<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 APRIL 30, 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: 12,078,822 shares at
June 13, 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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PART I: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheet at April 30, 1997
and Audited Consolidated Balance Sheet at January 31, 1997 3
Unaudited Consolidated Statements of Operations for the Three
Months ended April 30, 1997 and 1996 4
Unaudited Consolidated Statements of Cash Flows for the Three
Months ended April 30, 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 Months ended
April 30, 1997 and 1996 29
Liquidity and Capital Resources 30
Impact of Recent Accounting Pronouncements 31
Fluctuations in Revenue and Operating Results 31
Forward-Looking Statements - Cautionary Statement 32
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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<PAGE> 3
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
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====================================================================================================================
APRIL 30, 1997 JANUARY 31, 1997
- --------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
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ASSETS
CURRENT ASSETS
Cash and equivalents $ 6,670 $ 4,055
Restricted cash (Notes B and E) 1,872 1,744
Accounts receivable, net of reserve for doubtful accounts $888 (Note E) 19,428 19,090
Inventory (Notes B and E) 24,131 21,835
Other receivables (Notes C and O) 3,552 985
Prepaid expenses and other current assets 1,544 1,239
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 57,197 48,948
- --------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET (Notes B, D, E and F) 15,813 15,417
- --------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Purchased technology, net (Notes A and B) 7,357 7,588
Excess of cost over net assets acquired, net (Notes A and B) 1,443 1,464
Capitalized software, net (Note B) 4,289 2,005
Other assets (Notes K and Q) 10,395 3,054
- --------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 23,484 14,111
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 96,494 $ 78,476
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt (Note E) $ 11,295 $ 11,151
Current maturities of long term debt (Note F) 1,444 1,492
Accounts payable 22,012 18,706
Accrued liabilities 5,358 5,029
Other current liabilities (Note A) 3,992 2,737
Income taxes payable (Note M) 255 235
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 44,356 39,350
- --------------------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations (Notes F and H) 3,714 3,919
Deferred income taxes (Note M) 295 299
Other liabilities - 44
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 48,365 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;
23 shares issued and outstanding; $25,013 liquidation preference including
accumulated dividends at April 30, 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; 11,905
shares issued and 11,902 shares outstanding at April 30, 1997;
10.978 shares issued and 10,975 shares outstanding at January 31, 1997 1,190 1,098
Additional paid-in capital 63,496 49,246
Accumulated deficit (16,380) (17,297)
Treasury stock, 3 shares, at cost (178) (178)
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 48,129 32,870
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 96,494 $ 78,476
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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=====================================================================================
QUARTER ENDED APRIL 30,
-----------------------
1997 1996
- -------------------------------------------------------------------------------------
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NET SALES $ 32,632 $ 18,154
COST OF SALES 22,618 12,124
- -------------------------------------------------------------------------------------
GROSS PROFIT 10,014 6,030
- -------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and marketing 4,071 2,396
Engineering, research and development 1,490 1,267
General and administrative 3,052 1,525
Other operating expenses 467 (97)
- -------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 9,080 5,091
- -------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 934 939
- -------------------------------------------------------------------------------------
OTHER INCOME (CHARGES)
Investment income (loss) 100 (152)
Interest expense (434) (338)
Gain on disposal of assets 426 -
Other income (charges) (93) 9
- -------------------------------------------------------------------------------------
TOTAL OTHER INCOME (CHARGES) (1) (481)
- -------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 933 458
PROVISION FOR INCOME TAXES (Note M) 16 3
- -------------------------------------------------------------------------------------
NET INCOME $ 917 $ 455
=====================================================================================
NET INCOME PER COMMON SHARE (Note N):
ACCRUED UNDECLARED PREFERRED DIVIDENDS (38) (38)
INTEREST EXPENSE ADJUSTMENT 126 -
NET INCOME APPLICABLE TO COMMON SHARES $ 1,005 $ 417
=====================================================================================
PRIMARY
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 13,275 4,184
NET INCOME PER COMMON SHARE: $ 0.08 $ 0.10
=====================================================================================
FULLY DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 14,405 4,421
NET INCOME PER COMMON SHARE: $ 0.07 $ 0.09
=====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
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QUARTER ENDED APRIL 30,
-----------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 917 $ 455
- -----------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,349 428
Accounts receivable and inventory reserves (1,695) (40)
Gain on disposal of fixed assets (419) -
Expenses paid through issuances of securities 39 -
Unrealized losses (gains) in investment securities - 66
Changes in assets and liabilities net of effects of business entity
acquisitions and divestiture:
Increase in restricted cash (128) (36)
Decrease in accounts receivable 13 (550)
(Increase) decrease in inventories (952) 62
(Increase) decrease in other current assets (417) 23
Increase (decrease) in accounts payable 3,306 43
Increase (decrease) in accrued expenses 329 (238)
Decrease in other current liabilities (18) -
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,324 213
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (2,637) (3,696)
Product enhancement costs (Note B) (1,293) (404)
Proceeds from disposal of fixed assets 729 -
Other receivables (Notes C and O) (2,455) (414)
