UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
________________
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 0-23125
________________
OSI SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
California 33-0238801
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
12525 Chadron Avenue
Hawthorne, California 90250
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 978-0516
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 as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
YES X N0__
-
As of February 5, 2002 there were 12,511,695 shares of common stock outstanding.
OSI SYSTEMS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2001
and June 30, 2001 3
Consolidated Statements of Operations for the three and six months
ended December 31, 2001 and December 31, 2000 4
Consolidated Statements of Cash Flows for the six months
ended December 31, 2001 and 2000, respectively. 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds 18
Item 4 - Submission of Matters to a Vote of Security Holders 18
Item 6 - Exhibits and Reports on Form 8-K 19
Signatures 19
-2-
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, June 30,
2001 2001
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 66,814 $ 4,467
Investments 928 863
Accounts receivable, net of allowance for doubtful accounts of $1,216 and $903
at December 31, 2001 and June 30, 2001, respectively 30,038 28,437
Current portion of note receivable 400 450
Other receivables 1,696 1,552
Inventory 32,084 31,174
Prepaids 1,036 1,009
Deferred income taxes 693 832
Income taxes receivable 697 310
-------- -------
Total current assets 134,386 69,094
Property and Equipment, net 12,828 13,405
Intangible and other assets, net 7,602 7,371
Note receivable 600 800
Deferred income taxes 1,726 1,726
-------- -------
Total $157,142 $92,396
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank lines of credit $ 513 $ 100
Current portion of long-term debt 2,625 2,625
Accounts payable 14,397 10,720
Accrued payroll and related expenses 2,610 2,614
Income taxes payable 1,446 1,525
Advances from customers 1,240 924
Accrued warranties 1,684 1,687
Other accrued expenses and current liabilities 3,202 2,585
-------- -------
Total current liabilities 27,717 22,780
Long-term debt 5,734 7,003
Deferred income taxes 132 132
-------- -------
Total liabilities 33,583 29,915
Shareholders' Equity
Preferred stock, no par value; authorized, 10,000,000 shares; none issued
and outstanding at December 31, 2001 and June 30, 2001, respectively
Common stock, no par value; authorized, 40,000,000 shares; issued and outstanding
12,494,368 and 8,462,968 shares at December 31, 2001 and June 30, 2001, respectively 102,536 43,567
Retained earnings 23,986 22,291
Accumulated other comprehensive loss (2,963) (3,377)
-------- -------
Total shareholders' equity 123,559 62,481
-------- -------
Total $157,142 $92,396
======== =======
See accompanying notes to consolidated financial statements
-3-
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Three months ended Six months ended
December 31, December 31,
-------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues $ 30,044 $ 27,996 $ 56,499 $ 52,880
Cost of goods sold 21,172 20,046 40,621 37,987
----------- ----------- ----------- -----------
Gross profit 8,872 7,950 15,878 14,893
Operating expenses:
Selling, general and administrative 5,308 5,583 9,892 11,200
Research and development 1,581 1,502 3,156 3,217
Goodwill amortization 101 129 202 257
----------- ----------- ----------- -----------
Total operating expenses 6,990 7,214 13,250 14,674
----------- ----------- ----------- -----------
Income from operations 1,882 736 2,628 219
Interest expense, net 72 285 231 589
----------- ----------- ----------- -----------
Income (loss) before provision (benefit) for income taxes
and minority interest 1,810 451 2,397 (370)
Provision (benefit) for income taxes 525 100 702 (70)
----------- ----------- ----------- -----------
Income (loss) before minority interest in net loss of subsidiary 1,285 351 1,695 (300)
Minority interest in net loss of subsidiary 146
----------- ----------- ----------- -----------
Net income (loss) $ 1,285 $ 351 $ 1,695 ($154)
=========== =========== =========== ===========
Earnings (loss) per common share $ 0.12 $ 0.04 $ 0.17 ($0.02)
=========== =========== =========== ===========
Earnings (loss) per common share,assuming dilution $ 0.12 $ 0.04 $ 0.17 ($0.02)
=========== =========== =========== ===========
Weighted average shares outstanding -assuming dilution 11,098,649 9,311,229 9,756,496 9,310,199
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
-4-
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six months ended December 31,
-----------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 1,695 ($154)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Provision for losses on accounts receivable 313 32
Depreciation and amortization 2,123 2,167
Loss on sale of property and equipment 62 134
Deferred income taxes 112 (244)
Minority interest in net loss of subsidiary (146)
Changes in operating assets and liabilities:
Accounts receivable (1,701) (2,191)
Other receivables (245) 286
Inventory (911) (4,636)
Prepaids (20) (477)
Accounts payable 3,431 617
Accrued payroll and related expenses 130 (37)
Income taxes payable (73) 1,375
Income taxes receivable (377) 17
Advances from customers 294 689
Accrued warranty (7) (130)
