Changes in assets and liabilities net of effects of business entity
acquisitions:
Increase in restricted cash (376) 354
Decrease in accounts receivable 3,062 (829)
Decrease in inventories 2,189 (1,065)
(Increase) decrease in other current assets 20 920
Decrease in accounts payable (2,098) (1,631)
Increase in accrued expenses 3,242 934
Increase (decrease) in other current liabilities (109) (173)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 344 (990)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (5,358) (5,236)
Capitalized software development costs (Notes B and D) (3,280) (1,334)
Proceeds from disposal of fixed assets 729 63
Purchase of other assets (Note A) (198) (841)
Cash outlays for acquired companies in excess of cash acquired (Note A) (14) (16,959)
Other receivables (Notes C and O) (2,408) (2,575)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (10,529) (26,882)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock (Note J) 6,175 18,980
Proceeds from issuance of common stock (Note K) 6,556 --
Proceeds from issuance of convertible debentures (Note G) -- 16,831
Redemption of preferred stock (Notes A and J) -- (6,269)
Proceeds from issuance of short-term debt, net of repayments (Note E) 21 (1,552)
Proceeds from long-term debt (Note F) -- 2,847
Repayment of long-term debt (Note F) (407) (1,755)
Repayment of acquisition liabilities (Note A) (3,274) 3,036
Repayment of liability due on cashless warrant exercise (Note K) (1,567) --
Proceeds from stock option exercises (Note L) 63 407
Other (174) 121
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,393 32,646
- ---------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS (2,792) 4,774
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 4,055 910
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,263 $ 5,684
===============================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE> 6
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
Osicom Technologies, Inc. (the "Company") through its subsidiaries designs,
manufactures and markets bandwidth aggregation solutions for
wireless-enabled(TM) and photonic networking which allow businesses to connect
through wire-line and wireless technologies, thereby expanding the reach of
conventional networking. The Company operates in one business segment offering
solutions for local area networks, wide area networks and broadband networks
with products that include remote access servers, switches, embedded systems
solutions (Net+Arm(TM)), and Dense Wavelength Division Multiplexers
(Gigamux(TM)). The Company markets and sells its products and services through a
broad array of channels including worldwide distributors, value added resellers,
original equipment manufacturers ("OEM's"), local and long distance carriers and
governmental agencies.
The preparation of the accompanying unaudited financial statements in
conformity with generally accepted accounting principles requires management to
make estimates that affect the reported amounts of assets, liabilities, revenues
and expenses, the disclosure of contingent assets and liabilities and the values
of purchased assets and assumed liabilities in acquisitions. Actual results
could differ from these estimates.
In the opinion of Management, the accompanying unaudited financial
statements contain all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial position of Osicom
Technologies, Inc. and subsidiaries at October 31, 1997 and the results of
operations for the quarters and nine months ended October 31, 1997 and 1996. The
Consolidated Financial Statements which are contained in Part I, Item 7 of Form
10-KSB for the year ended January 31, 1997 should be read in conjunction with
the accompanying unaudited financial statements; disclosures which duplicate
those contained in Form 10-KSB for the year ended January 31, 1997 have been
omitted from the accompanying unaudited financial statements.
The accompanying consolidated financial statements are the
responsibility of the management of the Company.
A. THE COMPANY, BASIS OF PRESENTATION AND ACQUISITIONS
The Company, incorporated in New Jersey on July 7, 1981, operates as a
holding company for its various subsidiaries, more fully described below. The
companies and assets acquired have been integrated into divisions in accordance
with product line: Networking (including remote access servers routers, hubs,
switches and network interface cards), Broadband and Network Print Servers, and
in accordance with function: Sales, Distribution Sales, Marketing and
Manufacturing; all of which are currently doing business as Osicom Technologies.
For reference purposes acquisitions have been identified by legal entity, which
is not indicative of the organizational integration of the operations of the
Company.
ROCKWELL NETWORK SYSTEMS - On January 31, 1996, Meret Communications,
Inc. ("Meret"), a wholly owned subsidiary, acquired all the assets and assumed
certain specified liabilities of Rockwell Network Systems ("RNS") from Rockwell
International Corporation ("Seller") for approximately $11,000 in cash and notes
in a transaction accounted for as a purchase. In addition, $593 in finders fees
and fees for providing collateral for the notes issued, was paid with a
combination of cash and stock. RNS provides high-speed LAN solutions and
connections to the extended workgroups and servers in high growth networking
(FDDI, Fast Ethernet) markets.
To reflect the decline in net realizable value of purchased assets as
the result of changing market conditions RNS recorded, as other operating
expense, a reduction to the remaining net book value of purchased technology of
$893 during the quarter ended July 31, 1997 and recorded reductions to the net
book value of purchased inventory of $1,869, as cost of sales, and purchased
technology of $3,439, as purchased in-process research and development, during
the quarter ended July 31, 1996.
6
<PAGE> 7
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
DIGITAL PRODUCTS, INC. - In September 1996, the Company acquired Digital
Products, Inc. ("DPI") through a merger with a newly-formed subsidiary DPI
Acquisition Corp. for the Company's common stock valued at $5,000 less agreed
upon merger expenses of DPI and DPI stock option repurchases. 363,356 shares of
common stock and options granted to employees to acquire 51,064 of the Company's
common stock were issued in this transaction. In addition, a new $3,000 line of
credit with a lender provided funds to repay approximately $1,300 owed to the
previous lender and provide additional working capital. DPI produces and markets
to original equipment manufacturers of printers, distributors and end-users a
line of multi-function networking products that provide system, board, and chip
level integrated solutions for local area networks and remote access. The
acquisition is accounted for as a pooling of interests which requires the
inclusion of the results of operations of DPI for all periods presented herein.
(See Note T).
CRAY COMMUNICATIONS, INC. - Effective June 30, 1996, the Company
acquired, in a transaction accounted for as a purchase, 100% of CEH Holdings,
Inc. and its wholly-owned subsidiaries including Cray Communications, Inc.
(collectively "Cray"), the U.S. division of UK-based Cray Electronics Holdings,
PLC, for $11,000 in cash plus preferred stock of the Company valued at $2,068.
The preferred shares are convertible into common stock at the market price at
conversion and are being held in escrow pending resolution of acquisition
contingencies. Cray designs, manufactures, markets, and supports an extensive
range of communications products and systems for remote access and
internetworking markets. Cray provides its customers with products to build
networks that support data, voice, and video transmission over a wide variety of
carrier services as well as being an industry leader in frame relay encryption.
As a result of the Cray acquisition the Company recorded a one-time charge to
earnings for purchased in-process research and development of $6,877.
During the quarter ended July 31, 1997, Cray recorded a reduction to the
net book value of purchased technology of $3,750 to reflect the decline in the
net realizable value of this asset as the result of changing market conditions.
This reduction has been recorded as other operating expense.
DISTRIBUTED SYSTEMS INTERNATIONAL, INC. - In November 1996, the Company
acquired Distributed Systems International, Inc. ("DSI") for the Company's
common stock valued at $1,250. DSI produces and markets FDDI workgroup hub
technology (software and hardware) and the Company acquired DSI to start design
of workgroup ethernet switches with a variety of uplink connections including
gigabit ethernet backbone connections. The acquisition is accounted for as a
pooling of interests which requires the inclusion of the results of operations
of DSI for all periods presented herein. (See Note T).
BUILDERS WAREHOUSE ASSOCIATION, INC. - In September 1996, the Company
acquired all of Builder's Warehouse Association, Inc.'s ("BW") subsidiaries and
receivables, which constituted substantially all of its assets, and assumed the
obligations under convertible securities then outstanding, through the issuance
of .94 common shares for each currently outstanding share of BW; this
transaction resulted in the issuance of 4,879,806 shares. All share amounts for
BW transactions have been restated to reflect the .94 share of Osicom received
for each share of BW. The acquisition was an acquisition of a company under
common control accounted for similar to a pooling of interests which requires
the inclusion of the results of operations of BW for all periods presented
herein and required BW to changed its year end to that of the Company. (See Note
T).
Reference to the Company includes BW for the periods presented herein
where the context requires; the below listed acquisitions were completed by BW
prior to the transaction with the Company.
RELIALOGIC TECHNOLOGY CORPORATION - Effective May 31, 1995, BW acquired
100% of the outstanding common stock of Relialogic Technology Corporation
("RTC"), a designer and manufacturer of add-on products for the multimedia
computer marketplace as well as a distributor of computer products manufactured
by others. At the
7
<PAGE> 8
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
time of this acquisition, the shareholders of RTC gained voting control of BW
and therefore RTC became the acquiring entity. As a result, RTC is the
accounting survivor and reporting successor. The acquisition of RTC by BW was
recorded as a reverse acquisition. The predecessor company's balance sheets were
adjusted to reflect the recapitalization of RTC pursuant to the acquisition. The
historical stockholders' equity of RTC was adjusted to reflect the cost basis of
the RTC shareholders in the net assets of RTC.
During the quarter ended July 31, 1997, RTC recorded a reduction to the
net book value of excess cost over net assets acquired of $233 to reflect the
decline in the net realizable value of this asset as the result of changing
market conditions. This reduction has been recorded as other operating expense.
UNI PRECISION INDUSTRIAL LIMITED - On April 1, 1996, the Company
acquired, in a transaction accounted for as a purchase, 100% of the common stock
of Uni Precision Industrial Limited ("FED"), a Hong Kong corporation, for a
purchase price of approximately $6,000 in cash and debt assumed: $500 was paid
at the closing of the transaction and an additional $5,500 was paid upon the
delivery to the Company of audited financial statements as of the acquisition
date. An additional payment of $5,150 was made 12 months from closing based upon
FED having achieved net income after tax of $3,500 during the 12-month period
ending March 31, 1997. In lieu of cash the former shareholders of Uni received
996,085 shares of the Company's common stock with protection against declines in
value of these shares through April 1998. The Company incurred additional costs
in connection with the purchase of FED of $813, of which $809 was paid through
the issuance of restricted common shares.
SCITEQ ELECTRONICS, INC. - On May 31, 1996, through a merger with a
newly-formed, wholly-owned subsidiary corporation, Sciteq Communications, Inc.