Cash outlays for acquired companies in excess of cash acquired (Note A) (15) (500)
Other assets 24 (46)
Purchase of investment securities (67) 210
- -----------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (5,714) (4,850)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock (Note J) 6,176 -
Proceeds from issuance of convertible debentures (Note G) - 8,711
Proceeds from issuance of short-term debt, net of repayments (Note E) 185 (1,275)
Proceeds from issuance of notes due to affiliates - 1,093
Proceeds from long-term debt (Note F) - 2,996
Repayment of long-term debt (Note F) (294) (649)
Debt issued in acquisitions net of payments (Note A) - (964)
Proceeds from stock option exercises (Note L) 28 254
Other (90) -
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,005 10,166
- -----------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 2,615 5,529
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 4,055 910
- -----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 6,670 $ 6,439
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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 transmission, networking, remote access and
connectivity products for use in local area networks, wide area networks and
broadband networks. The Company operates in one business segment with products
including remote access products, routers, concentrators, multiplexors, hubs and
switches, high-performance network adapters, multi-function servers, network
print servers, frame relay encryption devices, video switches and routers, and a
family of products to build broadcast systems over copper, fiber optic or
wireless transmission.
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 April 30, 1997 and the results of
operations for the quarters ended April 30, 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 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. In addition, RNS is a leading supplier of remote
access router-based technologies for connections to network backbones via public
switch facilities (ISDN and analog modems).
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).
6
<PAGE> 7
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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 intelligent 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.
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). BW was a Colorado corporation originally incorporated under the name of
Ceetac Corp. on June 30, 1988, and subsequently did business as Omni
Corporation.
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 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.
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 provision
to the Company of audited financial statements as of the acquisition date. An
additional payment of up to $5,150 will be made 12 months from closing subject
to pro rata adjustment based upon FED having net income after tax of $3,750
during the 12-month period ending March 31, 1997. The capital needed to meet
this payment obligation will have to be raised to the extent
7
<PAGE> 8
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
funds are not then available. 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 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 will be 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 is included
in other current liabilities at April 30, 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 have the right to have the Company redeem their shares for cash
during a period of 12 days beginning May 31, 1997. The value of 102,134 shares
issued at closing and 748 shares issued upon exercise of options totaling $1,289
put to the Company during the notice period has been included in other current
liabilities in the accompanying financial statements. (See Note K). The $1,994
value assigned to the 159,148 shares issued at closing was reclassified as
redeemable common stock at January 31, 1997. The capital needed to meet this
payment obligation will have to be raised to the extent funds are available at
the required payment date of June 30, 1997.
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.
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 of
and the consolidated statements of operations for the three months ended April
30, 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 months ended April 30, 1996 include the
results of operations of Osicom, Meret, including its RNS division, DPI, DSI,
BW, Rnet and RTC for the period presented, and FED from April 1, 1996. (See Note
A). Immaterial subsidiaries of FED have been accounted for on the equity method.
All significant intercompany transactions and balances have been eliminated in
consolidation. The consolidated group is referred to individually and
collectively as the "Company".
8
<PAGE> 9
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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
months ended April 30, 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 on the tenth day of the
month following sales. 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 does not require collateral from its customers.
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 April 30, 1997 consist of:
<TABLE>
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Raw material $ 17,365
Work in process 6,203
Spare parts 668
Finished goods 5,100
--------
29,336
Less: Valuation reserve 5,205
---------
$ 24,131
=========
</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
9
<PAGE> 10
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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 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 months ended April 30, 1997 was $126 over 3 to 7 years. Amortization
expense for the three months ended April 30, 1996 was $21 over 3 years.
Accumulated amortization was $1,392 as of April 30, 1997.
The recoverability of capitalized software costs are reviewed on an
ongoing basis.
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 $759 at April 30, 1997. In-process research and development purchased by the
Company is expensed at the date of purchase.
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. Cost and accumulated amortization at April 30, 1997 were $1,703 and
$260, respectively. 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.
NEGATIVE GOODWILL - Negative goodwill has been amortized on a
straight-line basis over three years. Operating expenses for the three months
ended April 30, 1996 includes amortization expense of $238.
OTHER INTANGIBLE ASSETS (LOAN COSTS AND CUSTOMER LISTS) - Loan costs
represent legal and other costs associated with loans and are amortized on a
straight-line basis over the life of the loan. Customer lists (PDPA) are
amortized on a straight-line basis over its estimated economic life (5 years);
cost and accumulated amortization at April 30, 1997 were $995 and $105,
respectively.