Other accrued expenses and current liabilities 482 335
----------- -----------
Net cash provided by (used in) operating activities 5,308 (2,363)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (1,108) (1,714)
Proceeds from sale of property and equipment 73 16
Cash paid for business acquisitions, net of cash acquired (442)
Cash received on note receivable 250
Other assets (248) (478)
----------- -----------
Net cash used in investing activities (1,033) (2,618)
----------- -----------
Cash flows from financing activities:
Net proceeds from bank lines of credits 415 3,478
Net (payments) proceeds on long-term debt (1,269) 239
Proceeds from exercise of options and warrants 2,175 36
Proceeds from issuance of stock 56,794
Purchase of treasury stock (1,347)
----------- -----------
Net cash provided by financing activities 58,115 2,406
----------- -----------
Effect of exchange rate changes on cash (43) 12
----------- -----------
Net increase (decrease) in cash and cash equivalents 62,347 (2,563)
Cash and cash equivalents, beginning of period 4,467 10,892
----------- -----------
Cash and cash equivalents, end of period $ 66,814 $ 8,329
=========== ===========
Supplemental disclosures of cash flow information - Cash paid/(received) during
the period for:
Interest $ 168 $ 472
Income taxes $ 1,066 ($1,243)
See accompanying notes to consolidated financial statements
-5-
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General. OSI Systems, Inc. and its subsidiaries (collectively, the "Company") is
a vertically integrated worldwide provider of devices, subsystems and
end-products based on optoelectronic technology. The Company designs and
manufactures optoelectronic devices and value-added subsystems for original
equipment manufacturers in a broad range of applications, including security,
medical diagnostics, telecommunications, gigabit ethernet and fiber channel
supplies, gaming, office automation, aerospace, computer peripherals and
industrial automation. In addition, the Company utilizes its optoelectronic
technology and design capabilities to manufacture security and inspection
products that it markets worldwide to end users under the "Rapiscan", "Secure"
and "Metor" brand names. These products are used to inspect people, baggage,
cargo and other objects for weapons, explosives, drugs and other contraband. In
the medical field the Company manufactures and sell desitometers which are used
to provide bone loss measurements in the diagnosis of osteoporosis. The Company
also manufactures and sells saturation of arterial hemoglobin ("S\p\O\2\")
monitors and sensors under the trade names Digital Dolphin(TM) and Dolphin
2000(TM). Digital Dolphin(TM) model 2100 S\P\O\2\ monitors have received 510 (k)
approval for sale in the United States.
Consolidation. The consolidated financial statements include the accounts of OSI
Systems, Inc. and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
consolidated balance sheet as of December 31, 2001, the consolidated statements
of operations for the three-month and six-month periods ended December 31, 2001
and 2000 and the consolidated statements of cash flows for the six month periods
ended December 31, 2001 and 2000 have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "Commission"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. However, in the opinion of management all adjustments,
consisting of only normal and recurring adjustments, necessary for a fair
presentation of the financial position and the results of operations for the
periods presented have been included. These consolidated financial statements
and the accompanying notes should be read in conjunction with the audited
consolidated financial statements and accompanying notes for the fiscal year
ended June 30, 2001 included in the Company's Annual Report on Form 10K as filed
with the Commission on September 28, 2001. The results of operations for the
quarter and six months ended December 31, 2001 are not necessarily indicative of
the results to be expected for the fiscal year ending June 30, 2002.
-6-
Recent Developments - In November 2001, the Company entered into a letter of
intent with L-3 Communications (L-3) to purchase from L-3 certain detection
systems assets of PerkinElmer, Inc. Subject to the execution of a definitive
purchase agreement and other closing terms, the Company intends to acquire from
L-3, PerkinElmer's businesses pertaining to carry-on passenger baggage screening
including service, as well as all technologies and rights associated with
PerkinElmer's ARGUS explosive detection X-ray system. The closing is subject to
numerous conditions including the satisfactory closing of L-3's purchase from
PerkinElmer of the Dectection Systems business, government and regulatory
approval, as well as the execution of a definitive purchase agreement between
the Company and L-3. The Company believes that current cash balances,
anticipated cash flows from operations and current borrowing arrangements will
be sufficient to fund the purchase of PerkinElmer's assets from L-3.
Notwithstanding the fact that the Company has entered into a letter intent with
L-3, there can be no assurances that the Company will enter into a definitive
purchase agreement with L-3 on favorable terms, or at all. In addition, for the
foregoing seasons there can be no assurances that the Company will acquire
some or all of the intended assets of PerkinElmer.