("Sciteq"), the Company acquired, in a transaction accounted for as a purchase,
100% of Sciteq Electronics, Inc., for $600 in cash, plus stock and below-market
stock options of the Company valued at $2,400. An additional payment of $2,000
was made 12 months from closing based upon Sciteq having achieved pre-tax net
income of $750 during the 12 month period ending December 31, 1996; this
liability was included in other current liabilities at January 31, 1997. The
Company incurred additional costs in connection with the purchase of Sciteq of
$579, of which $532 was paid or will be paid through the issuance of common
shares. As a result of the Sciteq acquisition the Company recorded a one-time
charge to earnings for purchased in-process research and development of $1,798.
The former shareholders of Sciteq and option holders who have exercised
their options had the right to have the Company redeem their shares for cash
during a period of 12 days beginning May 31, 1997. 102,136 shares of the 159,148
shares issued at closing were put to the Company during the notice period; the
$1,994 value assigned to the 159,148 shares issued at closing was reclassified
as redeemable common stock at January 31, 1997.
The aggregate repayment to the former shareholders and option holders of
Sciteq of $3,274 is included in financing activities for the nine months ended
October 31, 1997. (See Note K).
PACIFIC DATA PRODUCTS, INC. - On May 24, 1996, the Company, through its
newly-created, wholly owned subsidiary PDP Acquisition Corp. ("PDPA"), acquired
substantially all of the assets of Pacific Data Products, Inc. ("PDP"). The
Company paid $273 in cash and assumed PDP's bank indebtedness of approximately
$2,400 in return for substantially all of PDP's assets, including cash, accounts
receivable, inventory, fixed assets and intangibles including patents,
trademarks, copyrights, in-process software development and certain specified
agreements. The Company incurred additional costs in connection with the
purchase of PDP's assets of $123 of which $121 was paid through the issuance of
common shares. As a result of the asset acquisition by PDPA the Company recorded
a one-time charge to earnings for purchased in-process software development
costs of $1,539.
8
<PAGE> 9
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
During the quarter ended July 31, 1997, PDPA recorded a reduction to the
net book value of its customer list of $812 to reflect the decline in the net
realizable value of this asset as the result of changing market conditions. This
reduction has been recorded as other operating expense.
PDPA entered into an agreement with Coast Business Credit ("Coast") for
a $5,000 credit facility secured by all of PDPA's newly-acquired assets. The
Company provided a $500 infusion of working capital to PDPA, as well as a
limited guarantee of $750 to effectuate the Coast credit facility. In January
1997, the Company issued 1,000 shares of Series B preferred stock in full
satisfaction of the then outstanding loan to PDPA. (See Note J).
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The balance sheets reflect the accounts
and the consolidated statements of operations for the three months and nine
months ended October 31, 1997 include the results of Osicom, its wholly-owned
subsidiaries Meret Communications, Inc. ("Meret"), including its RNS division,
DPI, Cray, DSI, BW, RTC, R-Net International, Inc. ("Rnet"), FED, Sciteq, and
PDPA. The consolidated statements of operations for the three and nine months
ended October 31, 1996 include the results of operations of Osicom, Meret,
including its RNS division, DPI, DSI, BW and RTC for the periods presented, Cray
from June 30, 1996, FED from April 1, 1996, Rnet from November, 1995
(formation), Sciteq from May 31, 1996 and PDPA from May 24, 1996. (See Note A).
All significant intercompany transactions and balances have been eliminated in
consolidation. The consolidated group is referred to individually and
collectively as the "Company".
USE OF ESTIMATES - The financial statements are prepared in conformity
with generally accepted accounting principles and the instructions set forth in
the Securities and Exchange Commission regulations which requires management to
make estimates that affect the reported amounts of assets, liabilities, revenues
and expenses, the disclosure of contingent assets and liabilities and the values
of purchased assets and assumed liabilities in acquisitions. Actual results
could differ from these estimates. The results of operations for the three and
nine months ended October 31, 1997 are not necessarily indicative of the results
to be expected for the fiscal year ending January 31, 1998.
CASH AND CASH EQUIVALENTS - All cash on hand and in banks, certificates
of deposit and other highly-liquid investments with original maturities of three
months or less, when purchased.
RESTRICTED CASH - Restricted cash represents collateral related to FED's
credit facilities as more fully described in Note E.
ACCOUNTS AND NOTES RECEIVABLE - In the normal course of business, the
Company extends unsecured credit to its customers related to the sales of
various products. Typically credit terms require payment within thirty days from
the date of shipment. The Company evaluates and monitors the creditworthiness of
each customer on a case-by-case basis.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company provides an allowance for
doubtful accounts based on its continuing evaluation of its customers' credit
risk. The Company generally does not require collateral from its customers.
9
<PAGE> 10
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
INVENTORY - Inventory, comprised of raw materials, work in process,
finished goods and spare parts, are stated at the lower of cost (first-in,
first-out method) or market. The Company provides a valuation allowance based on
product turnover and competing, emerging technologies.
Inventories at October 31, 1997 consist of:
<TABLE>
<S> <C>
Raw material $17,061
Work in process 5,069
Spare parts 498
Finished goods 3,566
--------
26,194
Less: Valuation reserve (4,945)
---------
$21,249
=========
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques as appropriate. Except for financial instruments issued in
conjunction with related party transactions management believes that there are
no material differences between the recorded book values of its financial
instruments and their estimated fair value. It is not practicable to estimate
the fair value of related party notes payable or shareholder notes receivable of
the Company due to their related party nature.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at
historical cost. Depreciation and amortization are provided over the estimated
useful lives of the individual assets or the terms of the leases if shorter
using accelerated and straight-line methods. Useful lives for property and
equipment range from 3 to 15 years. Depreciation of land improvements and
buildings is computed using the straight-line method over 39 years.
Capitalized leases are initially recorded at the present value of the
minimum payments at the inception of the contracts, with an equivalent liability
categorized as appropriate under current or non-current liabilities. Such assets
are depreciated on the same basis as described above. Interest expense, which
represents the difference between the minimum payments and the present value of
the minimum payments at the inception of the lease, is allocated to accounting
periods using a constant rate of interest over the lease.
SOFTWARE DEVELOPMENT - Software development costs where technological
feasibility has not been established are expensed in the period in which they
occurred, otherwise, development costs that will become an integral part of the
Company's products are deferred in accordance with Statement of Financial
Accounting Standards ("SFAS") Nos. 2 and 86. The deferred costs are amortized
using the straight-line method over the remaining estimated economic life of the
product or the ratio that current revenues for the product bear to the total of
current and anticipated future revenues for that product. Amortization expense
for the three and nine months ended October 31, 1997 was $101 and $261,
respectively, over 3 to 7 years. Amortization expense for the three and nine
months ended October 31, 1996 was $39 and 186, respectively over 3 years.
Accumulated amortization was $189 as of October 31, 1997.
The recoverability of capitalized software costs are reviewed on an
ongoing basis primarily based upon projected discounted cash future operating
cash flows from each software product line. The excess amount, if any, of the
remaining net book value over the calculated amount is fully reserved. During
the quarter ended July 31, 1997, the Company recorded a reduction to the net
book value of its capitalized software development costs of $2,719 to reflect
the decline in the net realizable value of these assets as the result of
changing market conditions. This reduction has been recorded as other operating
expense.
10
<PAGE> 11
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
PURCHASED TECHNOLOGY - Technology assets were acquired in connection
with the acquisitions of Cray, the RNS division of Meret and Sciteq. These
assets were analyzed by the Company during and after the close of the related
acquisition. The discounted projected future cash flow from proven technology
and software are capitalized and amortized over their remaining estimated
economic life (7 years) using the straight-line method. Accumulated amortization
was $412 at October 31, 1997. In-process research and development purchased by
the Company is expensed at the date of purchase.
The Company assesses the recoverability of purchased technology
primarily by determining whether the amortization of the net book value of
purchased technology over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of the impairment, if any, of the net book value of the excess cost over net
assets acquired is measured primarily based on projected discounted future
operating cash flows using a discount rate commensurate with the Company's cost
of capital. During the quarter ended July 31, 1997, Cray and RNS recorded
reductions to the net book value of purchased technology of $4,643 to reflect
the decline in the net realizable value of these assets as the result of
changing market conditions. This reduction has been recorded as other operating
expense. (See Note A).
EXCESS OF COST OVER NET ASSETS ACQUIRED - Excess of cost over net
assets acquired is being amortized over 7 to 15 years and represents the excess
of the purchase price over the fair value of net assets acquired in connection
with RTC and FED. Excess cost over net assets acquired and accumulated
amortization at October 31, 1997 were $7,235 and $372, respectively; cost
includes the additional payment made to the former shareholders of FED based
upon FED's net income during the 12-month period ending March 31, 1997 (see Note
A). The Company assesses the recoverability of excess of cost over net assets
acquired primarily by determining whether the amortization of the net book value
of the excess of cost over net assets acquired over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of net book value of the excess of cost over net assets
acquired impairment, if any, is measured primarily based on projected discounted
future operating cash flows using a discount rate commensurate with the
Company's cost of capital. During the quarter ended July 31, 1997, RTC recorded
a reduction to the net book value of excess cost over net assets acquired of
$233 to reflect the decline in the net realizable value of this asset as the
result of changing market conditions. This reduction has been recorded as other
operating expense. (See Note A).
NEGATIVE GOODWILL - Negative goodwill was amortized on a straight-line
basis over three years. Operating expenses for the three and nine months ended
October 31, 1996 includes amortization expense of $0 and $325, respectively.
OTHER INTANGIBLE ASSETS (CUSTOMER LISTS) - Customer lists (PDPA) are
amortized on a straight-line basis over its estimated economic life (5 years);
as a result of changing market conditions PDPA recorded a reduction to the net
book value of its customer list of $812 to reflect the decline in the net
realizable value of this asset and there is no remaining cost after this
reduction. This reduction has been recorded as other operating expense.
OTHER INVESTMENTS - Other investments (included in other noncurrent
assets) include non-marketable securities held in other companies and an
investment in a joint venture net of an allowance for permanent impairment of
value.
REVENUE RECOGNITION - The Company generally recognizes product revenue
upon shipment of product. Revenue from service obligations is deferred and
recognized over the lives of the contracts. The Company accrues for warranty
costs, sales returns, and other allowances at the time of shipment.