OTHER INVESTMENTS - Other investments (included in other assets) include
insignificant subsidiaries of FED accounted for on the equity method,
non-marketable securities held in other companies and an investment in a joint
venture net of an allowance for permanent impairment of value included in
noncurrent other assets.
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.
10
<PAGE> 11
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 Statement
of Financial Accounting Standards 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 April 30, 1997 the deferred taxes
and income tax provisions recorded in the financial statements relate primarily
to FED's operations in Hong Kong. (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
(applicable to income per share only). 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, the Statement of Financial
Accounting Standards ("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 months ended April
30, 1997 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. (See Note L).
11
<PAGE> 12
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 April 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Advance to non-affiliate at prime plus 3% including
accrued interest (see Note K) $2,034
8% demand loan due from an employee including
accrued interest (see Note O) 109
8% demand loan due from an entity controlled by a
director including accrued interest (see Note O) 101
Due to Company under indemnification against loss
in value of marketable securities due from an officer
and a former director (see Note O) 293
Due to Company under indemnification of costs related
to BWA, Inc. (see Notes A and I) 229
Due to Company from former shareholders and option
holders of DPI 360
8% demand loans due from non-affiliates including
accrued interest 262
Demand note receivable due from non-affiliate; interest
accrues at 1% over the prime rate 116
Other 48
------
$3,552
======
</TABLE>
D. PROPERTY AND EQUIPMENT
Property and equipment of the Company consisted of the following
components as of April 30, 1997:
<TABLE>
<S> <C>
Manufacturing, engineering and plant equipment and software $ 26,221
Office furniture and fixtures 4,933
Land and building 5,180
Automobiles 173
Leasehold and building improvements 2,661
--------
Total property and equipment 39,168
Less: Accumulated depreciation (23,355)
--------
Net book value at April 30, 1997 $ 15,813
========
</TABLE>
12
<PAGE> 13
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
E. SHORT TERM DEBT
Short term debt at April 30, 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 three months ended
April 30, 1997 was 13.1% $ 2,876
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 three months ended April 30, 1997 was 11.6% 2,981
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 three months ended April 30, 1997 was 11.5% 2,501
Floating interest rate loans; a portion of the banking facilities
of FED more fully described below; weighted average interest
rate for the three months ended April 30, 1997 was 8.4% 2,590
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 three months
ended April 30, 1997 was 9.7% 347
-------
$11,295
=======
</TABLE>
On April 14, 1995, the Company's wholly owned subsidiary, Meret, obtained
a $5,000 line of credit from Coast Business Credit ("Coast"), an asset based
lender, collateralized by accounts receivable, inventory and property and
equipment. Osicom has guaranteed this line, for which Meret is the borrower, to
the extent of $600. This line of credit provided for interest at 2.5% over the
bank's prime rate but not less than 8% (11.0% at April 30, 1997). Meret paid to
Coast a $50 origination fee and a $3 quarterly facility fee. In addition, the
Company issued to Coast warrants to purchase 10,000 shares of its common stock
exercisable at any time up to three years from funding (June 12, 1995) at the
then market price of $3.34 per share. 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 was to remain in effect until May 31, 1998 and automatically renew
for successive additional terms of one year on a continuous basis unless
terminated by written notice of either party or by default. On December 4, 1995
the agreement was amended to pay down the inventory loan, provide for a new term
loan as more fully described in Note F, and to extend the term of the agreement
to November 30, 1998.
On January 31, 1996, the line of credit was amended to increase the line
of credit to $8,000, increase Osicom's guarantee to the extent of $1,000, to
provide for an additional term loan as more fully described in Note F, and to
extend the term of the agreement to February 1, 1999. The Company issued the
lender additional warrants to purchase 40,000 shares of its common stock
exercisable at any time up to 3 years from funding (January 31, 1996) at the
then market price of $5.31 per share. Meret paid Coast a $30 origination fee and
the quarterly facility fee was increased to $4.
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
April 30, 1997). The proceeds of this loan were used, in
13
<PAGE> 14
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
part, to repay the line of credit outstanding at the acquisition of Cray. The
highest and average amounts outstanding were $2,981 and $2,794, respectively,
during the three months ended April 30, 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 April 30, 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 $2,502 and $2,271, respectively,
during the three months ended April 30, 1997.
At April 30, 1997 FED's short term bank borrowings consisted of $271 bank
overdrafts and $2,318 trust receipt loans. Aggregate banking facilities as of
that date were approximately $7.9 million from various banks for overdrafts,
loans and trade financing. Unused facilities as of the same date amounted to
approximately $720 (overdrafts: $569, loan and trade financing $151). These
facilities are secured by a priority lien on FED's leasehold land and buildings
(see Note D), a pledge of FED's $3,620 fixed bank deposits, liens on FED's
inventories released under trust receipt loans, and personal guarantees by two
former directors of FED. The maximum and average amounts outstanding during the
period ended April 30, 1997 were approximately $2,652 and $2,354, respectively.