In November 2001, the Company issued and sold an aggregate of 1,696,946 shares
of its common stock in a private placement to institutional investors for an
aggregate sales price of $19.9 million. After placements agents commission and
expenses, net proceeds to the Company were $18.5 million. Roth Capital Partners
and William Blair & Company acted as placement agents in the transaction. In
connection with the transactions, Roth Capital Partners received warrants to
purchase 84,847 shares of the Company at $15.00 per share, exercisable at any
time in full or part after May 13, 2002 and no later than May 13, 2005. The
Company filed a registration statement on Form S-3 with the Commission on
November 19, 2001 for the purpose of registering these securities.
In December 2001, the Company issued and sold an aggregate of 2,070,000 shares
of its common stock in a private placement to institution investors for an
aggregate sales price of $40.4 million. After placement agent commission and
expenses, net proceeds to the Company were $38.4 million. Roth Capital Partners
acted as placement agent in the transaction. As part of the transaction, the
Company issued to the investors warrants to purchase 517,500 additional shares
of the Company at an exercise price of $23.47 per share exercisable at any time
in full or part no later than December 10, 2008. In connection with the
transaction, Roth Capital Partners received warrants to purchase 103,500 shares
of the Company at an exercise price of $23.47 per share exercisable at any time
in full or part no later than December 10, 2008. The Company filed a
registration statement on Form S-3 with the Commission on December 14, 2001, for
the purpose of registering these securities.
New Accounting Pronouncements - In July 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No.
141, "Business Combinations", which requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method and
prohibits the use of the pooling-of-interests method. The Company does not
believe that the adoption of SFAS No. 141 will have any effect on its financial
position and results of operations.
-7-
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which becomes effective for the Company beginning July 1, 2002. This
statement changes the method of accounting for goodwill to a test for impairment
and requires among other things, the discontinuance of goodwill amortization.
The Company is currently assessing the impact of the adoption of this statement
on its financial position and result of operations.
SFAS No. 143 "Accounting for Asset Retirement Obligations", which becomes
effective for the Company on July 1, 2002, addresses the obligations and asset
retirement costs associated with the retirement of tangible long-lived assets.
It requires that the fair value of the liability for an asset retirement
obligation be recorded when incurred instead of over the life of the asset. The
asset retirement costs must be capitalized as part of the carrying value of the
long-lived asset. If the liability is settled for an amount other than the
recorded balance, either a gain or loss will be recognized at settlement. The
Company is currently assessing the impact of the adoption of this statement on
its financial position and results of operations.
SFAS No. 144, "Impairment or Disposal of Long-Lived Assets", will become
effective for the Company on July 1, 2002. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
provides guidance on implementation issues related to SFAS No. "121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", and addresses the accounting for a component of an entity which has been
disposed of has been classified as held for sale. The Company is currently
assessing the impact of the adoption of this statement on its financial position
and results of operations.
Credit Risk. The Company's financial instruments that are exposed to
concentration of credit risk consist primarily of its cash, cash equivalents,
available-for-sale investments, and accounts receivable. The Company restricts
investments in cash equivalents and available-for-sale investments to financial
institutions with high credit standing. At December 31, 2001, approximately 92%
of the Company's cash equivalents were held at two financial institutions.
Credit risk on accounts receivable is minimized as a result of the large and
diverse nature of the Company's worldwide customer base. The Company performs
ongoing credit evaluations of its customers' financial condition and maintains
allowances for potential credit losses.
Derivative Instruments - The Company's use of derivatives consists of the
purchase of foreign exchange contracts, in order to attempt to reduce foreign
exchange transaction gains and losses, along with interest rate swaps on a
variable interest rate term loan.
The Company purchases forward contracts to hedge foreign exchange exposure
related to commitments to acquire inventory for sale and does not use the
contracts for trading purposes. As of December 31, 2001 and June 30, 2001,
notional amounts were approximately $5.9 million and $1.5 million for
outstanding foreign exchange contracts, respectively. The estimated fair value
of these contracts, based on quoted market prices, approximated $0 and ($50,000)
at December 31, 2001 and June 30, 2001 respectively. The foreign exchange
contracts are effective foreign exchange hedges and the difference in the fair
value from the prior reporting period has been recorded as other comprehensive
income (loss).
The Company also has entered into interest rate swaps. The terms of the swaps
are to convert a portion of the Company's variable interest rate debt into a
fixed rate liability. At December 31, 2001, and June 30, 2001 the notional
amount of the swaps were $7,973,200 and $5,042,000 respectively. The fair values
of the swaps at December 31,
-8-
2001 and June 30, 2001 were ($215,000) and ($50,000) respectively. The decrease
in the period is recorded in other comprehensive income (loss), due to the swaps
meeting the criteria of an effective cash flow hedge. No amounts were
reclassified to earnings resulting from the ineffectiveness or discontinuation
of cash flow hedges. As of December 31, 2001, the amount to be reclassified from
other comprehensive income (loss) during the next twelve months is expected to
be immaterial. The actual amounts that will be reclassified into earnings will
vary as a result of changes in market conditions. All forward contracts, swaps,
and underlying transaction exposures are carried at fair value in other accrued
expenses and liabilities in the accompanying consolidated balance sheets.