11
<PAGE> 12
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
INCOME TAXES - Income taxes are accounted for in accordance with SFAS
No. 109 "Accounting for Income Taxes." The statement employs an asset and
liability approach for financial accounting and reporting of deferred income
taxes generally allowing for recognition of deferred tax assets in the current
period for future benefit of net operating loss and research credit
carryforwards as well as items for which expenses have been recognized for
financial statement purposes but will be deductible in future periods. A
valuation allowance is recognized, if on the weight of available evidence it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. At October 31, 1997, the deferred taxes and income tax
provisions recorded in the financial statements relate primarily to FED's
operations in China. (See Note M).
ADVERTISING - The Company expenses advertising expenditures as incurred.
Advertising expenses of the Company consist of allowances given to customers as
well as direct expenditures by the Company.
INCOME AND LOSS PER COMMON SHARE - Income and loss per common share is
computed by dividing net loss by the weighted average number of common shares
and dilutive common equivalent shares outstanding during each period presented.
Convertible securities outstanding and common stock equivalents are not included
in the earnings per share computations for the three and nine months ended
October 31, 1997 and the nine months ended October 31, 1996 as they would be
anti-dilutive. All references in the financial statements of common shares and
per share data give effect to the 2 for 1 stock split effective February 12,
1996. In addition, SFAS No. 128, "Earnings Per Share" is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. SFAS 128 requires dual presentation of basic and diluted earnings per
share ("EPS") on the face of the income statement. It also requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. This statement
also requires restatement of all prior-period EPS data presented. The Company
has not determined the effect on its EPS from the adoption of this statement.
FOREIGN CURRENCY TRANSLATION - Foreign operations of the Company have
been translated into U.S. dollars in accordance with the principles prescribed
in SFAS No. 52, "Foreign Currency Translation". For the three and nine months
ended October 31, 1997 and 1996 the current rate method was used whereby all
assets and liabilities are translated at period end exchange rates, and the
resultant translation adjustments are included as a separate component of
stockholders' equity. Revenues and expenses are translated at the average rates
of exchange prevailing throughout the period, and the resultant gains and losses
are included in net earnings.
STOCK-BASED COMPENSATION - The Company has adopted SFAS No. 123,
"Stock-Based Compensation" as of February 1, 1996. SFAS No. 123 also encourages,
but does not require companies to record compensation cost for stock-based
employee compensation. The Company has chosen to continue to account for
stock-based compensation utilizing the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options issued to employees
is measured as the excess, if any, of the fair market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock. The Company does not grant options to employees at prices below the then
market value. (See Note L).
CAPITAL STRUCTURE - SFAS No. 129, "Disclosure of Information about
Capital Structure" is effective for financial statement periods issued for
periods ending after December 15, 1997. The new standard reinstates various
securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by SFAS No. 128. The
Company does not expect the adoption of SFAS No. 129 to have a material effect,
if any, on its financial position or results of operations.
COMPREHENSIVE INCOME - SFAS No. 130, "Reporting Comprehensive Income"
is effective for financial statements with fiscal years beginning after
December 15, 1997. Earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. The Company has not
determined the effect on its financial position or results of operations, if
any, from the adoption of this statement.
SEGMENT REPORTING - SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" is effective for financial statements with
fiscal years beginning after December 15, 1997. The new standard requires that
public business enterprises report certain information about operating segments
in complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain information about
their products and services, the geographic areas in which they operate and
their major customers. The Company does not expect the adoption of SFAS No. 131
to have a material effect, if any, on its results of operations.
12
<PAGE> 13
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
C. OTHER RECEIVABLES
Other receivables at October 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Advance to non-affiliate at prime plus 3% including accrued
interest (see Note K) $2,157
8% demand loan due from an entity controlled by a director
including accrued interest (see Note O) 170
Due to Company from former shareholders and option holders
of DPI 260
8% demand loans due from non-affiliates including accrued
interest 230
Other 74
--------
$2,891
========
D. PROPERTY AND EQUIPMENT
Property and equipment of the Company consisted of the following
components as of October 31, 1997:
Manufacturing, engineering and plant equipment and software $27,841
Office furniture, fixtures and information systems 4,929
Land and building 5,180
Automobiles 173
Leasehold and building improvements 2,756
--------
Total property and equipment 40,879
Less: Accumulated depreciation (24,520)
--------
Net book value at October 31, 1997 $16,359
========
</TABLE>
E. SHORT TERM DEBT
Short term debt at October 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Floating interest rate loan (2.5% over Coast's prime rate)
secured by all the tangible assets of Meret; weighted average
interest rate for the nine months ended October 31, 1997 was 15.2% $663
Floating interest rate loan (2.5% over Coast's prime rate)
secured by all the tangible assets of Cray; weighted average
interest rate for the nine months ended October 31, 1997 was 12.5% 4,934
Floating interest rate loan (2.5% over Coast's prime rate)
secured by all the tangible assets of DPI; weighted average
interest rate for the nine months ended October 31, 1997 was 11.9% 1,751
Floating interest rate loans; a portion of the banking facilities
of FED more fully described below; weighted average interest
rate for the nine months ended October 31, 1997 was 8.8% 3,562
Floating interest rate loan (1% over bank's base lending rate)
secured by accounts receivable and a director's personal
guarantee; weighted average interest rate for the nine months
ended October 31, 1997 was 10.3% 262
--------
$11,172
========
</TABLE>
On January 31, 1996, the Company's wholly owned subsidiary, Meret,
increased its then $5,000 line of credit from Coast Business Credit ("Coast"),
to $8,000; the line of credit is collateralized by substantially all the assets
of Meret including accounts receivable, inventory and property and equipment.
Osicom has guaranteed this line, for
13
<PAGE> 14
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
which Meret is the borrower, to the extent of $1,000. This line of credit
provides for interest at 2.5% over the bank's prime rate but not less than 8%
(11.0% at October 31, 1997). In addition, the Company issued to Coast three year
warrants to purchase shares of its common stock at the respective market prices
at funding: 10,000 shares of its common stock at $3.34 per share expiring June
11, 1998 and 40,000 shares of its common stock at $5.31 per share expiring
January 31, 1999. Advances are limited to 80% of eligible accounts receivable
and 25% of eligible raw materials and finished goods not to exceed the lesser of
$1,000 or 75% of then outstanding accounts receivable loan. The agreement
remains in effect until February 1, 1999 and automatically renews for successive
additional terms of one year on a continuous basis unless terminated by written
notice of either party or by default. Additionally, the agreements provide for
term loans more fully described in Note F. Meret paid Coast a $30 origination
fee and the quarterly facility fee was increased to $4. The interest rate on the
Meret line of credit remained unchanged at 11.0% for the nine months ended
October 31, 1997. The highest and average amounts outstanding were $3,070 and
$1,708, respectively, during the nine months ended October 31, 1997.
On October 2, 1996, the Company's wholly owned subsidiary, Cray,
obtained a $5,000 line of credit from Coast. The line of credit is
collateralized by substantially all the assets of Cray and a guarantee by
Osicom. Advances are limited to 80% of eligible receivables and 30% of eligible
inventory. The loan bears interest at 2.5% over the bank's prime rate but not
less than 8% (11.0% at October 31, 1997). The proceeds of this loan were used,
in part, to repay the line of credit outstanding at the acquisition of Cray. The
highest and average amounts outstanding were $4,934 and $3,765, respectively,
during the nine months ended October 31, 1997.
On October 11, 1996 DPI obtained a $3,000 line of credit from Coast. The
line of credit is collateralized by substantially all the assets of DPI and a
guarantee by Osicom. Advances are limited to 80% of eligible receivables and 30%
of eligible inventory. The loan bears interest at 2.5% over the bank's prime
rate but not less than 8% (11.0% at October 31, 1997). The proceeds of this loan
were used, in part, to repay the line of credit outstanding at the acquisition
of DPI under which the interest rate was 4% over the lender's prime rate. The
highest and average amounts outstanding were $2,919 and $2,250, respectively,
during the nine months ended October 31, 1997.
At October 31, 1997, FED's short term bank borrowings consisted of
$1,617 bank overdrafts and $3,630 trust receipt loans. Aggregate banking
facilities as of that date were approximately $9,917 from various banks for
overdrafts, loans and trade financing. Unused facilities as of the same date
amounted to approximately $1,681 (overdrafts: $512, loan and trade financing:
$1,170). These facilities are secured by a priority lien on FED's leasehold land
and buildings (see Note D), a pledge of FED's $2,121 fixed bank deposits, liens
on FED's inventories released under trust receipt loans, and personal
guarantees by two former shareholders and present directors of FED. The highest
and average amounts outstanding during the nine months ended October 31, 1997
were $4,087 and $2,755, respectively.
At October 31, 1997, the Company had outstanding indebtedness under its
revolving demand loan agreement with Banca di Roma of $262. The agreement
provides for interest at 1% above the bank's base lending rate, which was 9.5%,
at October 31, 1997. The line of credit is collateralized by accounts receivable
and personally guaranteed by a director of the Company. The highest and average
amounts outstanding were $387 and $262, respectively, during the nine months
ended October 31, 1997.
The Company was in compliance with its debt covenants at October 31,
1997.
14
<PAGE> 15
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
F. LONG TERM DEBT
Long term debt at October 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Variable rate 8 year mortgage (1% over Hong Kong prime rate);
interest rate at October 31, 1997 was 9.75% $809
Variable rate 10 year mortgage (1% over Hong Kong prime rate);
interest rate at October 31, 1997 was 9.75% 606
Variable rate 30 year mortgage note payable (5.5% over LIBOR
rate); interest rate at October 31, 1997 was 11.5% 1,321
Floating interest rate term loans (2.5% over Coast's prime rate)
secured by machinery and equipment of Meret; interest rate at
October 31, 1997 was 11.0% 435
Floating interest rate notes payable to shareholder (former
shareholders of DPI) (4% over prime rate); interest rate at
October 31, 1997 was 12.5% 59
5.5% term note payable to shareholder (former shareholder
and present officer of DPI) 100
Debentures payable (See Note G) 410
6.4% term note payable 288
Obligations under finance leases (See Note H) 707
------
4,735
Less: Current ortion (1,369)
------
$3,366
======
</TABLE>
On March 25, 1996, Meret purchased land and building in San Diego,
California for $1,779 in cash. On April 24, 1996, Meret entered into a mortgage
agreement with a lender in the amount of $1,331 amortized over 30 years with an
adjustable interest rate of 5.5% over the LIBOR rate (adjusted bi-annually),
with an initial rate of 8.95% for the initial six months. The interest rate at
October 31, 1997 was 11.5%.