At April 30, 1997, the Company had outstanding indebtedness under its
revolving demand loan agreement with Banca di Roma of $347. The agreement
provides for interest at 1% above the bank's base lending rate, which was 9.5%,
at April 30, 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 $367, respectively, during the three months
ended April 30, 1997.
The Company was in compliance with its debt covenants at April 30, 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 April 30, 1997 consisted of the following:
<TABLE>
<S> <C>
Variable rate 8 year mortgage (1% over Hong Kong prime
rate); interest rate at April 30, 1997 was 9.5% $ 871
Variable rate 10 year mortgage (1% over Hong Kong prime
rate); interest rate at April 30, 1997 was 9.5% 628
Variable rate 30 year mortgage note payable (5.5% over
LIBOR rate); interest rate at April 30, 1997 was 8.95% 1,288
Floating interest rate term loans (2.5% over Coast's prime
rate) secured by machinery and equipment of Meret;
interest rate at April 30, 1997 was 11.0% 668
Floating interest rate notes payable to shareholder (former
shareholders of DPI) (4% over prime rate); interest rate
at April 30, 1997 was 11.25% 16
Floating interest rate notes payable to shareholder (former
shareholders of DPI) (4% over prime rate); interest rate
at April 30, 1997 was 12.25% 118
5.5% term note payable to shareholder (former shareholder
and present officer of DPI) 364
Debentures payable (See Note G) 410
Obligations under finance leases (See Note H) 795
------
5,158
Less: Current portion 1,444
------
$3,714
======
</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
April 30, 1997 was 11.25%.
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
including a note payable requiring installments of $8 including both principal
and interest, and notes due September 1997 with interest only payable monthly.
15
<PAGE> 16
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Long term debt including capitalized leases at April 30, 1997 is payable
by year as follows:
<TABLE>
<S> <C>
1998 $ 1,444
1999 621
2000 799
2001 247
2002 202
2003 and later 1,845
-------
$ 5,158
=======
</TABLE>
G. DEBENTURES PAYABLE
During the year ended January 31, 1997, the Company received net proceeds
of $16.8 million 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. 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 January 31, 1997, $410 of debentures, with
a $550 face amount, were outstanding.
H. LEASES AND OTHER COMMITMENTS
Rental expense under operating leases was $602 and $407 for the three
months ended April 30, 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 April 30, 1997:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- --------
<S> <C> <C>
1998 $ 368 $ 1,481
1999 270 873
2000 216 392
2001 54 112
2002 - -
-------- --------
908 $ 2,858
========
Less: Amount representing interest (113)
--------
Present value of minimum annual rentals $ 795
========
</TABLE>
As of April 30, 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 $2,487.
The former shareholders of Sciteq and option holders who have exercised
their options have the right to have the Company redeem their shares for cash
during a period of 12 days beginning May 31, 1997. The value of 102,134 shares
issued at closing and 748 shares issued upon exercise of options totaling $1,289
has been included
16
<PAGE> 17
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
in other current liabilities in the accompanying financial statements. (See Note
K). The repurchase obligation for options unexercised as of April 30, 1997 is
$931 net of amounts due the Company on exercise.
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 April 30, 1997, no liability related to this additional
consideration has been incurred.
Two officers and former shareholders of Sciteq have three year employment
contracts ending May 31, 1999 under which Sciteq is obligated to make payments
of $220 per year in total. The Company has the right to terminate these
contracts 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 $180 per year in total; additionally, each employee is 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
BW and certain former officers and directors are defendants in litigation
filed May 1994 seeking unspecified 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. The plaintiff, who purports to represent all persons who
purchased stock of BW between May 3, 1993 and April 17, 1994, seeks a
declaration that this action be determined a class under Federal Rules. The
Company believes the matter is without merit as to it, its officers and
directors. No provisions for any loss that may result upon the resolution of
this matter were made in the audited financial statements of BW for the fiscal
year ended May 31, 1996, and the Company did not assume any liabilities of the
former officers and directors in this matter in its acquisition agreement with
BW. The matter is currently in discovery and the Company believes it is
premature to evaluate the likelihood of an unfavorable outcome or the extent of
such outcome, if any.
The Company is a party to several lawsuits related to businesses sold in
prior years. The majority of such claims were assumed by the buyers in
conjunction with the sales, and as such the buyers have indemnified the Company
against any loss with respect to those claims. Management believes that any
losses to the Company, if any were to occur, as a result of these lawsuits would
be immaterial.
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.