Revenue Recognition - The Company generally recognizes revenue upon shipment of
its products. Concurrent with the shipment of the product, the Company accrues
estimated warranty expenses. The Company has undertaken projects which include
the development and construction of large complex cargo inspection systems
requiring installation and customization at the customer's site. Sales under
such long-term contracts are recorded under the percentage of completion method.
Costs and estimated revenues are recorded as work is performed based on the
percentage that incurred costs bear to estimated total costs utilizing the most
recent estimates of costs. If the current contract estimate indicates a loss,
provision is made for the total anticipated loss in the current period.
Inventory - Inventory is stated at the lower of cost or market; cost is
determined on the first-in, first-out method. Inventory at December 31, 2001 and
June 30, 2001 consisted of the following (in thousands):
December 31, June 30,
2001 2001
Raw Materials ................................. $15,245 $16,442
Work-in-process ............................... 7,651 6,595
Finished goods ................................ 9,188 8,137
------- -------
Total ................................ $32,084 $31,174
======= =======
Accounts Receivable. Accounts receivable at December 31, 2001 and June 30, 2001
consisted of the following (in thousands):
December 31, June 30,
2001 2001
Trade receivables net ......................... $28,423 $27,113
Unbilled costs and accrued profit on progress
completed ..................................... 1,615 1,324
------- -------
Total ................................ $30,038 $28,437
======= =======
The unbilled costs and accrued profit at December 31, 2001 are expected to be
entirely billed and collected during calendar 2002.
-9-
Earnings Per Share. Earnings (loss) per common share is computed by dividing net
income (loss) by the weighted average number of shares outstanding during each
period presented. Earnings (loss) per common share assuming dilution is computed
based on the weighted average number of shares plus the dilutive effect of
potential common stock. As of December 31, 2000, the only type of potential
common stock was stock options from the Company's stock option plans. As of
December 31, 2001, the types of potential common stock were stock options and
stock purchase rights. Stock options and stock purchase rights totaling 621,000
and 1,149,824 were outstanding for the quarter and six months ended December 31,
2001, but were not included in the earnings (loss) assuming dilution calculation
because to do so would have been antidulitive. 988,729 stock options were
outstanding for the quarter ended December 31, 2000, but were not included in
the earnings (loss) assuming dilution calculation because to do so would have
been antidilutive.
Because the inclusion of potential commons stock had an antidilutive effect on
the earnings (loss) per share for the six months ended December 31, 2000,
reported earnings (loss) per common share and earnings (loss) per share assuming
dilution were the same for the six months ended December 31, 2000.
The following tables reconciles the numerator and denominator used in
calculating earnings per common share and earnings per common share-assuming
dilution.
For the quarter ended December 31,
----------------------------------------------------------------------------
2001 2000
---------------------------------------- -----------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Earnings per common share
Income available to
common stockholders $1,285,000 10,435,677 $0.12 $351,000 9,265,095 $0.04
Effect of Dilutive Securities
Options, treasury stock method 662,972 46,134
------------ ------------ ----------- --------- ----------- --------
Earnings per common share assuming dilution
Income available to common
stockholder, assuming dilution $1,285,000 $11,098,649 $0.12 $351,000 $9,311,229 $0.04
============ ============ =========== ========= =========== ========
For the six months ended December 31,
-----------------------------------------------------------------------------
2001 2000
---------------------------------------- -----------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Earnings per common share
Income (loss) available to
common stockholders $1,695,000 9,457,893 $0.17 ($154,000) 9,310,199 ($0.02)
Effect of Dilutive Securities
Options, treasury stock method 298,603
------------ ------------ ----------- --------- ----------- --------
Earnings per common share assuming dilution
Income (loss) available to common
stockholder, assuming dilution $1,695,000 9,756,496 $0.17 ($154,000) 9,310,199 ($0.02)
============ ============ =========== ========= =========== ========
-10-
Comprehensive Income - Comprehensive Income (loss) is computed as follows (in
thousands):
For the quarter ended
December 31,
2001 2000
------------ ------------
Net income $1,285 $351
------------ ------------
Other Comprehensive income (loss), net of taxes:
Foreign currency translation adjustments ($351) $484
Unrealized gains on marketable securities available for sale $221
Change in fair value of derivative instruments $31
------------ ------------
Other Comprehensive income (loss) ($99) $484
------------ ------------
Comprehensive income (loss) $1,186 $835
============ ============
For the six months ended
December 31,
2001 2000
------------ ------------
Net income (loss) $1,695 ($154)
------------ ------------
Other Comprehensive income (loss), net of taxes:
Foreign currency translation adjustments $501 ($98)
Unrealized gains on marketable securities available for sale $28
Change in fair value of derivative instruments ($115)
------------ ------------
Other Comprehensive income (loss) $414 ($98)
------------ ------------
Comprehensive income (loss) $2,109 ($252)
============ ============
Segment Information.
