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 March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-23125
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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] NO [ ]
As of April 13, 2002 there were 12,785,624 shares of common stock outstanding.
OSI SYSTEMS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2002 and June 30, 2001 3
Consolidated Statements of Operations for the three and nine
months ended March 31, 2002 and March 31, 2001 4
Consolidated Statements of Cash Flows for the nine months ended
March 31, 2002 and 2001, respectively. 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition,
and Results of Operations 13
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds 19
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 20
-2-
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31, June 30,
2002 2001
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $67,205 $4,467
Investments 897 863
Accounts receivable, net of allowance for doubtful accounts of $1,272 and $903
at March 31, 2002 and June 30, 2001, respectively 32,123 28,437
Current portion of note receivable 350 450
Other receivables 2,626 1,552
Inventory 31,813 31,174
Prepaids 1,420 1,009
Deferred income taxes 547 832
Income taxes receivable 289 310
---------- ----------
Total current assets 137,270 69,094
Property and Equipment, net 12,939 13,405
Intangible and other assets, net 7,874 7,371
Note receivable 450 800
Deferred income taxes 1,726 1,726
---------- ----------
Total $160,259 $92,396
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank lines of credit $294 $100
Current portion of long-term debt 2,625 2,625
Accounts payable 12,768 10,720
Accrued payroll and related expenses 3,411 2,614
Income taxes payable 783 1,525
Advances from customers 1,485 924
Accrued warranties 1,694 1,687
Other accrued expenses and current liabilities 3,052 2,585
---------- ----------
Total current liabilities 26,112 22,780
Long-term debt 5,072 7,003
Deferred income taxes 132 132
---------- ----------
Total liabilities 31,316 29,915
Minority interest 65
---------- ----------
Shareholders' Equity
Preferred stock, no par value; authorized, 10,000,000 shares; none issued
and outstanding at March 31, 2002 and June 30, 2001, respectively
Common stock, no par value; authorized, 40,000,000 shares; issued and
outstanding 12,751,699 and 8,462,968 shares at March 31, 2002 and
June 30, 2001, respectively 105,506 43,567
Retained earnings 26,281 22,291
Accumulated other comprehensive loss (2,909) (3,377)
---------- ----------
Total shareholders' equity 128,878 62,481
---------- ----------
Total $160,259 $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 March 31, Nine months ended March 31,
---------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ -----------
Revenues $32,134 $29,379 $88,633 $82,259
Cost of goods sold 21,721 21,506 62,342 59,493
------------ ------------ ------------ -----------
Gross profit 10,413 7,873 26,291 22,766
Operating expenses:
Selling, general and administrative 5,493 5,258 15,385 16,458
Research and development 1,706 1,765 4,862 4,982
Goodwill amortization 101 132 303 389
------------ ------------ ------------ -----------
Total operating expenses 7,300 7,155 20,550 21,829
------------ ------------ ------------ -----------
Income from operations 3,113 718 5,741 937
Interest (income) expense, net (180) 276 51 865
Gain on sale of subsidiary (2,967) (2,967)
------------ ------------ ------------ -----------
Income before provision for income taxes and minority interest 3,293 3,409 5,690 3,039
Provision for income taxes 933 869 1,635 799
------------ ------------ ------------ -----------
Income before minority interest of subsidiary 2,360 2,540 4,055 2,240
Minority interest in net (income) loss of subsidiary (65) (65) 146
------------ ------------ ------------ -----------
Net income $2,295 $2,540 $3,990 $2,386
============ ============ ============ ===========
Earnings per common share $0.18 $0.28 $0.38 $0.26
============ ============ ============ ===========
Earnings per common share,assuming dilution $0.17 $0.28 $0.37 $0.26
============ ============ ============ ===========
Weighted average shares outstanding 12,642,855 9,007,468 10,519,547 9,209,289
============ ============ ============ ===========
Weighted average shares outstanding -assuming dilution 13,387,798 9,032,638 10,860,778 9,225,122
============ ============ ============ ===========
See accompanying notes to consolidated financial statements
-4-
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine months ended March 31,
--------------------------
2002 2001
--------- --------
Cash flows from operating activities:
Net Income $3,990 $2,386
Adjustments to reconcile net income to net cash used in operating
activities:
Provision for losses in accounts receivables 370 206