17
<PAGE> 18
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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 700
Series B 1,000 - 2,366
Series C 4,988 - 4,988
Series D 2,853 - 2,853
Series E 11,606 1 11,606
------- ------- -------
22,947 $ 1 $25,013
======= ======= =======
</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 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 April
30, 1997, there was $700 of 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 if the then market value is less than the call limit price
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
18
<PAGE> 19
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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 693,185 shares of the Company's
common stock have been issued in conversion of these securities and accrued
dividends thereon.
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 $6,176 including $1,216 from the sale of an assigned call of
previously outstanding Series C preferred stock. 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. In connection with this placement a director of the company received a
finder's fee of $254.
An aggregate of 690,695 shares of the Company's common stock have been
issued in conversions of the Series E preferred stock and accrued dividends
thereon of which 151,034 were issued during the quarter ended April 30, 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 quarter ended April 30, 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.
19
<PAGE> 20
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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 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
April 30, 1997 totaled $34.
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 additional payment contingent
upon the net income of Sciteq for the year ended December 31, 1996 will be made
in common shares at the then market price and additional below market options.
At December 31, 1996 it Sciteq has reported unaudited net income for the
earn-out period sufficient to fully meet the contingent payment requirement and
137,683 additional shares and 48,960 additional options are due to be issued.
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 four payments resulted in the issuance of 24,340 shares of
common stock of which 6,053 were issued during the quarter ended April 30, 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 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,
20
<PAGE> 21
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1998 of which 51,959 expired unexercised during the quarter ended April 30,
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 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 quarter ended April 30, 1997.
In addition, warrants to purchase 888,683 shares at prices ranging from
$3.34 to $5.638 are outstanding from bank loan financing agreements and business
acquisitions consummated during the years ended January 31, 1993 through 1997;
558,414 of these warrants exercisable at $5.638 through June 30, 1997 are held
by entities controlled by an officer and a former director (see Note P). 100,000
warrants, exercisable at $4.00 per share through December 31, 2002, may be
redeemed by the Company for $1,000.
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).
CONTRIBUTION TO CAPITAL - RTC had a non-interest bearing demand loan of
$100 from Jardine Cho, Ltd., the former owner of RTC, which was contributed to
the capital of the Company as of May 31, 1995. No shares were issued in this
transaction.
PRIVATE PLACEMENTS - The Company issued 139,330 common shares for $835
cash during the year ended January 31, 1996.
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. 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 93,184 $ 10.47
Exercised (35,412) $ 5.63
---------
Shares under option at April 30, 1997 2,836,532 $ 6.14
=========
</TABLE>
21
<PAGE> 22
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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.
Additional information relating to stock options outstanding and
exercisable at April 30, 1997 summarized by exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
---------------------------------------------- ---------------------------
Exercise Price Weighted Average Weighted Average
Per Share Shares Life (Years) Exercise Price Shares Exercise Price
--------- ------ ------------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$1.00 - $4.99 1,254,809 8.24 $3.39 977,809 $ 3.31
$5.00 - $7.99 1,050,424 9.29 $7.32 297,918 $7.78
$8.00 - $16.50 531,299 8.15 $10.29 133,133 $10.73
--------- ---------
$1.00 - $16.50 2,836,532 8.61 $6.14 1,408,860 $4.96
========= =========
</TABLE>
M. INCOME TAXES
The Company's provision for taxes on income consists of:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
April 30, 1997 April 30, 1996
------------------------------- ----------------------------
U.S. Non-U.S. Total U.S. Non-U.S. Total
---- -------- ----- ---- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Income taxes:
Current $ - $ 20 $ 20 $ - $ 3 $ 3
Deferred - (4) (4) - - -
----- ----- ----- ----- ---- ----
Total $ - $ 16 $ 16 $ - $ 3 $ 3
===== ==== ==== ===== ==== ====
</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 April 30, 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 April 30, 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
22
<PAGE> 23
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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 to analyze the impact of such
transfers on the continued availability, for tax purposes, of the Company's net
operating losses incurred through July 31, 1996. 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 months ended
April 30, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Earnings before U.S. and non-U.S. income taxes:
United States $ (6) $ 12
Foreign 939 446
----- -----
Earnings before income taxes $ 933 $ 458
===== =====
Theoretical tax at 35% $ 327 $ 160
Loss for which no benefit was recorded as there is no
assurance of realization 834 172
Permanent differences including offshore claim with respect
to Peoples Republic of China activities (434) (144)
Timing differences (535) (76)
Adjustment for non-U.S. taxes in excess of theoretical rate (174) (83)
Utilization of tax loss carryforwards (non-U.S.) - (18)
Other - net (2) (8)
----- -----
$ 16 $ 3
===== =====
</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 $4,020 at April 30, 1997.