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company has reflected the provisions of
SFAS No. 131 in the accompanying financial statements for all periods presented.
The Company believes that it operates in two identifiable industry segments, a)
optoelectronic devices and subsystems, medical imaging systems, and b) security
and inspection products. For the quarter and six months ended December 31, 2001,
external revenues from optoelectronics devices subsystems and medical imaging
systems were $11,433 and $23,973, compared to $13,878 and $27,423 for the
quarter and six months ended December 31, 2000. For the quarter and six months
ended December 31, 2001, revenues from security and inspection products were
$18,611 and $32,526, compared to $14,118 and $25,457 for the quarter and six
months ended December 31, 2000.
Segment information is provided by geographic area. The Company is vertically
integrated and is sharing common resources and facilities. Therefore, with the
exception of external revenues, meaningful information is not available by
industry or product segment.
-11-
The company's operating locations include the North America (United
States and Canada), Europe (United Kingdom, Denmark, Finland and Norway) and
Asia (Singapore and Malaysia). The company's operations by geographical areas
are as follows (in thousands):
Three months ended December 31, 2001
-----------------------------------------------------------------------------
North
America Europe Asia Eliminations Consolidated
-----------------------------------------------------------------------------
Revenues from external customers $18,413 $ 8,979 $ 2,652 $30,044
Transfer between geographical areas $ 1,336 $ 1,097 $ 9,097 ($11,530)
-----------------------------------------------------------------------------
Total revenues $19,749 $10,076 $11,749 ($11,530) $30,044
=============================================================================
Income (loss) from operations ($303) $ 726 $ 1,602 ($143) $ 1,882
=============================================================================
Three months ended December 31, 2000
-----------------------------------------------------------------------------
North
America Europe Asia Eliminations Consolidated
-----------------------------------------------------------------------------
Revenues from external customers $ 21,000 $ 5,869 $ 1,127 $27,996
Transfer between geographical areas $ 2,254 $ 1,152 $ 7,760 ($11,166)
-----------------------------------------------------------------------------
Total revenues $ 23,254 $ 7,021 $ 8,887 ($11,166) $27,996
=============================================================================
Income (loss) from operations $ (709) $ 249 $ 989 $ 207 $ 736
=============================================================================
Six months ended December 31, 2001
-----------------------------------------------------------------------------
North
America Europe Asia Eliminations Consolidated
-----------------------------------------------------------------------------
Revenues from external customers $36,094 $15,259 $ 5,146 $56,499
Transfer between geographical areas $ 2,632 $2,373 $16,495 ($21,500)
-----------------------------------------------------------------------------
Total revenues $38,726 $17,632 $21,641 ($21,500) $56,499
=============================================================================
Income (loss) from operations ($1,437) $ 1,244 $ 2,957 $ (136) $ 2,628
=============================================================================
Six months ended December 31, 2000
-----------------------------------------------------------------------------
North
America Europe Asia Eliminations Consolidated
-----------------------------------------------------------------------------
Revenues from external customers $ 36,606 $ 13,138 $ 3,136 $52,880
Transfer between geographical areas $ 4,535 $ 2,591 $ 13,544 ($20,670)
-----------------------------------------------------------------------------
Total revenues $ 41,141 $ 15,729 $ 16,680 ($20,670) $52,880
=============================================================================
Income (loss) from operations $ (2,333) $ 882 $ 1,525 $ 145 $ 219
=============================================================================
-12-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Statements in this report that are forward-looking are based on current
expectations, and actual results may differ materially. Forward-looking
statements involve numerous risks and uncertainties that could cause actual
results to differ materially, including, but not limited to, the possibilities
that the demand for the Company's products may decline as a result of possible
changes in general and industry specific economic conditions and the effects of
competitive pricing and such other risks and uncertainties as are described in
this report on Form 10-Q and other documents previously filed or hereafter filed
by the Company from time to time with the Securities and Exchange Commission.
Results of Operations
Revenues. Revenues consist of sales of optoelectronic devices and value added
subsystems, medical imaging systems and security and inspection products.