In addition, Meret has two terms loans outstanding with original amounts
of $915 and $480, on December 4, 1995 and January 31, 1996, respectively, which
are collateralized by machinery and equipment. Combined monthly principal
payments are $39 per month; interest at 2.5% over Coast's prime rate is due
monthly.
DPI has various notes payable to certain of its former shareholders
notes due December 1997 with interest only payable monthly. In lieu of cash a
noteholder received 114,537 shares of the Company's common stock in satisfaction
of principal and accrued interest of $269 during October 1997.
Long term debt including capitalized leases at October 31, 1997 is
payable by year as follows:
<TABLE>
<S> <C>
1998 $1,369
1999 425
2000 756
2001 196
2002 203
2003 and later 1,786
-------
$4,735
=======
</TABLE>
15
<PAGE> 16
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
G. DEBENTURES PAYABLE
During the year ended January 31, 1997, the Company received net
proceeds of $16,831 from the private placement of convertible debentures to
unaffiliated parties. The Company issued 2,187,319 shares of its common stock in
conversions of these securities and accrued interest thereon through January 31,
1997; no conversions occurred during the nine months ended October 31, 1997.
The Company has the right to call the debentures prior to conversion at 90% of
face value and has the right to assign this call option. The debentures bear
interest at 8.0% beginning specified periods after date of issue which is
payable in common shares of the Company. The debentures are convertible into
common shares of the Company at a maximum of $18.00 per share or at the average
closing price as reported by Nasdaq for the five preceding business days.
Including the 2.5% commission imputed on these placements the effective
annualized interest rate on these securities for the period they were
outstanding was approximately 13%. At October 31, 1997, $410 of debentures, with
a $550 face amount, were outstanding.
H. LEASES AND OTHER COMMITMENTS
Rental expense under operating leases was $582 and $637 for the three
months ended October 31, 1997 and 1996, respectively and $1,713 and $1,538 for
the nine months ended October 31, 1997 and 1996, respectively. The table below
sets forth minimum payments under capital and operating leases with remaining
terms in excess of one year, at October 31, 1997:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ---------
<S> <C> <C>
1998 $416 $2,094
1999 228 1,771
2000 161 1,012
2001 - 372
2002 - -
---------- ---------
805 $5,249
======
Less: Amount representing interest (98)
----------
Present value of minimum annual rentals $707
==========
</TABLE>
As of October 31, 1997, FED had commitments and contingent liabilities
for open letters of credit, discounted bills and shipping guarantees executed in
favor of various banks totaling approximately $3,260.
Under the terms of the purchase agreement for Dynair, the Company is
obligated to pay the seller additional cash consideration equal to a percentage
of net revenues in excess of $5,000 within a post-closing year derived from the
sales of Dynair products, for each of the five years subsequent to the
acquisitions date. As of October 31, 1997, no liability related to this
additional consideration has been incurred as the target net revenues have not
been met.
One officer and former shareholder of Sciteq has a three year employment
contract ending May 31, 1999 under which Sciteq is obligated to make payments
of $110 per year. The Company has the right to terminate this contract
for cause.
Two employees and former shareholders of DSI have three year employment
contracts ending October 23, 1999 under which DSI is obligated to make payments
of $90 per year to each employee; additionally, each employee is
16
<PAGE> 17
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
entitled to receive a $50 bonus, payable in cash or stock at the Company's
option, on October 31, 1998 if still employed at DSI. The Company has the right
to terminate these contracts for cause.
One employee and former shareholder of DPI has a two year employment
contract ending September 12, 1998 under which DPI is obligated to make payment
of $150 per year; additionally, the employee is entitled to receive a $50 bonus,
payable in cash or stock at the Company's option at the end of the contract if
still employed at DPI. The Company has the right to terminate this contract for
cause.
I. LITIGATION
In October 1997, the Company entered into an agreement resolving the
claims against BW in litigation filed May 1994 seeking previously unspecified in
compensatory damages, costs and attorney fees for allegedly violating sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and committing common law
fraud and deceit through the issuance of positive statements. Osicom was named
recently as a party to a lawsuit solely because of its September 1996
acquisition of substantially all of the assets of BW. The lawsuit did not name
any past or present employee, officer, or director of Osicom as a defendant. The
agreement between Osicom and the plaintiff class allows Osicom to assert the
claims brought by the plaintiff against the original defendants in the action in
return for a payment of $600 in value of Osicom common stock to the certified
class members (persons who purchased stock of BW between May 3, 1993 and April
17, 1994). The plaintiff class previously had sought $3.6 million in damages.
200,000 shares of Osicom's common stock were issued to the escrow agent for the
plaintiffs in connection with this settlement.
The Company and its subsidiaries are involved in various other legal
proceedings and claims incident to the normal conduct of its business. Although
it is impossible to predict the outcome of any outstanding legal proceedings,
the Company believes that such legal proceedings and claims, individually and in
the aggregate, are not likely to have a material effect on its financial
position, the results of operations or cash flows.
J. STOCKHOLDERS' EQUITY
The Company is authorized to issue the following shares of stock:
20,000,000 shares of Common Stock ($.10 par value)
2,500 shares of Preferred Stock, Series A ($.01 par value)
1,000 shares of Preferred Stock, Series B ($.01 par value)
10,000 shares of Preferred Stock, Series C ($.01 par value)
3,000 shares of Preferred Stock, Series D ($.01 par value)
10,000 shares of Preferred Stock, Series E ($.01 par value)
The Company has outstanding the following shares of preferred stock:
<TABLE>
<CAPTION>
Shares Par Liquidation
Outstanding Value Preference
----------- ----- -----------
<S> <C> <C> <C>
Series A 2,500 $-- $2,500
Accrued, unpaid dividends 775
Series B 1,000 -- 2,366
Series C 2,000 -- 2,000
Series D 2,853 -- 2,853
Series E 600 1 600
------- ------- -------
8,953 $1 $11,094
======= ======= =======
</TABLE>
The Series A Convertible Preferred stock was issued on August 21, 1992
in exchange for $2,500 of trade debt. The preferred stock was ascribed a value
of $250 based on the estimated market value of the underlying
17
<PAGE> 18
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
common stock of the Company. The preferred stock accrues cumulative dividends at
6% and is convertible into common stock (i) at the option of the holder at the
market price of the common stock provided the market price is equal to or
exceeds $67.50, and (ii) at the option of the Company at 110% of the market
price of the common stock. In no event shall a conversion result in the holder
having more than 49% of the outstanding common stock of the Company. The shares
of preferred stock are redeemable at the option of the Company at $1,000 per
share. At October 31, 1997, there was $775 of unpaid cumulative preferred stock
dividends.
In January 1997, the Company issued 1,000 shares of Series B preferred
stock, valued at $1,656, with a $0.01 par value and a $2 liquidation value in
full satisfaction of the then outstanding loan to PDPA. Holders of Series B
preferred stock are not entitled to vote nor receive dividends. Each share of
Series B preferred stock is convertible at the option of the holder into the
number of shares of the Company's common stock having a market value equal to $2
($2,366 in the aggregate). "Market value" is the average of the closing price
for the Company's common stock for the five immediately preceding trading days
as reported by Nasdaq. The Company is not obligated to register the common
shares issuable upon conversion of Series B preferred.
In July 1996, the Company issued 10,000 shares of Series C preferred
stock with a $0.01 par value and a $1,000 liquidation value receiving net
proceeds of $7,525; the Company has the right to call the shares prior to
conversion at 90% of conversion value and has the right to assign the call
option. Holders of Series C preferred stock are not entitled to vote. During the
fourth quarter of fiscal 1997 the Company issued 6,738 shares of Series C
preferred in exchange for convertible securities previously outstanding. The
Series C preferred stock bears a cumulative 8% annual dividend payable
quarterly; such dividend is payable at the Company's option in either cash or
common stock at then market value. Each share of Series C preferred stock is
convertible into common shares at the lesser of $18.00 or the then market value
at (i) the option of the holder beginning 40 days from issuance or (ii) at the
option of the Company beginning after June 30, 1997. Any shares of Series C
preferred stock unconverted as of December 30, 1999 are subject to mandatory
conversion at the then market value as of that date. In no event shall a
conversion result in a holder owning, or deemed to beneficially own, more than
4.99% of the then issued and outstanding common stock of the Company. An
aggregate of 1,156,633 shares of the Company's common stock have been issued in
conversion of these securities and accrued dividends thereon of which 463,448
were issued during the nine months ended October 31, 1997.
As of June 30, 1996, the Company issued 2,853 shares of Series D
preferred stock, valued at $2,068, with a $.01 par value and a $1 liquidation
value in connection with its acquisition of Cray; the Company has the right to
redeem the shares prior to conversion at 100% of conversion value. Holders of
the Series D preferred stock are not entitled to vote and the shares bear no
dividends. Each share of Series D preferred stock is convertible into common
shares at the then market value. The shares are being held in escrow pending
resolution of acquisition contingencies.
In September 1996 and January 1997, the Company issued 9,248 shares of
Series E preferred stock with a $.01 par value and a $1 liquidation value
receiving net proceeds of $6,732. During the quarter ended April 1997 the
Company issued an additional 8,053 shares of Series E preferred stock receiving
net proceeds of $6,175 including $1,216 from the sale of an assigned call of
previously outstanding Series C preferred stock. In connection with this
placement a then director of the company received a finder's fee of $254. The
Series E preferred stock does not bear dividends, has voting rights on an "as
converted into common share basis", and is not convertible for 180 days from
issuance, is subject to mandatory conversion no later than December 31, 2000,
and the market value for purposes of conversion into common shares is limited to
a maximum of the stated conversion price (varying from $9.25 to $11.25 per
common share) and a minimum of $4.00 per common share. The Company has the right
to call these shares at 90% of the then outstanding face amount if the market
value at which the shares would convert into common stock is less than or equal
to $10.00 per common share.