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 for the
three months ended April 30, 1997 and 1996 included options, warrants,
convertible preferred securities issued by DPI and BW, and additional shares to
be issued in 1997 in connection with the acquisition of DSI accounted for as a
pooling of interests. 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. The assumed repurchase is limited to 20% of the shares
outstanding as of the end of the period with the excess proceeds used to repay
short term borrowings thereby reducing interest expense.
The calculation of fully diluted earnings per share for the quarters ended
April 30, 1997 and 1996 includes the dilutive effect of convertible securities
not determined to be common stock equivalents and the additional dilution
resulting from the assumed exercise of options and warrants calculated using the
quarter end market price in the calculation of the shares repurchased under the
treasury stock method. The average market
23
<PAGE> 24
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
price of the Company's common stock for the quarter ended April 30, 1997
exceeded its quarter end price therefore no increased dilution resulted.
<TABLE>
<CAPTION>
Three Months Ended April 30
---------------------------
1997 1996
---------- ---------
<S> <C> <C>
Shares used in computing primary earnings per share:
Weighted average number of shares outstanding 11,380,476 2,914,928
Common stock equivalents, net:
Options and warrants, net 1,811,392 1,146,806
Convertible preferred stock - 67,931
Shares issuable in business combinations 82,645 54,348
---------- ---------
1,894,037 1,269,085
---------- ---------
13,274,513 4,184,013
========== =========
Shares used in computing fully diluted earnings per share:
Computed above for primary earnings per share 13,274,513 4,184,013
Other convertible securities 1,130,370 77,814
Options and warrants, net - 158,976
---------- ---------
14,404,883 4,420,803
========== =========
</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.
On February 29, 1996, the Company made a 8% demand loan in the amount of
$100 to an employee. Accrued and unpaid interest at April 30, 1997 totaled $9.
On March 11, 1997, the Company made a 8% demand loan in the amount of $100
to an entity controlled by an outside director. Accrued and unpaid interest at
April 30, 1997 totaled $1.
The Company is indemnified by an officer and former director for declines
in value of marketable securities received by it in a private placement of
common shares in February 1995. The liability under this agreement was $293 at
April 30, 1997.
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.
FED, as a founding shareholder, holds 35% of the outstanding of 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 April 30, 1997 the amount due FED from Spectra for sales in
the ordinary course of business was $452.
In the ordinary course of business, FED made sales of $212 and paid
marketing research service fees of $194 to companies and made purchases of $3
from companies controlled by a former director and present officer of FED.
24
<PAGE> 25
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
P. SUBSEQUENT EVENTS
In May 1997, the Company issued 161,940 shares of common stock in
conversion of Series C preferred stock and accrued dividends thereon.
On May 12, 1997 warrants to acquire 558,414 shares of common stock at
$5.638 per share held by entities controlled by an officer and former director
were exercised in a "cashless" transaction in which the Company recorded a
liability of $1,877 representing the difference between the closing price of the
Company's common shares at exercise and the exercise price. This liability does
not bear interest for 90 days and thereafter at 10% and will be satisfied
through a combination of the issuance of stock and cash.
Q. SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest expense and taxes paid approximated the related expenses for the
three months ended April 30, 1997 and 1996.
The stock issued to effect, in part, the FED acquisition during the
quarter ended April 30, 1996 and the ABCN investment during the quarter ended
April 30, 1997 valued at $809 and $7,250, respectively, 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
quarter ended April 30, 1996 neither provided nor used cash. Accordingly, the
$1,371 value assigned to such stock for the three months ended April 30, 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 24.7% of net sales for the three months ended April 30, 1997 and 17.3% of
net sales for the three months ended April 30, 1996. The largest single customer
account receivable at April 30, 1997 was $8,034 which is within credit terms.
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)
Three months ended April 30, 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 $ 18,154 $ 9,820 $ 1,024 $ 6,577 $ 35,575
Cost of sales 12,124 8,235 495 4,272 25,126
-------- ------- ------- ------- ---------
Gross Profit 6,030 1,585 529 2,305 10,449
Operating expenses 5,091 803 392 4,424 $ 14 (iv) 19,651
104 (v)
148 (vi)
1,798 (vii)
6,877 (viii)
-------- ------- ------- ------- ------- ---------
Operating income (loss) 939 782 137 (2,119) (8,941) (9,202)
Other income (charges) (481) (363) (111) (110) (ix) (1,384)
(17) (x)
(302) (xi)
-------- ------- ------- ------- ------- ---------
Income (loss) before
income taxes 458 419 137 (2,230) (9,370) (10,586)
Provision for income
Provision for income taxes 3 220 1 7 231
-------- ------- ------- ------- ------- ---------
Net income (loss) $ 455 $ 199 $ 136 $(2,237) $(9,370) $ (10,817)
======== ======= ======= ======= ======= =========
Weighted average shares
outstanding (000's) 4,184 2,915
Earnings (loss) per share:
Primary $ 0.10 $ (3.72)
Fully diluted $ 0.09 n/a
</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 excess of cost over net assets acquired of $1,288
arising from the FED acquisition, using an estimated 15 year useful
life.