Revenues are recorded net of all inter-company transactions. Revenues increased
by 7.3% to $30.0 million for the three months ended December 31, 2001, compared
to $28.0 million for the comparable prior year period. For the six months ended
December 31, 2001, revenues increased by 6.8% to $56.5 million from $52.9
million for the comparable prior year period. Revenues for the three months
ended December 31, 2001 from optoelectronic devices and value added subsystems,
and medical imaging systems net of intercompany eliminations decreased by $2.4
million or 17.6% to $11.4 million, compared to $13.9 million for comparable
prior year period and revenues from security and inspection products increased
by $4.5 million, or 31.8% to $18.6 million, compared to $14.1 million for the
comparable prior year period. Revenues for the six months ended December 31,
2001 from optoelectronic devices, value added subsystems and medical imaging
systems net of intercompany eliminations decreased by $3.5 million or 12.6% to
$24.0 million, compared to $27.4 million for the comparable prior year period
and revenues from security and inspection products increased by $7.1 million or
27.8%, to $32.5 million, compared to $25.5 million for the comparable prior year
period. The decrease in revenues from sales of optoelectronic devices, value
added subsystems and medical imaging systems for the quarter and six months
ended December 31, 2001 was primarily due to a discontinued product line of
portable data/video projectors systems and the exclusion of Silicon
Microstructures, Inc. ("SMI") revenues and decrease in fiber optic sales. SMI
was sold in March 2001. SMI `s revenues and revenues from the sale of data/video
projector systems for the three and six months ended December 31, 2001 were $2.0
million and $4.4 million, respectively, compared to $0 revenues for the three
and six months ended December 31, 2001.The increase in revenues from the sale of
security and inspection was due to increased sales of X-ray screening machines
in the United States and international markets in response to the attacks on the
World Trade Center and Pentagon on September 11, 2001.
-13-
Gross Profit. Cost of goods sold consists of material, labor and manufacturing
overhead. Gross profit increased by 11.6% to $8.9 million for the three months
ended December 31, 2001, compared to $8.0 million for the comparable prior year
period. For the six months ended December 31, 2001, gross profit increased by
6.6% to $15.9 million, compared to $14.9 million change for the comparable prior
year period. As a percentage of revenues, gross profit increased in the quarter
to 29.5% this year, from 28.4% last year. As a percentage of revenues, gross
profit decreased in the six months to 28% this year, from 28.2% last year. The
increase in gross profit for the quarter ended December 31, 2001, was due to
increased security and inspection products shipments which have a higher gross
margin.
Selling, General and Administrative. Selling, general and administrative
expenses consisted primarily of compensation paid to sales, marketing and
administrative personnel, and professional service fees and marketing expenses.
For the three months ended December 31, 2001, such expenses decreased 5.1% to
$5.3 million, compared to $5.6 million for the comparable prior year period. For
the six months ended December 31, 2001, such expenses decreased by 11.7% to $9.9
million, compared to $11.2 million for the comparable prior year period. As a
percentage of revenues, selling, general and administrative expenses decreased
in the quarter and six months to 17.7% and 17.5% this year, from 19.9% and 21.2%
last year, respectively. The decrease in expenses for the quarter and six months
was primarily due to the absence of selling general and administrative expenses
of the divested SMI subsidiary and decreased legal and professional fees and
decreased administrative expenses. Selling, general and administrative expenses
of SMI for the quarter and six months ended December 31, 2000 were $236,000 and
$405,000 , respectively, compared to $0 for the three and six months periods
ended December 31, 2001.
Research and Development. Research and development expenses include research
related to new product development and product enhancement expenditures. For the
three months ended December 31, 2001, such expenses increased 5.3% to $1.6
million, compared to $1.5 million for the comparable prior year period. For the
six months ended December 31, 2001, such expenses remained relatively constant
compared to the prior year period. As a percentage of revenues, research and
development expenses decreased in the three month and six month periods to 5.3%
and 5.6% this period from 5.4% and 6.1% for the comparable prior year period.
The decrease in research and development expenses was primarily due to certain
research and development personnel who worked directly on specific shipments and
the cost of their services were charged to manufacturing overhead and the
absence of research and development expenses of SMI.
Income (Loss) from Operations. For the three months ended December 31, 2001, the
Company had income from operations of $1.8 million compared to $736,000 for the
three months ended December 31, 2000. For the six months ended December 31,
2001, the Company had income from operations of $2.6 million compared to
$219,000 for the comparable prior year period. Income from operations for the
three months ended December 31, 2001, increased due to increased revenues and
increased gross margin and
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income from operations for the six months ended December 31, 2001 increased due
to increased revenues, increased gross profits and lower selling, general and
administrative expenses.
Interest Expense. For the three months ended December 31, 2001, the Company
incurred net interest expense of $72,000, compared to net interest expense of
$285,000 for the three months ended December 31, 2000. For the six months ended
December 31, 2001, the Company incurred net interest expense of $231,000,
compared to net interest expense of $589,000 for the six months ended December
31, 2000. The decrease in net interest expense for the three and six months
ended December 31, 2001 was due to decreased borrowings under the Company's
lines of credit and was further reduced by interest income on the proceeds from
private placements in November and December 2001. These proceeds are invested in
short term investments with an original maturity date of less than ninety days.