18
<PAGE> 19
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
An aggregate of 3,320,696 shares of the Company's common stock have been
issued in conversions of the Series E preferred stock and accrued dividends
thereon of which 2,781,035 were issued during the nine months ended October 31,
1997.
In July 1996, BW issued 215,060 shares of its Series B preferred stock
with a $0.01 par value and a fifty dollar liquidation value receiving net
proceeds of $8,091. The rights of the BW Series B preferred stock are identical
to that of Series C except as regards to: the period from issuance prior to
which the holder may not convert the shares, which varies from 40 to 90 days. In
connection with the acquisition of BW, the Company has assumed the obligations,
including conversions, for the Series B preferred shares. An aggregate of
952,170 shares of the Company's common stock have been issued in conversions of
the Series B preferred stock and accrued dividends thereon of which 127,460 were
issued during the nine months ended October 31, 1997. No Series B shares remain
outstanding at October 31, 1997.
K. OTHER CAPITAL STOCK TRANSACTIONS AND BUSINESS ACQUISITIONS
STOCK SPLIT - In February 1996, approval was granted for a two for one
stock split effective February 12, 1996. The effect of this change was reflected
in the financial statements retroactively as if the reverse splits occurred at
the beginning of the earliest period reported.
PRIVATE PLACEMENTS - During the nine months ended October 31, 1997, the
Company issued 824,093 common shares and warrants to acquire 782,888 common
shares at $7.50 per share expiring three years from issue receiving net proceeds
of $5,528. The holders have the right to request additional shares ("price
adjustment shares") to be issued by the Company to the extent that the five day
average trading price of the shares issued in these transactions is below $7.50
per share at the time of the request; such request may be made only once with
respect to the original shares which have been held continuously by the holder
from the original issue date. In the event a price adjustment is requested the
related warrant exercise price is adjusted to the lesser of $7.50 or 125% of the
market value used for purposes of calculating the price adjustment shares.
Holders of 724,093 shares requested reset shares during three months ended
October 31, 1997 and an additional 711,412 shares were issued. Holders of
100,000 shares have requested reset shares and an additional 203,030 shares were
issued subsequent to October 31, 1997. The exercise price of warrants to acquire
782,888 common shares were reduced to $3.09 to $4.88 per share of which 390,000
were exercised during December, 1997. In addition, the Company issued 437,630
common shares receiving net proceeds of $1,028 during the three months ended
October 31, 1997.
BW LITIGATION SETTLEMENT - In October 1997, the Company issued 200,000
common shares valued at $600 in settlement of a lawsuit, described in Note I. To
the extent the market value of such shares, as determined by the closing bid
price as reported by Nasdaq, is higher or lower than $600 at liquidation shares
will be returnable to or issuable by the Company.
ABCN INVESTMENT - Effective March 20, 1997, the Company and Asia
Broadcasting Communications Network, Ltd. ("ABCN"), established a strategic
alliance. ABCN, a privately-held media and communications company based in
Bangkok, Thailand, was established to create the first Asia-wide broadband
distribution platform for direct broadcasting services, multi-media and high
speed Internet access and online services. Under the terms of the alliance, ABCN
agrees that the Company shall be the designated supplier of ABCN's network
equipment and technology and of its customers' terminal devices subject to the
satisfaction of certain conditions. As part of the strategic alliance, pursuant
to the terms of a share purchase agreement dated March 20, 1997, the Company
acquired 5,000,000 common shares (1.8%) of ABCN, at a purchase price of $1.45
per share, in exchange for 674,419 shares of the Company's common stock valued
at $7,250 and an option to acquire an additional 5,000,000 shares at $1.45 per
share. The Company issued 121,601 additional common shares to ABCN during August
1997 as the market value of the 674,419 shares on the date the shares were
registered was less than $5,000. The
19
<PAGE> 20
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
Company incurred $6 costs, paid in cash, in connection with this investment.
Pursuant to a separate loan agreement the Company advanced $2,000 to ABCN at
3.0% over prime rate due upon demand; accrued and unpaid interest at October 31,
1997 totaled $157.
CRAY ACQUISITION - In the acquisition described in Note A, the Company
issued 26,000 shares of common stock valued at $175 in payment of costs incurred
in connection with the transaction
DPI ACQUISITION - In the acquisition described in Note A, the Company
issued 363,356 shares of its common stock to the holders of DPI's outstanding
common stock. In addition, the Company issued 14,000 shares of its common stock
valued at $83 in payment of costs incurred in connection with the transaction.
RNS ACQUISITION - In the acquisition described in Note A, the Company
issued 61,224 shares of its common stock valued at $214 in payment of costs
incurred in connection with the transaction.
SCITEQ ACQUISITION - As described in Note A, BW issued 159,148 shares of
common stock to the holders of Sciteq's outstanding common stock and 54,755
shares of common stock in payment of costs incurred in connection with the
transaction. In addition the BW issued options to acquire an additional 56,594
shares of common stock at $5.34 per share. The Company satisfied its $2,000
liability arising from the earn-out contingency to the former shareholders of
Sciteq to issue 137,683 additional shares and 48,960 additional options in cash
and the additional shares were issued in connection with the private placements
of common stock above.
COVENANT NOT TO COMPETE - In connection with the acquisition of Sciteq,
a former shareholder and officer of Sciteq executed a covenant not to compete
with the Company and any of its subsidiaries for a period of five years. Shares
with a value at issue of $200 will be issued in quarterly installments over two
years. The first five payments resulted in the issuance of 19,475 shares of
common stock of which 12,045 were issued during the nine months ended October
31, 1997.
FED ACQUISITION - In connection with the Company's acquisition of FED on
March 31, 1996 BW issued 133,480 shares of its common stock valued at $809 in
payment of costs incurred in connection with the transaction to two former
officers of RTC. (See Note A).
PDP ACQUISITION - In connection with the Company's acquisition of the
assets of PDP on May 24, 1996 the BW issued 16,168 shares of its common stock
valued at $121 in payment of costs incurred in connection with the transaction
to a director. (See Note A).
WARRANTS - In connection with the placements of convertible debentures
the Company issued warrants to purchase 96,056 shares at prices ranging from
$8.125 to $14.36 which expire at various dates through May 30, 1998 of which
51,959 expired unexercised during the nine months ended July 31, 1997. The value
of these warrants is included in the placement fee recorded as interest expense
during the year ended January 31, 1997.
In connection with the placements of convertible preferred stock the
Company issued warrants to purchase 367,994 shares at prices ranging from $8.00
to $18.00 which expire at various dates through July 15, 1998 of which 258,734
expired unexercised during the nine months ended July 31, 1997 and 75,000 shares
at $8.00 which expire March 5, 1999. The value of these warrants is included in
the placement fee recorded as a reduction to the proceeds received in the
placement thereby reducing the increase to additional paid in capital during the
year ended January 31, 1997 and nine months ended October 31, 1997.
20
<PAGE> 21
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
In addition, warrants to purchase 252,348 shares at prices ranging from
$3.34 to $5.31 are outstanding from bank loan financing agreements and business
acquisitions consummated during the years ended January 31, 1993 through 1997.
100,000 warrants, exercisable at $4.00 per share through December 31, 2002, may
be redeemed by the Company for $1,000. 558,414 warrants exercisable at $5.638
held by entities controlled by an officer and a former director, 27,971 warrants
exercisable at $5.638 and 50,000 warrants exercisable at $4.125 were exercised
during May, 1997 in "cashless" transactions. Of the $2,315 liability
representing the difference between the closing price of the Company's common
shares at exercise and the exercise price $1,567 was paid in cash with the
remaining balances applied to amounts due the Company under indemnification
agreements and an outstanding other receivable.
RTC ACQUISITION - Pursuant to an Amended and Restated Stock Purchase
Agreement dated May 31, 1995 BW acquired all the outstanding shares of RTC, a
California corporation, which began business on July 1, 1994 and in which
certain officers and directors had a indirect ownership interest. The agreement
provided that the Company issue 1,095,560 common shares and 4,000 Class A
Preferred shares (convertible into 1,074,420 common shares). Acquisition costs
to the Company in this transaction were $250. The acquisition was recorded as a
"reverse merger". (See Note A).
L. STOCK OPTION PLANS AND STOCK AWARD PLAN
The Company has two stock options plans in effect: The 1987 Stock Option
Plan and the 1988 Stock Option Plan. Pending approval by the shareholders the
Company has adopted the 1997 Incentive and Non-Qualified Stock Option Plan and
the 1997 Director Stock Option Plan. The stock options have been made available
to certain employees and consultants. At the date of acquisition BW had in
effect two stock option plans, the 1994 Stock Option Plan ("94 SOP") and the
1995 Stock Option Plan ("95 SOP") and a Stock Award Plan ("SAP"). All options
were granted at not less than fair value at the date of grant and have terms
varying from 3 to 10 years. The purpose of these plans is to attract, retain,
motivate and reward officers, directors, employees and consultants of the
Company to maximize their contribution towards the Company's success.
The following table summarizes the activity in the plans:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Exercise Price
---------------- ----------------
<S> <C> <C>
Shares under option at February 1, 1997 2,778,760 $6.07
Granted 759,500 $7.15
Canceled (73,254) $6.92
Exercised (116,876) $8.01
---------
Shares under option at October 31, 1997 3,348,130 $6.19
=========
</TABLE>
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's common stock on the date of grant,
and in accordance with the accounting for such options utilizing the intrinsic
value method there is no related compensation expense recorded in the Company's
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value at the grant dates in accordance with the
method delineated in Statement of Accounting Standards No. 123, the Company's
operating expenses would have been greater.