(v) To amortize the purchased technology acquired of $2,895 arising from
the Sciteq acquisition, using an estimated 7 year useful life.
(vi) To amortize the purchased technology acquired of $4,165 arising from
the Cray acquisition, using an estimated 7 year useful life.
26
<PAGE> 27
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
(vii) To immediately recognize in-process research and development expense
arising from the Sciteq acquisition.
(viii) To immediately recognize in-process research and development expense
arising from the Cray acquisition.
(ix) To recognize interest expense assuming the Company borrowed $6,000
at 11% interest per annum to complete the FED acquisition.
(x) To recognize interest expense assuming the Company borrowed $600 at
11% interest per annum to complete the Sciteq acquisition.
(xi) To recognize interest expense assuming the Company borrowed $11,000
at 11% interest per annum to complete the Cray acquisition.
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.
27
<PAGE> 28
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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>
28
<PAGE> 29
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 three months ended April 30, 1997 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 MONTHS ENDED APRIL 30, 1997 AND
1996
Net sales of the Company for the quarter ended April 30, 1997 increased by 79.1%
to $32.6 million from $18.2 million for the quarter ended April 30, 1996 due
primarily to the business acquired during the year ended January 31, 1997 as
well as increased demand for the Company's products. (See Footnote A to the
Unaudited Consolidated Financial Statements contained in Part I herein).
Consolidated gross profit increased by 66.7% to $10 million for the quarter
ended April 30, 1997 from $6 million for the quarter ended April 30, 1996 due to
the increase in net sales related to acquisitions. Gross margin declined to
30.7% for the quarter ended April 30, 1997 from 32.9% for the quarter ended
April 30, 1996. This decline was substantially due to the lower gross margins
intrinsic to original equipment manufacturers (FED) and is not reflective of the
anticipated operational efficiencies to be achieved through the integration of
the various acquisitions of the Company although such results are not assured.
Selling and administrative expense totaled $7.1 million, or 21.8% of net sales
for the quarter ended April 30, 1997. This compares to $3.9 million, or 21.4% of
net sales for the quarter ended April 30, 1996. The increase in the dollar
amount of these expenses resulted from the addition of acquired businesses and
increased public company costs including legal, accounting and consulting fees.
As a percentage of net sales, however, these operating expenses remained
approximately constant reflecting the impact of the higher sales level attained
by the acquired businesses. These results do not reflect the full impact of the
synergy's to be achieved by the vertical and horizontal integration of the past
year's acquisitions and management believes that ongoing programs may reduce
selling and administrative expenses as a percentage of net sales nor the
implementation of new marketing plans for increasing the Company's recognition
in the marketplace, however, there can be no assurances that such reductions
will be achieved.
Research, development and engineering expenses were $1.5 million for the quarter
ended April 30, 1997, representing only 4.6% of net sales as compared with $1.3
million for the quarter ended April 30, 1996, or 7.1% of net sales. This lower
percentage reflects the increase in net sales which resulted from the addition
of acquired businesses. Management expects that in future periods, research,
development and engineering expenses will approximate a target level of 10% of
net sales.
Other operating expenses for the quarter ended April 30, 1997 included
acquisition-related charges of $467,000. This amount included amortization of
purchased technology and excess cost over net book value of assets acquired as
well as the costs associated with acquisitions accounted for as poolings of
interests. During the quarter ended April 30, 1996 the amortization of negative
goodwill decreased other operating expenses by $238,000. (See Note A to the
Unaudited Consolidated Financial Statements contained in Part I herein).
29
<PAGE> 30
Investment income was $100,000 for the quarter ended April 30, 1997, as compared
to a net investment loss of $152,000 for the quarter ended April 30, 1996. This
increase is the result of the interest earned on miscellaneous receivables as
well as investment by the Company of its securities proceeds prior to
utilization in the operations of and acquisitions by the Company during the
quarter ended April 30, 1997.
Interest expense was $434,000 or 1.3% of net sales for the quarter ended April
30, 1997 compared to $338,000 or 1.9% of net sales for the quarter ended April
30, 1996. The increase in interest expense was the result of expanded borrowing
for continuing and newly acquired businesses partially offset by the higher
interest rates paid by DPI during the quarter ended April 30, 1996.