Depreciation and amortization 2,989 3,359
Loss on sale of property and equipment 69 140
Deferred income taxes 248 (244)
Gain on sale of subsidiary (2,967)
Minority interest in net income (loss) of subsidiary 65 (146)
Changes in operating assets and liabilities:
Accounts receivable (3,907) (2,367)
Other receivables (1,184) 350
Inventory (903) (4,254)
Prepaids (407) (972)
Accounts payable 1,994 (1,862)
Accrued payroll and related expenses 771 818
Income taxes payable (647) 2,142
Income taxes receivable 27 (36)
Advances from customers 547 1,670
Accrued warranties 5 (78)
Other accrued expenses and current liabilities 408 109
--------- --------
Net cash provided by (used in) operating activities 4,435 (1,746)
--------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,803) (3,017)
Proceeds from sale of property and equipment 92 496
Increase in investments (223) (121)
Cash received for business disposition, net of disposition costs 5,961
Cash paid for business acquisitions, net of cash acquired (442)
Cash received on note receivable 450 250
Other assets (448) (201)
--------- --------
Net cash (used in) provided by investing activities (1,932) 2,926
--------- --------
Cash flows from financing activities:
Net proceeds from (payment to) bank lines of credits 191 (2,506)
Net payments on long-term debt (1,930) (7)
Proceeds from exercise of stock options 5,145 58
Proceeds from issuance of stock 56,794
Purchase of treasury stock (2,042)
--------- --------
Net cash provided by (used in) financing activities 60,200 (4,497)
--------- --------
Effect of exchange rate changes on cash 35 29
--------- --------
Net increase (decrease) in cash and cash equivalents 62,738 (3,288)
Cash and cash equivalents, beginning of period 4,467 10,892
--------- --------
Cash and cash equivalents, end of period $67,205 $7,604
========= ========
Supplemental disclosures of cash flow information - Cash paid/(received) during
the period for:
Interest $2 $745
Income taxes $2,003 ($1,316)
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 densitometers, which are
used to provide bone loss measurements in the diagnosis of osteoporosis. The
Company also manufactures and sells saturation of arterial hemoglobin ("SpO2")
monitors and sensors under the trade names Digital DolphinTM and Dolphin 2000TM.
Digital DolphinTM model 2100 SpO2 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 March 31, 2002, the consolidated statements of
operations for the three-month and nine-month periods ended March 31, 2002 and
2001 and the consolidated statements of cash flows for the nine-month periods
ended March 31, 2002 and 2001 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 10-K as filed with the
Commission on September 28, 2001. The results of operations for the quarter and
nine months ended March 31, 2002 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., which L-3 is in the process of acquiring.
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 its Detection
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 such
assets from L-3. Notwithstanding the fact that the Company has entered into a
letter of 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 reasons, there can be no assurances that the
Company will acquire some or all of the intended assets of Perkin Elmer.
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 placement agents commissions, 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's commission, and
expenses, net proceeds to the Company were $38.3 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's common stock 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 Pronouncement. 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
-7-
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.
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 and which 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 March 31, 2002, approximately 89.1%
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 or speculative
-8-
purposes. As of March 31, 2002 and June 30, 2001, notional amounts were
approximately $0 and $1.5 million for outstanding foreign exchange contracts,
respectively. The estimated fair value of these contracts, based on quoted
market prices, approximated ($50,000) at June 30, 2001. 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 has also entered into an forward exchange contract with a notional
amount of $5.9 million to hedge foreign exchange exposure on accounts receivable
and payable balances in Malaysia in the event of a possible change in monetary
policy in Malaysia relating to the pegging of the Malaysian ringgit to the US
dollar. Since the monetary policy has remained unchanged and the Malaysian
ringgit is still pegged to the US dollar, the forward exchange contract has no
fair value as of March 31, 2002. This contract expires in December 2002.