21
<PAGE> 22
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
Additional information relating to stock options outstanding and
exercisable at October 31, 1997 summarized by exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------- -------------------------------
Weighted Average
Exercise Price --------------------------- Weighted Average
Per Share Shares Life (Years) Exercise Price Shares Exercise Price
-------------- --------- ------------ -------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 - $4.99 1,554,810 8.20 $3.61 1,456,810 $3.60
$5.00 - $7.99 625,926 8.53 $6.69 276,518 $7.03
$8.00 - $16.50 1,167,394 7.69 $9.36 314,970 $10.20
--------- ---------
$1.00 - $16.50 3,348,130 8.09 $6.19 2,048,298 $5.08
========= =========
</TABLE>
M. INCOME TAXES
The Company's provision for taxes on income consists of:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended October 31 Ended October 31
---------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Currently payable:
U.S. taxes $-- $6 $-- $8
Non-U.S. taxes -- 99 20 180
--- ----- ---- ----
-- 105 20 188
--- ----- ---- ----
Deferred:
U.S. taxes -- -- -- --
Non-U.S. taxes -- -- (4) --
--- ----- ---- ----
-- -- (4) --
--- ----- ---- ----
Total tax provision $-- $105 $16 $188
==== ===== ==== ====
</TABLE>
Deferred income taxes reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. Deferred tax liabilities
are comprised of the following at October 31, 1997:
<TABLE>
<S> <C>
Tax effects of temporary differences for:
Depreciation $295
====
</TABLE>
In addition to the tax effects of temporary differences for
depreciation, amortization and valuation allowances from current and prior
periods the Company has other tax attributes arising from acquisitions that
could give rise to the recording of deferred tax assets. In addition, the
Company has recorded a 100% valuation allowance against its deferred tax assets
including net operating loss and research credit carryforwards in accordance
with the provisions of Statement of Financial Accounting Standards No. 109
whereby such allowance is recognized, if on the weight of available evidence, it
is more likely than not that some portion or all of the deferred tax assets will
not be realized.
At October 31, 1997, the Company has accumulated federal net operating
losses which may be potentially available to reduce future taxable income.
However, among potential adjustments which may reduce available loss
carryforwards, the Internal Revenue Code of 1986, as amended, (IRC), reduces the
extent to which net operating loss carryforwards may be utilized in the event
there has been an "ownership change" of a company as defined by applicable IRC
provisions. The Company believes that the issuances of its equity securities and
transfers of ownership of outstanding equity securities may have resulted in one
or more such ownership changes and intends
22
<PAGE> 23
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
to analyze the impact of such transfers on the continued availability, for tax
purposes, of the Company's net operating losses incurred through October 31,
1997. Further ownership changes in the future, as defined by the IRC, may reduce
the extent to which any net operating losses may be utilized.
The reconciliation between income tax expense and a theoretical United
States tax computed by applying a rate of 35% for the three and nine months
ended October 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
Three Months Ended October 31 Six Months Ended October 31
----------------------------- ---------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings before income taxes:
United States $ (3,944) $ 821 $(17,055) $(18,498)
Foreign (662) 628 629 1,652
-------- -------- -------- --------
$ (4,606) $ 1,449 $(16,426) $(16,846)
======== ======== ======== ========
Theoretical tax provision
(benefit) at 35% $(1,612) $ 507 $(5,749) $(5,896)
Loss for which no benefit
was recorded as there is
no assurance of realization 1,691 0 4,934 1,394
Permanent differences 109 (60) 1,109 2,833
Timing differences (310) 109 (182) 2,204
Adjustment for non-U.S
taxes in excess of
theoretical rate 122 (116) (116) (306)
Utilization of tax loss
carryforwards -- (326) -- (18)
Other -- (9) 20 (23)
-------- -------- -------- --------
$-- $105 $16 $188
======== ======== ======== ========
</TABLE>
United States federal income taxes have not been provided on all of the
unremitted earnings of non-U.S. subsidiaries, since it is management's practice
and intent to reinvest such earnings in the operations of these subsidiaries.
The total amount of the net unremitted earnings of the non-U.S. subsidiaries was
approximately $3,709 at October 31, 1997.
23
<PAGE> 24
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
N. EARNINGS PER SHARE CALCULATION
Primary income (loss) per share was calculated by dividing net income
(loss) by the weighted average shares of common stock and common stock
equivalents outstanding during the period. Common stock equivalents of the
Company include options, warrants, shares issuable in business combinations and
reset shares due in connection with private placements of common stock. All
common stock equivalents outstanding during the periods presented were
determined to be anti-dilutive and therefore excluded from the computation of
primary loss per share. The number of shares issuable upon the exercise of
dilutive options and warrants was reduced by the assumed repurchase, at the
average market price during the period, with the proceeds assumed to have been
received on the exercise of these securities in accordance with the mandated
treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31 October 31
------------------ ----------------
1997 1996 1997 1996
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Shares used in computing primary
earnings (loss) per share:
Weighted average number of
shares outstanding 16,347,610 8,740,638 13,471,410 7,167,797
Common stock equivalents, net:
Options and warrants, net -- 1,701,908 -- --
Shares issuable in business
combinations -- 69,444 -- --
---------- ---------- ---------- ---------
-- 1,771,352 n/a --
---------- ---------- ---------- ---------
16,347,610 10,511,990 13,471,410 7,167,797
========== ========== ========== =========
Shares used in computing fully
diluted earnings per share:
Computed above for primary
earnings per share n/a 10,511,990 n/a n/a
Other convertible securities n/a 1,218,420 n/a n/a
---------- ---------- ---------- ---------
n/a 11,730,410 n/a n/a
========== ========== ========== =========
</TABLE>
O. OTHER RELATED PARTY TRANSACTIONS
Summarized below are all material related party transactions entered
into by the Company and its subsidiaries during the periods presented not
otherwise disclosed in these notes.
FED, as a founding shareholder, holds 35% of the outstanding shares
of Spectra Electronics Systems, Ltd. ("Spectra"), a Hong Kong private company,
which sells point of sale equipment such as credit card readers for merchants in
the Asian market. At October 31, 1997 the amount due FED from Spectra for sales
in the ordinary course of business was $688.
In the ordinary course of business, FED made sales of $1,062 and paid
marketing research service fees of $511 to companies and made purchases of $3
from companies controlled by a former director of FED during the nine months
ended October 31, 1997.
During the nine months ended October 31, 1997 the Company made 8% demand
loans in the amount of $165 to an entity controlled by an outside director.
Accrued and unpaid interest at October 31, 1997 totaled $5.
24
<PAGE> 25
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
Dividends payable to a former shareholder and current officer of FED of
$1,256 were declared prior to the acquisition of FED by the Company; the
dividends were paid prior to January 31, 1997.
P. SUBSEQUENT EVENTS
In December, 1997, the Company issued 390,000 shares of common stock
pursuant to the exercise of outstanding warrants receiving net proceeds $870.
Q. SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest expense and taxes paid approximated the related expenses for
the nine months ended October 31, 1997 and 1996.
The stock issued to effect, in part, the FED acquisition valued at
$5,150, the ABCN investment valued at $7,250, and cashless option and warrant
exercises applied to other receivables including interest thereon valued at $726
during the nine months ended October 31, 1997 neither provided nor used cash.
The stock issued to effect, in part, the FED acquisition valued at $809 and the
Sciteq acquisition valued at $2,932 during the nine months ended October 31,
1996 neither provided nor used cash. Accordingly, the value assigned to such
stock has been excluded from the statements of cash flows.
Common shares issued on conversion of convertible debentures during the
nine months ended October 31, 1996 neither provided nor used cash. Accordingly,
the $8,764 value assigned to such stock for the nine months ended October 31,
1996 has been excluded from the statement of cash flows.
R. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade receivables. As regards the former, the Company places its temporary
cash investments with high credit financial institutions and limits, by policy,
the amount of credit exposure to any one institution. No accounts at a single
bank accounted for more than 10% of current assets.
Concentrations of credit risk with respect to trade receivables are
limited because there is a large number of customers in the Company's customer
base spread across many industries and geographic areas. One customer accounted
for 21.8% and 22.6% of net sales for the nine months ended October 31, 1997 and
1996, respectively, and 15.6% and 21.5% of net sales for the three months ended
October 31, 1997 and 1996, respectively. At October 31, 1997 no single
receivable exceeded 10% of net receivables.
25
<PAGE> 26
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
S. PROFORMA INFORMATION (PURCHASE ACCOUNTING)
Nine months October 31, 1996:
<TABLE>
<CAPTION>
Company FED Sciteq Cray Pro Forma Pro Forma
Consolidated (i) (ii) (iii) Adjustments Notes Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 79,088 $ 9,820 $ 1,445 $ 11,751 $ 102,104
Cost of sales 58,306 8,235 661 7,202 74,404
--------- --------- --------- --------- ---------
Gross Profit 20,782 1,585 784 4,549 27,700
Operating expenses 36,214 803 494 6,060 $ 138 (iv) 43,971
248 (v)
14 (vi)
--------- --------- --------- --------- --------- ---------
Operating income (loss) (15,432) 782 290 (1,511) (400) (16,271)
Other income (charges) (1,414) (363) (152) (22) (vii) (2,565)
(504) (viii)
(110) (ix)
--------- --------- --------- --------- --------- ---------
Income (loss) before
income taxes (16,846) 419 290 (1,663) (1,036) (18,836)
Provision for income
Provision for income taxes 188 220 1 7 416
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (17,034) $ 199 $ 289 $ (1,670) $ (1,036) $ (19,252)
========= ========= ========= ========= ========= =========
Weighted average shares
outstanding (000's) 7,168 7,168
Earnings (loss) per share:
Primary $ (2.39) $ (2.70)
</TABLE>
Notes to pro forma financial information:
(i) The FED acquisition is recorded as a purchase effective April 1, 1996.
The Company consolidated results include the results of FED from April
1, 1996.
(ii) The Sciteq acquisition is recorded as a purchase effective May 31, 1996.
The Company consolidated results include the results of Sciteq from May
31, 1996.
(iii) The Cray acquisition is recorded as a purchase effective June 30, 1996.
The Company consolidated results include the results of Cray from June
30, 1996.
(iv) To amortize the purchased technology acquired of $2,895 arising from the
Sciteq acquisition, using an estimated 7 year useful life.
(v) To amortize the purchased technology acquired of $4,165 arising from the
Cray acquisition, using an estimated 7 year useful life.
(vi) To amortize the excess of cost over net assets acquired of $1,288
arising from the FED acquisition, using an estimated 15 year useful
life.
(vii) To recognize interest expense assuming the Company borrowed $600 at 11%
interest per annum to complete the Sciteq acquisition.