Provision (Benefit) for Income Taxes. Provision for income taxes increased to
$525,000 for the three months ended December 31, 2001, compared to $100,000 for
the three months ended December 31, 2000. For the six months ended December 31,
2001, the Company had provision for income taxes income of $702,000 compared to
a income tax benefit of $70,000 for the six months ended December 31, 2000. The
change in the effective income tax rate was due to a mix in income from U.S. and
foreign operations.
Net Income (Loss). For the reasons outlined above, the Company had net income of
$1.3 million and $1.7 million for the three and six months ended December 31,
2001, compared to net income of $351,000 and a net loss of $154,000 for the
three and six months ended December 31, 2000, respectively.
Liquidity and Capital Resources
The Company's operations provided net cash of $5.3 million during the six months
ended December 31, 2001. The amount of net cash provided by operations reflects
increases in accounts payable, advances from customers and other accrued
expenses and current liabilities, and was offset in part by an increase in
accounts receivable, other receivables, inventory and income taxes receivable.
The increase in accounts receivable is mainly due to the increased sales. The
increase in inventory is due to an increased demand for security and inspection
products.
Net cash used in investing activities was $1.0 million and $2.6 million for the
six months ended December 31, 2001 and 2000, respectively. In the six month
period ended December 31, 2001, net cash used in investing activities reflects
cash used for the purchase of property and equipment. In the six months ended
December 31, 2000, the net cash used in investing activities primarily reflects
cash used in business acquisitions and the purchase of property and equipment.
Net cash provided by financing activities was $58.1 million and $2.4 million for
the six
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months ended December 31, 2001 and 2000, respectively. During the six months
ended December 31, 2001, net cash provided by financing activities was $58.1
million and $2.4 million for the six months ended December 31, 2001 and 2000,
respectively. During the six months ended December 31, 2001, net cash provided
by financing activities resulted primarily from the proceeds from the private
placements totaling $56.9 million and was offset in part by repayment of long
term debt. The Company anticipates utilizing the proceeds from these private
placements for working capital requirements and other general corporate purposes
including acquisitions.
In March 1999, the Company announced a stock repurchase program of up to
2,000,000 shares of its common stock. Through February 13, 2002, the Company
repurchased 1,404,500 shares at an average price $4.37 per share. The stock
repurchase program did not have a material effect on the Company's liquidity and
is not expected to have a material effect on liquidity in subsequent quarters.
The Company anticipates that current cash balances, anticipated cash flows from
operations and current borrowing arrangements will be sufficient to meet its
working capital, stock repurchase program and capital expenditure needs for the
foreseeable future.
Market Risk - The Company is exposed to certain market risks which are inherent
in the Company's financial instruments and arise from transactions entered into
in the normal course of business. The Company may enter into derivative
financial instrument transactions in order to manage or reduce market risk in
connection with specific foreign currency-denominated transactions. The Company
does not enter into derivative financial instrument transactions for speculative
purposes.
Foreign Currency Translation. The accounts of the Company's operations in
Singapore, Malaysia, England, Norway, Denmark, Finland and Canada are maintained
in Singapore dollars, Malaysian ringgits, U.K. pounds sterling, Norwegian
kroner, Danish kroner, Finnish markka and Canadian dollars, respectively.
Foreign currency financial statements are translated into U.S. dollars at
current rates, with the exception of revenues, costs and expenses, which are
translated at average rates during the reporting period. Gains and losses
resulting from foreign currency transactions are included in income, while those
resulting from translation of financial statements are excluded from income and
accumulated as a component of accumulated other comprehensive income. Net
transaction losses of approximately $84,000 and $67,000 were included in the
Company's results for the six months ended December 31, 2001 and 2000,
respectively.
Importance of International Markets - International markets provide the Company
with significant growth opportunities. However, the following events, among
others, could adversely affect the Company's financial results in subsequent
periods: periodic economic downturns in different regions of the world, changes
in trade policies or tariffs, and political instability.
For the quarter and six months ended December 31, 2001, overall foreign currency
fluctuations relative to the U.S. dollar had an immaterial effect on the
Company's
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consolidated revenues and results of operations. As a result of monetary policy
in Malaysia, including the pegging of the Malaysian ringgit to the U.S. dollar,
the Company believes that its foreign currency exposure in Malaysia will not be
significant in the foreseeable future. The Company continues to perform ongoing
credit evaluations of its customers' financial condition and, if deemed
necessary, the Company requires advance payments for sales. The Company is
monitoring economic and currency conditions around the world to evaluate whether
there may be any significant effect on its international sales in the future.
Due to its overseas investments and the necessity of dealing with local
currencies in its foreign business transactions, the Company is at risk with
respect to foreign currency fluctuations.