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 March 31, 2002, and June 30, 2001 the notional amount
of the swaps were $7,343,709 and $5,042,000 respectively. The fair values of the
swaps at March 31, 2002 and June 30, 2001 were ($144,000) 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 March 31, 2002,
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 March 31, 2002 and
June 30, 2001 consisted of the following (in thousands):
March 31, June 30,
2002 2001
Raw Materials $15,793 $16,442
Work-in-process 7,379 6,595
Finished goods 8,641 8,137
--------- ---------
Total $31,813 $31,174
========= =========
Accounts Receivable. Accounts receivable at March 31, 2002 and June 30, 2001
consisted of the following (in thousands):
March 31, June 30,
2002 2001
Trade receivables net $29,633 $27,113
Unbilled costs and accrued profit on progress
completed 2,490 1,324
--------- ---------
Total $32,123 $28,437
========= =========
The unbilled costs and accrued profit at March 31, 2002 are expected to be
entirely billed and collected during calendar 2002.
-9-
Earnings Per Share. Earnings per common share is computed by dividing net income
by the weighted average number of shares outstanding during each period
presented. Earnings 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 March 31, 2001, the only type of potential common stock was
stock options from the Company's stock option plans. As of March 31, 2002, the
types of potential common stock were stock options and stock purchase rights.
Stock options and stock purchase rights totaling 0 and 841,000 were outstanding
for the quarter and nine months ended March 31, 2002, but were not included in
the earnings per common share (assuming dilution) calculation because to do so
would have been antidilutive. For the quarter and nine months ended March 31,
2001, 938,479 and 766,548 stock options were outstanding, but were not included
in the earnings per common share (assuming dilution) calculation because to do
so would have been antidilutive.
The following tables reconcile the numerator and denominator used in calculating
earnings per common share and earnings per common share-assuming dilution.
For the quarter ended March 31,
-----------------------------------------------------------------------------
2002 2001
---------------------------------------- -----------------------------------
Income
(Numerator) Shares Per-Share Income Shares Per-Share
(Denominator) Amount (Numerator) (Denominator) Amount
Earnings per common share
Income available to
common stockholders $2,295,000 12,642,855 $0.18 $2,540,000 9,007,468 $0.28
Effect of Dilutive Securities
Options, treasury stock method 744,943 25,170
------------- ------------- ----------- ---------- ------------ ---------
Earnings per common share assuming dilution
Income available to common
stockholder, assuming dilution $2,295,000 13,387,798 $0.17 $2,540,000 9,032,638 $0.28
============= ============= =========== ========== ============ =========
For the nine months ended March 31,
--------------------------------------------------------------------------------
2002 2001
---------------------------------------- --------------------------------------
Income
(Numerator) Shares Per-Share Income Shares Per-Share
(Denominator) Amount (Numerator) (Denominator) Amount
Earnings per common share
Income available to
common stockholders $3,990,000 10,519,547 $0.38 $2,386,000 9,209,289 $0.26
Effect of Dilutive Securities
Options, treasury stock method 341,231 15,833
------------- ------------- ----------- -------------- ------------ --------
Earnings per common share assuming dilution
Income available to common
stockholder, assuming dilution $3,990,000 10,860,778 $0.37 $2,386,000 9,225,122 $0.26
============= ============= =========== ============== ============ ========
-10-
Comprehensive Income - Comprehensive Income (loss) is computed as follows
(in thousands):
For the quarter ended
March 31,
2002 2001
------------ ------------
Net income $2,295 $2,540
------------ ------------
Other Comprehensive income (loss), net of taxes:
Foreign currency translation adjustments ($68) ($850)
Unrealized gains on marketable securities available for sale ($7)
Change in fair value of hedging
instruments $129
------------ ------------
Other Comprehensive income (loss) $54 ($850)
------------ ------------
Comprehensive income $2,349 $1,690
============ ============
For the nine months ended
March 31,
2002 2001
------------ ------------
Net income $3,990 $2,386
------------ ------------
Other Comprehensive income (loss), net of taxes:
Foreign currency translation adjustments $433 ($948)
Unrealized gains on marketable securities available for sale $21
Change in fair value of hedging
instruments $14
------------ ------------
Other Comprehensive income (loss) $468 ($948)
------------ ------------
Comprehensive income $4,458 $1,438
============ ============
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 nine months ended March 31, 2002,
external revenues from optoelectronic devices subsystems and medical imaging
systems were $12,716 and $36,689 compared to $16,723 and $44,146 for the quarter
and nine months ended March 31, 2001. For the quarter and nine months ended
March 31, 2002, revenues from security and inspection products were $19,418 and
$51,944 compared to $12,656 and $38,113 for the quarter and nine months ended
March 31, 2001.