Provision for income taxes for the quarter ended April 30, 1997 was $16,000 as
compared to $3,000 for the quarter ended April 30, 1996. The increased tax
provision resulted from the profitable operations of FED and full utilization
during the year ended January 31, 1997 of its remaining net operating loss
carryforwards. 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 April 30, 1997, the Company had net worth of $48.1 million, with total assets
of $96.5 million. Of these assets, current assets totaled $57.2 million
including $8.5 million of cash and cash equivalents, $19.4 million of accounts
receivable and $24.1 million of inventory. The Company's working capital at
April 30, 1997 was $12.8 million.
The Company's operations provided a cash flow of $2.3 million during the three
months ended April 30, 1997, as compared to $213,000 during the three months
ended April 30, 1996. This increase in net operating cash flow is reflective of
the net cash flow from operations after adjustment for non-cash income and
expense of $191,000 increased by the net decline in current assets and
liabilities.
Investing activities during the three months ended April 30, 1997 consisted of
purchases of property plant and equipment of $2.6 million, expenditures for
software development costs capitalized of $1.3 million, and other receivables of
$2.5 million (including interest bearing advances to ABCN of $2.0 million), net
of proceeds from the disposition of fixed assets. During the three months ended
April 30, 1996 investing activities included purchases of property, plant and
equipment (including the San Diego and FED facilities) of $3.7 million,
expenditures for software development costs capitalized of $404,000, net cash
outlays of $500,000 in connection with acquisition activities of the Company and
other receivables of $414,000.
The financing activities of the Company during the three months ended April 30,
1997 provided net cash inflows of $6.0 million as compared with $10.2 million
during the three months ended April 30, 1996. This $4.2 million decrease is
primarily the result of declines in private placements of the Company's
convertible preferred stock and debentures ($2.5 million), declines in proceeds
from long term debt ($3.0 million), and declines in proceeds from notes issued
to affiliates ($1.1 million) net of net repayments of short-term debt ($1.3
million).
The Company finances its operations and acquisitions from debt issuances, bank
lines of credit and security placements.
The Company through private placements of its convertible preferred stock raised
net proceeds of $6.2 million during the quarter ended April 30, 1997. (See Note
J to the Unaudited Consolidated Financial Statements contained in Part I
herein).
The Company through private placements of its 8% callable, convertible
debentures raised net proceeds of $8.7 million through April 30, 1996. (See Note
G to the Unaudited Consolidated Financial Statements contained in Part I
herein).
At April 30, 1997 the Company had $9.5 million face value of currently
convertible preferred stock outstanding of which $1.1 million was converted
prior to June 13, 1997.
30
<PAGE> 31
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 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. The capital needed to accomplish this as well as to meet
obligations arising out of acquisitions previously completed will have to be
raised to the extent funds are not then available. (See Note A to the Unaudited
Consolidated Financial Statements contained in Part I herein). The Company
cannot give any assurances that sufficient capital will be available when
needed.
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.
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; 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.
31
<PAGE> 32
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 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, scalable 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 Consolidated Financial Statements included therein.
ITEM 2: CHANGES IN SECURITIES
Not Applicable
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
A. Exhibits
20 Consolidated Financial Statements for the
Quarter Ended April 30, 1997 (included in
Part 1, Item 1)
27 Financial Data Schedule
B. Reports on Form 8-K
April 10, 1997 Change in Registrants Certifying Accountant-
BDO Seidman LLP
April 10, 1997 Stock Purchase Agreement as of March 20, 1996
and Cooperation and Supply Agreement dated
as of March 21, 1997 with Asia Broadcasting
and Communications Network, Ltd.
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/ Christopher E. Sue Date: June 16, 1997
------------------------------
Christopher E. Sue,
Chief Financial Officer
34
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED BALANCE SHEET AND UNAUDITED CONSOLIDATED
STATEMENT OF OPERATIONS AS OF AND FOR THE QUARTER ENDED APRIL 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 8,542,000
<SECURITIES> 0
<RECEIVABLES> 20,316,000
<ALLOWANCES> 888,000
<INVENTORY> 24,131,000
<CURRENT-ASSETS> 57,197,000
<PP&E> 39,168,000
<DEPRECIATION> 23,355,000
<TOTAL-ASSETS> 96,494,000
<CURRENT-LIABILITIES> 44,356,000
<BONDS> 0
0
1,000
<COMMON> 1,190,000
<OTHER-SE> 46,938,000
<TOTAL-LIABILITY-AND-EQUITY> 96,494,000
<SALES> 32,632,000
<TOTAL-REVENUES> 32,632,000
<CGS> 22,618,000
<TOTAL-COSTS> 22,618,000
<OTHER-EXPENSES> 9,080,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 434,000
<INCOME-PRETAX> 933,000
<INCOME-TAX> 16,000
<INCOME-CONTINUING> 917,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 917,000
<EPS-PRIMARY> .08
<EPS-DILUTED> .07
</TABLE>