(viii) To recognize interest expense assuming the Company borrowed $11,000 at
11% interest per annum to complete the Cray acquisition.
(ix) To recognize interest expense assuming the Company borrowed $6,000 at
11% interest per annum to complete the FED acquisition.
26
<PAGE> 27
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
T. PROFORMA INFORMATION (POOLINGS OF INTEREST)
The following table shows the historical results of the Company, BW, DPI
and DSI for the periods prior to the consummation of the mergers of the
entities:
<TABLE>
<CAPTION>
Three Months Year Ended
Ended April 30, January 31,
1996 1996
-------- --------
<S> <C> <C>
Net sales:
Company $ 6,070 $ 7,733
BW 6,772 7,634
DPI 5,202 18,631
DSI 110 475
-------- --------
Total $ 18,154 $ 34,473
======== ========
Net income (loss):
Company, as previously reported $ 249 $ 626
BW 14 (446)
DPI 202 (1,544)
DSI (10) 47
-------- --------
Net income as restated $ 455 $ (1,317)
======== ========
</TABLE>
U. RECONCILIATION TO PREVIOUSLY REPORTED AMOUNTS
Following is a reconciliation of the Company's fiscal 1997 quarterly net income
(loss) as previously reported in the Company's 10-QSB filings to the revised
amounts listed above. Differences between fiscal 1996 net income (loss) amounts
above and amounts previously reported in the Company's 10-QSB filings are due to
the effect of the pooling transactions consummated by the Company during fiscal
1997.
Amounts in thousands, except per share amounts.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net income (loss) as
previously reported $ 249 $ (8,311) $ 1,332 $ 1,425 $ (5,305)
Effect of pooling transactions 206 (3,914) 12 -- (3,696)
Inventory valuation adjustments -- (3,169) -- -- (3,169)
Purchased technology
valuation adjustment -- (3,439) -- -- (3,439)
-------- -------- -------- -------- --------
Net income (loss) $ 455 $(18,833) $ 1,344 $ 1,425 $(15,609)
======== ======== ======== ======== ========
</TABLE>
27
<PAGE> 28
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated unaudited
financial statements and related notes thereto. Further reference should be made
to the Company's Form 10-KSB for the year ended January 31, 1997.
Results of operations for the nine months ended October 31, 1996 include the
operations of Osicom and its wholly owned subsidiaries for the periods noted in
Note B to the consolidated unaudited financial statements contained herein.
RESULTS OF OPERATIONS/COMPARISON OF THE THREE AND NINE MONTHS ENDED OCTOBER 31,
1997 AND 1996
Net sales of the Company for the quarter ended October 31, 1997 was $23.4
million compared to $33.5 million for the quarter ended October 31, 1996. This
decline in quarterly revenue of 30.1% resulted primarily from delays in order
placement by some of the Company's OEM customers. The Company believes these
OEM customers have resolved their internal issues and will begin to take
delivery at their historical levels, however, there can be no assurances that
such sales levels will be achieved. Net sales for the nine months ended
October 31, 1997 was $88.6 million compared to $79.1 million for the nine
months ended October 31, 1996. This 12.0% increase for the nine month period
was due primarily to the various businesses acquired during the nine months
ended October 31, 1996 as well as increased demand for the Company's products
partially offset by the decline in sales to OEM customers as noted previously.
(See Footnote A to the Unaudited Consolidated Financial Statements contained in
Part I herein which more fully describes the acquisitions during the nine months
ended October 31, 1996).
The Company's gross profit for the three months ended October 31, 1997 was $7.4
million compared to $10.4 million for the quarter ended October 31, 1996. This
28.8% decrease is due to the decline in net sales to OEM customers during the
quarter ended October 31, 1997. Gross profit for the nine months ended October
31, 1997 was $27.9 million compared to $20.8 million for the nine months ended
October 31, 1996. This 34.1% increase was due primarily to the various
businesses acquired during the nine months ended October 31, 1996 partially
offset by significant inventory valuation adjustments of $3.2 million (including
$1.9 million for slow-moving and obsolete inventory purchased in connection with
an acquired entity) during the nine months ended October 31, 1996.
Gross margins increased to 31.9% for the quarter ended October 31, 1997 from
31.2% for the quarter ended October 31, 1996. Gross margins increased to 31.4%
for the nine months ended October 31, 1997 from 26.3% for the nine months ended
October 31, 1996. The improvement in the gross margins reflects the operational
efficiencies achieved through the integration of the various acquisitions of the
Company made during the prior year as well as the shift in product sales to
higher margin items which resulted from the decline in sales to OEM customers as
noted previously and, for the nine month period, the significant inventory
valuation adjustments during the nine months ended October 31, 1996.
Selling and marketing expense totaled $4.4 million, or 19.0% of net sales for
the quarter ended October 31, 1997. This compares to $4.2 million, or 12.5% of
net sales for the quarter ended October 31, 1996. For the nine months ended
October 31, 1997 selling and marketing expenses totaled $13.5 million, or 15.3%
of net sales as compared to $9.9 million or 12.5% of net sales for the nine
months ended October 31, 1996. The increase in the dollar amount of these
expenses resulted from marketing efforts related to the introduction of new
products as well as efforts to expand the Company's domestic and international
sales channels. The increase in these expenses as a percentage of net sales
during the quarter ended October 31, 1997 reflects the reduced net sales during
the period.
Engineering, research and development expenses totaled $1.9 million, or 8.3% of
net sales for the quarter ended October 31, 1997. This compares to $2.3 million,
or 6.9% of net sales for the quarter ended October 31, 1996. For the nine months
ended October 31, 1997 engineering, research and development expenses totaled
$5.3 million, or 6.0% of net sales as compared to $5.1 million, or 6.4% of net
sales for the nine months ended October 31, 1996. The increase in these expenses
as a percentage of net sales during the quarter ended October 31, 1997 reflects
the reduced net sales during the period.
28
<PAGE> 29
General and administrative expenses totaled $4.9 million, or 21.0% of net sales
for the quarter ended October 31, 1997. This compares to $2.0 million, or 6.0%
of net sales for the quarter ended October 31, 1996. For the nine months ended
October 31, 1997 general and administrative expenses totaled $12.8 million, or
14.5% of net sales as compared to $6.1 million, or 7.7% of net sales for the
nine months ended October 31, 1996. The increase in these expenses for the three
months ended October 31, 1997 includes approximately $1.0 million related to the
settlement of a class action suit (see Note I to the Unaudited Consolidated
Financial Statements contained in Part I herein which more fully describes this
legal settlement) as well as legal and other costs associated with preserving
shareholder value. The increase in these expenses as a percentage of net sales
during the quarter ended October 31, 1997 reflects both the increased level of
expenditures as well as reduced net sales during the period. The increase in
general and administrative expenses for the nine months ended October 31, 1997
is due to the businesses acquired during the nine months ended October 31, 1996
as well as the items noted for the quarter ended October 31, 1997.
In-process research and development purchased in connection with the
acquisitions of Sciteq, Cray and PDP was $10.3 million and in accordance with
Statement of Financial Accounting Standards No. 2 this amount was expensed
immediately during the quarter ended October 31, 1996. An additional $3.4
million representing a reduction to the valuation of purchased software in
connection with RNS was expensed during the quarter ended July 31, 1996
reflecting changing market conditions. Comparable amounts incurred during the
three and ninemonths ended October 31, 1997 were included in other operating
expenses; see following paragraph.
Other operating expenses for the quarters ended October 31, 1997 and 1996 were
$300,000 and represent the amortization of purchased technologies and excess
cost over net assets acquired. Other operating expenses of $11.8 million for the
nine months ended October 31, 1997 included acquisition-related charges of $6.0
million, software capitalization valuation adjustments of $2.7 million and $2.3
million related to the horizontal and vertical integration of the Company's
acquisitions during the prior fiscal year. Acquisition-related charges included
amortization of purchased technology, amortization of excess cost over net book
value of assets acquired as well as valuation adjustments of intangible assets
acquired. Integration costs included the physical relocation of the Santa
Barbara, CA manufacturing operations of the adapter division, consolidation of
the broadband division operations, and personnel reduction costs. Other
operating expenses for the nine months ended October 31, 1996 included
acquisition-related charges of $1.5 million.. These amounts included
amortization of purchased technology, excess cost over net book value of assets
acquired, and negative goodwill as well as the costs associated with
acquisitions accounted for as poolings of interests during the quarters ended
July 31, and October 31, 1996. (See Note A to the Unaudited Consolidated
Financial Statements contained in Part I herein).
The operating loss for the quarter ended October 31, 1997 was $4.2 million which
reflects the lower net sales and the increased general and administrative
expenses discussed previously. The operating profit for the quarter ended
October 31, 1996 was $1.6 million. The operating loss for the nine months ended
October 31, 1997 was $15.7 million reflecting the charges for other operating
expenses above of $11.8 million. The operating loss for the nine months ended
October 31, 1996 was $15.4 million reflecting the the charges for other
operating expenses above of $1.5 million and in-process research and development
of $13.7 million.
Investment income was $115,000 and $368,000 for the quarter and nine months
ended October 31, 1997, respectively, as compared to $155,000 and $292,000 for
the quarter and nine months ended October 31, 1996, respectively. These
fluctuations are the result of the investment by the Company of its surplus cash
prior to utilization in the operations of and acquisitions by the Company.
Interest expense for the quarter ended October 31, 1997 was $567,000 compared to
$349,000 for the quarter ended October 31, 1996. Interest expense for the nine
months ended October 31, 1997 was $1.5 million compared to $1.8 for the nine
months ended October 31, 1996. Interest expense for the nine months ended
October 31, 1996 included a commission recorded as interest expense of $582,000
incurred in connection with the placement of convertible debentures (see Note G
to the Unaudited Consolidated Financial Statements contained in Part I herein
which more fully describes the Company's convertible debentures).
Provision for income taxes for the nine months ended October 31, 1997 was
$16,000 and no provision was required for the quarter ended October 31, 1997.
Provision for income taxes for the quarter and nine months ended October 31,
1996 were $105,000 and $188,000, respectively. The provision for taxes relates
predominantly
29
<PAGE> 30
from the profitable operations of the Company's Far East Division. The decline
in the provision is the result of over-accruals in prior periods. The Company
has carryforwards of domestic federal net operating losses which may be
available, in part, to reduce future taxable income in the United States.