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-
Segment Information. 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 March 31, 2002
--------------------------------------------------------------------------
North
America Europe Asia Eliminations Consolidated
--------------------------------------------------------------------------
Revenues $ 21,978 $ 8,050 $ 2,106 $ 32,134
Transfer between geographical areas $ 2,434 $ 1,326 $ 9,410 $ (13,170)
--------------------------------------------------------------------------
Net revenues $ 24,412 $ 9,376 $ 11,516 $ (13,170) $ 32,134
==========================================================================
Income (loss) from operations $ 951 $ 449 $ 1,840 $ (127) $ 3,113
==========================================================================
Three months ended March 31, 2001
--------------------------------------------------------------------------
North
America Europe Asia Eliminations Consolidated
--------------------------------------------------------------------------
Revenues $ 21,037 $ 6,786 $ 1,556 $ 29,379
Transfer between geographical areas $ 2,417 $ 1,001 $ 7,822 $ (11,240)
--------------------------------------------------------------------------
Net revenues $ 23,454 $ 7,787 $ 9,378 $ (11,240) $ 29,379
==========================================================================
Income (loss) from operations $ (368) $ (79) $ 1,315 $ (150) $ 718
==========================================================================
Nine months ended March 31, 2002
--------------------------------------------------------------------------
North
America Europe Asia Eliminations Consolidated
--------------------------------------------------------------------------
Revenues $ 58,072 $ 23,309 $ 7,252 $ 88,633
Transfer between geographical areas $ 5,066 $ 3,699 $ 25,905 $ (34,670)
--------------------------------------------------------------------------
Net revenues $ 63,138 $ 27,008 $ 33,157 $ (34,670) $ 88,633
==========================================================================
Income (loss) from operations $ (486) $ 1,693 $ 4,797 $ (263) $ 5,741
==========================================================================
Nine months ended March 31, 2001
--------------------------------------------------------------------------
North
America Europe Asia Eliminations Consolidated
--------------------------------------------------------------------------
Revenues $ 57,643 $ 19,924 $ 4,692 $ 82,259
Transfer between geographical areas $ 6,952 $ 3,592 $ 21,366 $ (31,910)
--------------------------------------------------------------------------
Net revenues $ 64,595 $ 23,516 $ 26,058 $ (31,910) $ 82,259
==========================================================================
Income (loss) from operations $ (2,701) $ 803 $ 2,840 $ (5) $ 937
==========================================================================
-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.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United States of
America. Our preparation of these consolidated financial statements requires us
to make judgments and estimates that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from such estimates under different
assumptions or conditions. The following summarizes our critical accounting
policies and significant estimates used in preparing our consolidated financial
statements:
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. The
percentage-of-completion method relies on estimates of total expected contract
revenue and costs. We use this method of revenue recognition since reasonably
dependable estimates of the revenue and costs applicable to various stages of a
contract can be made. Recognized revenues and profit are subject to revisions as
the contract progresses to completion.
Accounts Receivable. We perform ongoing credit evaluations of our customers and
adjust credit limits based upon each customer's payment history and current
credit worthiness, as determined by credit information available at that time.
We continuously monitor collections and payments from our customers and we
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. If the condition of
our customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.
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Inventory. Inventory is stated at the lower of cost or market, cost is
determined on the first-in, first-out method. We write down inventory for
slow-moving and obsolete inventory based on assessments of future demands for
the next 18 to 24 months, market conditions and customers who may be
experiencing financial difficulties. If these factors are less favorable than
those projected, additional inventory write-downs may be required.
Deferred Tax Asset Valuation Allowance. We record a valuation allowance to
reduce our U.S. deferred tax assets when it is more likely than not, based upon
currently available evidence and other factors, that we will not realize some
portion or all of our deferred tax assets. We base our determination of the need
for a valuation allowance on an on-going evaluation of current evidence
including, among other things, estimates of future earnings, the backlog of
customer orders and the expected timing of deferred tax asset reversals. We
charge or credit adjustments to the valuation allowance to income tax expense in
the period in which these determinations are made. If we determine that we would
be able to realize our deferred tax assets in the future in excess of its net
recorded amount, an adjustment to the deferred tax asset would increase net
income in the period this determination was made. Likewise, if we determine that
we would not be able to realize all or part of our net deferred tax assets in
the future, we would reduce net income and would establish a valuation allowance
for the deferred tax asset in the period this determination was made.