Euro Conversion. On January 1, 1999, 11 of 15 member countries of the European
Union introduced a new currency, the "Euro". The conversion rates between the
Euro and the participating nations' existing legacy currencies were fixed
irrevocably as of December 31, 1998. Prior to full implementation of the new
currency on January 1, 2002, there will be a transition period during which
parties may, at their discretion, use either the legacy currencies or the Euro
for financial transactions. The Company is not aware of any material operational
issues or costs associated with preparing internal systems for the Euro. While
it is not possible to accurately predict the impact the Euro will have on the
Company's business or on the economy in general, management does not anticipate
that the Euro conversion will have a material adverse impact on the Company's
market risk with respect to foreign exchange, its results of operations, or its
financial condition.
Foreign Exchange Contracts. The Company purchases forward contracts to hedge
foreign exchange exposure related to commitments to acquire inventory for sale
and does not use the contracts for trading purposes. As of December 31, 2001 and
June 30, 2001, notional amounts were approximately $5.9 million and $1.5 million
for outstanding foreign exchange contracts, respectively. The estimated fair
value of these contracts, based on quoted market prices, approximated $0 and
($50,000) at December 31, 2001 and June 30, 2001 respectively. The foreign
exchange contracts are effective foreign exchange hedges and the difference in
the fair value from the prior reporting period has been recorded as other
comprehensive income (loss).
Credit Risk. The Company's financial instruments that are exposed to
concentration of credit risk consist primarily of its cash, cash equivalents,
available-for-sale investments, and accounts receivable. The Company restricts
investments in cash equivalents and available-for-sale investments to financial
institutions with high credit standing. At December 31, 2001, approximately 92%
of the Company's cash equivalents were held at two financial institutions.
Credit risk on accounts receivable is minimized as a result of the large and
diverse nature of the Company's worldwide customer base. The Company performs
ongoing credit evaluations of its customers' financial condition and maintains
allowances for potential credit losses.
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Interest Rate Risk. All highly-liquid investments with a maturity of three
months or less are classified as cash equivalents and recorded in the balance
sheet at fair value. Short-term investments are comprised of high quality
marketable securities. The Company generally does not use derivatives to hedge
its interest rate risk with the exception of interest rate swaps to convert a
portion of the Company's variable-interest-rate debt to a fixed-rate liability.
At December 31, 2001, the fair values of the swaps were ($215,000). The change
in the fair values of the swaps from the previous reported period is recorded in
other comprehensive income (loss) due to the swaps meeting the criteria of an
effective cash flow hedge.
Inflation. The Company does not believe that inflation has had a material impact
on its results of operations for the six months ended December 31, 2001.
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
In December 2001, the Company offered and sold 2,070,000 shares of its common
stock to certain accredited, institutional investors for an aggregate of $40.4
million. As part of the sale, the Company granted warrants to the investors to
purchase 517,500 shares of common stock at an exercise price of $23.47 per
share. The Company paid Roth Capital Partners a placement agent fee consisting
of a cash commission of $2.0 million and warrants. The warrants issued to Roth
Capital represented the right to purchase 103,500 shares of common stock at an
exercise price of $23.47 per share. Both the investor and Roth Capital warrants
were exercisable immediately and expire in December 2008. No general forms of
advertising or solicitation were used in connection the issuance of shares and
warrants. The offer and sale of the Company's common stock and warrants above
was exempt from the registration provisions of the Securities Act of 1933, as
amended (the "Act"), pursuant to Section 4(2) and Regulation D thereof.
In November 2001, the Company offered and sold 1,696,946 shares of its common
stock to certain accredited, institutional investors for an aggregate of $19.9
million. The Company paid Roth Capital Partners and William Blair & Company a
placement agent fee consisting of a cash commission of $977,000 and $419,000,
respectively, and, with respect to Roth Capital, warrants. The warrants issued
to Roth Capital represented the right to purchase 84,847 shares of common stock
at an exercise price of $15 per share. The Roth Capital warrants are exercisable
after May 13, 2002 and expire in May 2005. No general forms of advertising or
solicitation were used in connection the issuance of shares and warrants. The
offer and sale of the Company's common stock and warrants above was exempt from
the registration provisions of the Act, pursuant to Section 4(2) and Regulation
D thereof.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders on November 16, 2001, the following
actions were taken:
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1. Election of Directors
Name For Withheld
---- --- --------
Deepak Chopra 6,955,380 53,362
Ajay Mehra 6,955,380 53,362
Steven C. Good 6,996,380 12,362
Meyer Luskin 6,996,380 12,362
Madan G. Syal 6,994,500 14,242
1. Ratification of Deloitte & Touche L.L.P. as independent auditors for
the year ending June 30, 2001.
For 6,999,681
Against 4,857
Abstain 4,204
Item 6. Exhibits and Reports of Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
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, in the City of Hawthorne, State of
California on the 14th day of February 2002.
OSI Systems, Inc.
-----------------
By: /s/ Deepak Chopra
___________________________
Deepak Chopra
President and
Chief Executive Officer
By: /s/ Ajay Mehra
___________________________
Ajay Mehra
Vice President and
Chief Financial Officer
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