However, due to potential adjustments to the net operating loss carryforwards as
provided by the Internal Revenue Code with respect to future ownership changes,
future availability of these tax benefits is not assured. In addition, the
Company provides a valuation allowance for a deferred tax asset when in
management's opinion it is more likely than not that some portion or all of the
asset will not be realized. (See Note M to the Unaudited Consolidated Financial
Statements contained in Part I herein).
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1997, the Company had net worth of $41.3 million, with total
assets of $83.2 million. Of these assets, current assets totaled $44.8 million
including $3.4 million of cash and cash equivalents, $16.1 million of accounts
receivable and $21.2 million of inventory. The Company's working capital at
October 31, 1997 was $6.7 million.
The Company's operations provided a cash flow of $344,000 during the nine months
ended October 31, 1997, as compared an operating cash flow deficit of $990,000
during the nine months ended October 31, 1996. This increase in net operating
cash flow is reflective of the net cash outflow from operations after adjustment
for non-cash income and expense of $5.6 million reduced by the net decline in
current assets and increase in current liabilities during the nine months ended
October 31, 1997. During the nine months ended October 31, 1996 net cash outflow
from operations after adjustment for non-cash income and expense was $500,000.
Investing activities during the nine months ended October 31, 1997 consisted of
purchases of property and equipment of $5.4 million, expenditures for software
development costs capitalized of $3.3 million, and other receivables of $2.4
million (including interest bearing advances to ABCN of $2.0 million), net of
proceeds from the disposition of fixed assets. During the nine months ended
October 31, 1996 investing activities included purchases of property, plant and
equipment (including the San Diego and FED facilities) of $5.2 million,
expenditures for software development costs capitalized of $1.3 million, net
cash outlays of $17.0 million in connection with acquisition activities of the
Company and other receivables of $2.6 million.
The financing activities of the Company during the nine months ended October 31,
1997 provided net cash inflows of $7.4 million as compared with $27.6 million
during the six months ended October 31, 1996. This $25.2 million decrease is
primarily the result of declines in private placements of the Company's common
stock, convertible preferred stock and debentures net of redemptions ($16.8
million), declines in net proceeds from long term debt ($1.5 million),
repayments of acquisition related liabilities ($6.3 million) and repayment of
liabilities due on cashless warrant exercises ($1.6 million) net of net proceeds
from short term debt as compared with net repayments ($1.6 million). The
increase in the outstanding balance of Cray's line of credit and corresponding
decrease in Meret's line of credit is reflective of the Company's ongoing
operational integration program.
The Company finances its operations and acquisitions from debt issuances, bank
lines of credit and security placements.
The Company through private placements of its common stock and convertible
preferred stock raised net proceeds of $12.7 million during the nine months
ended October 31, 1997 which are reflected in the net cash inflows from
financing activities. Warrants to purchase 75,000 shares of common stock at
$8.00 and callable warrants to purchase 782,888 shares of common stock at $7.50
per share were also issued in these placements. (See Notes J and K to the
Unaudited Consolidated Financial Statements contained in Part I herein which
more fully describe the Company's convertible preferred stock and terms of
securities placements).
The Company through private placements of its convertible preferred stock and
its 8% callable, convertible debentures raised net proceeds of $32.4 million
during the six months ended October 31, 1996 which are included in the net cash
inflows from financing activities. Warrants to purchase 342,021 shares of
common stock at prices from $8.13 to $18.00 were also issued in these
placements. (See Note J to the Unaudited Consolidated Financial Statements
contained in Part I herein which more fully describe the Company's convertible
preferred stock and debentures).
30
<PAGE> 31
At October 31, 1997 the Company had $5.0 million of convertible preferred stock
outstanding that was currently convertible.
If not previously converted by the holder or called by the Company the remaining
$550,000 face amount of convertible debentures outstanding at October 31, 1997
will be due during 1999. (See Note G to the Unaudited Consolidated Financial
Statements contained in Part I herein which more fully describes the Company's
convertible debentures).
The Company's customers generally remit payments within the terms of sale. The
Company is currently able to meet its obligations as they become due.
Management believes that the Company has sufficient working capital to meet its
planned level of operations. Management has completed the realignment of its
various acquired businesses along product and functional lines and is
implementing plans which it believes will enable the Company to internally
generate funds for its current operations. There can be no assurance that these
mechanisms to improve liquidity will be effective. The Company plans to grow
both internally as well as through acquisitions with primary focus on internal
growth. The capital needed to accomplish this will have to be raised to the
extent funds are not then available. The Company cannot give any assurances that
sufficient capital will be available when needed.
The Company is in discussion with several companies regarding the sale of one or
more of its business units, as well as preliminary discussions which may result
in the formation of strategic alliances, however, there can no assurances
that any sales or agreements will occur. These preliminary discussions are the
result of both solicited and unsolicited interest in the Company. An investment
banking firm has been engaged to advise Management.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, "Earnings per Share" is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. This pronouncement requires dual presentation
of basic and diluted earnings per share ("EPS") on the face of the income
statement. It also requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. This statement also requires restatement of all prior-period EPS
data presented after the effective date. The Company has not determined the
effect on its EPS from the adoption of this statement.
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" is effective for financial statement periods issued for
periods ending after December 15, 1997. The new standard reinstates various
securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by SFAS No. 128. The
Company does not expect the adoption of SFAS No. 129 to have a material effect,
if any, on its financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" is effective for financial statements with fiscal years beginning after
December 15, 1997. Earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. The Company has not
determined the effect on its financial position or results of operations, if
any, from the adoption of this statement.
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" is effective for financial statements
with fiscal years beginning after December 15, 1997. The new standard requires
that public business enterprises report certain information about operating
segments in complete sets of financial statements of the enterprise and in
condensed financial statements of interim periods issued to shareholders. It
also requires that public business enterprises report certain information about
their products and services, the geographic areas in which they operate and
their major customers. The Company does not expect the adoption of SFAS No. 131
to have a material effect, if any, on its results of operations.
OTHER MATTERS
See Part II, Item 1 "Legal Proceedings" contained herein.
FLUCTUATIONS IN REVENUE AND OPERATING RESULTS
The networking and remote access industry is subject to fluctuation and the
growth rates recently experienced by the Company are not necessarily indicative
of the operating results for any future periods. The Company's operating results
may fluctuate as a result of a number of factors, including the timing of orders
from, and shipments to, customers; the timing of new product introductions and
the market acceptance of those products; increased competition; changes in
manufacturing costs; availability of parts; changes in the mix of product sales;
the rate of end user adoption and carrier and private network deployment of WAN
data, video and audio communication services; factors associated with
international operations; and changes in world economic conditions.
FORWARD LOOKING STATEMENTS - CAUTIONARY STATEMENT
When used anywhere in this Form 10-QSB, in future filings by the Company with
the Securities and Exchange Commission, in the Company's press releases and in
oral statements made with the approval of an authorized executive officer of the
Company, the words or phrases, "will likely result," "will continue," "are
expected to," "is anticipated," "estimated," "project," or "outlook" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are
31
<PAGE> 32
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include the Company's plans to introduce wireless enabled network
strategy, Gigabit Ethernet, ATM switches for workgroups and enterprise markets,
scaleable routers with broad practical support and aggregation possibilities,
and the Company's plans to develop new products, expand its sales force, expand
its customer base, make acquisitions, establish strategic relationships and
expand within international markets. Such forward-looking statements also
include the Company's expectations concerning factors affecting the markets for
its products, such as demand for increased bandwidth, the migration from private
to public networks, growth in corporate networks, deregulation and increased
competition, the introduction of a wide range of new communication services and
technologies and growth in the domestic and international market for network
access solutions.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks and uncertainties are described above. The
Company specifically declines any obligation to publicly release the result of
any revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
32
<PAGE> 33
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
For a discussion of material legal proceedings, see Part I, Item 3 of
the Form 10-KSB for the year ended January 31, 1997 and Note I to the
Unaudited Consolidated Financial Statements included therein.
ITEM 2: CHANGES IN SECURITIES
On October 31, 1997 the Company issued 437,630 shares of its common
stock to existing shareholders and members of senior management
receiving $1,028,432 in net proceeds to be used for general corporate
purposes. No underwriters received fees in connection with this security
sale. The shares were issued pursuant to exemptions from registration
under Rules 505 and 506 of Regulation D and Section 4(2) of the
Securities Exchange Act of 1933.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
Not Applicable
ITEM 5: OTHER INFORMATION
Not Applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
A. Exhibits
--------
<S> <C>
20 Consolidated Financial Statements for the Quarter and
Nine Months Ended October 31, 1997 (included in Part I,
Item 1)
27 Financial Data Schedule
B. Reports on Form 8-K
-------------------
None
</TABLE>
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OSICOM TECHNOLOGIES, INC.
(Registrant)
By: /s/ John H. Gorman Date: December 15, 1997
------------------------------
John H. Gorman,
Chief Financial Officer
34
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED UNAUDITED BALANCE SHEET, CONSOLIDATED UNAUDITED STATEMENT OF
OPERATIONS AND CONSOLIDATED UNAUDITED STATEMENT OF CASH FLOWS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 3,384,000
<SECURITIES> 0
<RECEIVABLES> 17,242,000
<ALLOWANCES> 1,181,000
<INVENTORY> 21,249,000
<CURRENT-ASSETS> 44,854,000
<PP&E> 40,879,000
<DEPRECIATION> 24,520,000
<TOTAL-ASSETS> 83,168,000
<CURRENT-LIABILITIES> 38,202,000
<BONDS> 3,661,000
0
1
<COMMON> 1,864,000
<OTHER-SE> 39,440,000
<TOTAL-LIABILITY-AND-EQUITY> 83,168,000
<SALES> 88,631,000
<TOTAL-REVENUES> 88,631,000
<CGS> 60,778,000
<TOTAL-COSTS> 60,778,000
<OTHER-EXPENSES> 43,529,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,531,000
<INCOME-PRETAX> (16,426,000)
<INCOME-TAX> 16,000
<INCOME-CONTINUING> (16,442,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,442,000)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> 0
</TABLE>