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 9.4% to $32.1 million for the three months ended March 31, 2002, compared to
$29.4 million for the comparable prior year period. For the nine months ended
March 31, 2002, revenues increased by 7.7% to $88.6 million from $82.3 million
for the comparable prior year period. Revenues for the three months ended March
31, 2002 from optoelectronic devices and value added subsystems, and medical
imaging systems net of intercompany eliminations decreased by $4.0 million or
24.0% to $12.7 million, compared to $16.7 million for comparable prior year
period and revenues from security and inspection products increased by $6.7
million, or 53.4% to $19.4 million, compared to $12.7 million for the comparable
prior year period. Revenues for the nine months ended March 31, 2002 from
optoelectronic devices, value added subsystems and medical imaging systems net
of intercompany eliminations decreased by $7.5 million or 16.9% to $36.7
million, compared to $44.2 million for the comparable prior year period and
revenues from security and inspection products increased by $13.8 million or
36.3%, to $51.9 million, compared to $38.1 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 nine months
ended March 31, 2002 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 nine months ended March 31, 2001 were $1.5
million and $5.9 million, respectively, compared to $0 revenues for the three
and nine months ended March 31, 2002. The increase in revenues from the sale of
security and inspection was
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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.
Gross Profit. Cost of goods sold consists of material, labor and manufacturing
overhead. Gross profit increased by 32.4% to $10.4 million for the three months
ended March 31, 2002, compared to $7.8 million for the comparable prior year
period. For the nine months ended March 31, 2002, gross profit increased by
15.5% to $26.3 million, compared to $22.8 million change for the comparable
prior year period. As a percentage of revenues, gross profit increased in the
quarter to 32.4% this year, from 26.8% last year, and for the nine months to
29.7% this year, from 27.7% last year. The increase in gross profit, for the
quarter and nine months ended March 31, 2002, was due primarily 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 March 31, 2002, such expenses increased by 4.5% to
$5.5 million, compared to $5.3 million for the comparable prior year period. For
the nine months ended March 31, 2002, such expenses decreased by 6.5% to $15.4
million, compared to $16.5 million for the comparable prior year period. As a
percentage of revenues, selling, general and administrative expenses decreased
in the quarter and nine months to 17.1% and 17.4% this year, from 17.9% and
20.0% last year, respectively. The increase in selling, general and
administrative expenses for the quarter ended March 31, 2002 was primarily due
to increased marketing expenses for the sales of security and inspection
products and was offset in part by the absence of selling, general and
administrative expenses of the divested SMI subsidiary. The decrease in expenses
for the nine 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 nine months ended March 31,
2001 were $118,000 and $523,000, respectively, compared to $0 for the three and
nine months periods ended March 31, 2002.
Research and Development. Research and development expenses include research
related to new product development and product enhancement expenditures. For the
three months ended March 31, 2002, such expenses decreased by 3.3% to $1.7
million, compared to $1.8 million for the comparable prior year period. For the
nine months ended March 31, 2002, such expenses decreased by 2.4% to $4.9
million, compared to $5.0 million for the comparable prior year period. As a
percentage of revenues, research and development expenses decreased in the three
month and nine month periods to 5.3% and 5.5% this period from 6.0% 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.
-15-
Income from Operations. For the three months ended March 31, 2002, the Company
had income from operations of $3.1 million compared to $718,000 for the three
months ended March 31, 2001. For the nine months ended March 31, 2002, the
Company had income from operations of $5.7 million compared to $937,000 for the
comparable prior year period. Income from operations for the three months ended
March 31, 2002, increased due to increased revenues and increased gross margin
and income from operations for the nine months ended March 31, 2002 increased
due to increased revenues, increased gross profits and lower selling general and
administrative expenses.
Interest (Income) Expense. For the three months ended March 31, 2002, the
Company earned net interest income of $180,000 compared to net interest expense
of $276,000 for the three months ended March 31, 2001. For the nine months ended
March 31, 2002, the Company incurred net interest expense of $51,000, compared
to net interest expense of $865,000 for the nine months ended March 31, 2001.
The net interest income for the quarter and decrease in net interest expense for
the nine months ended March 31, 2002 was due to decreased borrowings under the
Company's lines of credit and 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.
Gain on Sale of Subsidiary. On March 31, 2001, the Company sold all of the
outstanding stock of its wholly owned subsidiary SMI to Elmos Semiconductor AG
of Germany for $6.0 million in cash resulting in a gain of $3.0 million. In
addition, as a part of the agreement, $2.2 million of the accounts payable by
SMI to the Company, as a result of intercompany transactions, was converted to a
note receivable payable by the buyer over a period of four and a half years.
Provision for Income Taxes. Provision for income taxes increased to $933,000 for
the three months ended March 31, 2002, compared to $869,000 for the three months
ended March 31, 2001. For the nine months ended March 31, 2002, the Company had
provision for income taxes income of $1.6 million compared to $799,000 for the
nine months ended March 31, 2001. As a percentage of income before provision for
income taxes and minority interest, provision for income taxes was 28.3% and
28.7% for the quarter and nine months ended March 31, 2002, compared to 25.5%
and 26.3% for the quarter and nine months ended March 31, 2001, respectively.
The change in the effective income tax rate was due to changes in the mix in
income from U.S. and foreign operations.
Net Income. For the reasons outlined above, the Company had net income of $2.3
million and $4.0 million for the three and nine months ended March 31, 2002,
compared to net income of $2.5 million and $2.4 million for the three and nine
months ended March 31, 2001, respectively.
-16-
Liquidity and Capital Resources
The Company's operations provided net cash of $4.4 million during the nine
months ended March 31, 2002. The amount of net cash provided by operations
reflects increases in accounts payable, accrued payroll and related expenses,
advances from customers and other accrued expenses and current liabilities, and
was offset in part by an increase in accounts receivable, other receivables,
inventory, prepaids and reduction in income taxes payable. 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 $1.9 million for the nine months ended
March 31, 2002, compared to net cash provided by investing activities of $2.9
million for the comparable prior year period. In the nine month period ended
March 31, 2002, net cash used in investing activities reflects cash used for the
purchase of property and equipment and other assets and was offset in part by
cash received on a note receivable. In the nine month period ended March 31,
2001, net cash provided by investing activities reflects cash received from the
sale of SMI and the sale of property and equipment and was offset in part by
cash used in business acquisitions and the purchase of property and equipment.
Net cash provided by financing activities was $60.2 million for the nine month
period ended March 31, 2002, compared to net cash used in financing activities
of $4.5 million for the comparable prior year period. In the nine month period
ended March 31, 2002, net cash provided by financing activities resulted
primarily from the private placements totaling $56.8 million and exercise of
stock options 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 May 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.
-17-
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 (loss). Net
transaction losses of approximately $213,000 and $258,000 were included in the
Company's results for the nine months ended March 31, 2002 and 2001,
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 nine months ended March 31, 2002, overall foreign currency
fluctuations relative to the U.S. dollar had an immaterial effect on the
Company's 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 was a transition period during which parties,
at their discretion, used 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, the euro conversion has not, and
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.
-18-
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 March 31, 2002 and
June 30, 2001, notional amounts were approximately $0 and $1.5 million for
outstanding foreign exchange contracts, respectively. The estimated fair value
of these contracts, based on quoted market prices, approximated ($50,000) at
June 30, 2001. 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 has also entered into an forward exchange contract with a notional
amount of $5.9 million to hedge foreign exchange exposure on accounts receivable
and payable balances in Malaysia in the event of a possible change in monetary
policy in Malaysia relating to the pegging of the Malaysian ringgit to the US
dollar. Since the monetary policy has remained unchanged and the Malaysian
ringgit is still pegged to the US dollar, the forward exchange contract has no
fair value as of March 31, 2002. This contract expires in December 2002.
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 March 31, 2002, approximately 89% 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.
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 March 31, 2002, the fair values of the swaps were ($144,000). 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 March 31, 2002.
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
-19-
general forms of advertising or solicitation were used in connection with 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 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 15th day of May 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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