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, 1999
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 NO
--- ---
As of May 6, 1999 there were 9,706,665 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, 1999 3
and June 30, 1998 (Unaudited)
Consolidated Statements of Operations for the three and nine 4
months ended March 31, 1999 and March 31, 1998
(Unaudited)
Consolidated Statements of Cash Flows for the nine months 5
ended March 31, 1999 and March 31, 1998
(Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risks 18
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 19
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
March 31, June 30,
1999 1998
--------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,615 $22,447
Marketable securities available for sale $ 1,997
Accounts receivable, net of allowance for doubtful accounts of $928 and $551
at March, 31, 1999 and June 30, 1998, respectively 25,970 24,254
Other receivables 1,995 1,990
Inventory 27,794 21,705
Prepaid expenses 1,549 841
Deferred income taxes 1,381 1,381
--------------- --------------
Total current assets 67,301 72,618
Property and Equipment, Net 14,829 11,466
Other Assets:
Goodwill and other intangible assets, net 10,521 1,997
Other Assets 2,736 741
--------------- --------------
Total $95,387 $86,822
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank lines of credit $ 8,633 $ 198
Current portion of long-term debt 321 633
Accounts payable 8,728 8,560
Accrued payroll and related expenses 2,069 2,400
Income taxes payable 1,476 2,517
Advances from customers 1,511 1,808
Accrued warranties 1,816 1,948
Other accrued expenses and current liabilities 2,899 2,137
--------------- --------------
Total current liabilities 27,453 20,201
Long-Term Debt 158 412
Deferred Income Taxes 295 294
--------------- --------------
Total liabilities 27,906 20,907
Shareholders' Equity
Preferred stock, no par value; authorized, 10,000,000 shares; none issued and
outstanding at March 31, 1999 and June 30, 1998, respectively
Common stock, no par value; authorized, 40,000,000 shares; issued and outstanding
9,724,915 and 9,691,915 shares at March 31, 1999 and June 30, 1998, respectively 49,209 49,131
Retained earnings 18,856 17,419
Accumulated comprehensive loss (584) (635)
--------------- --------------
Total shareholders' equity 67,481 65,915
--------------- --------------
Total $95,387 $86,822
=============== ==============
See accompanying notes to consolidated financial statements
-3-
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three months ended March 31, Nine months ended March 31,
---------------------------- ---------------------------
1999 1998 1999 1998
------- ------- ------- -------
Revenues $24,606 $21,893 $70,857 $69,139
Cost of goods sold 17,099 15,366 49,511 49,198
------- ------- ------- -------
Gross profit 7,507 6,527 21,346 19,941
Operating expenses:
Selling, general and administrative 5,104 3,079 11,853 9,419
Research and development 1,537 995 4,120 2,795
In-process research and development -- -- 2,579 --
Goodwill amortization 203 27 391 79
Restructuring Costs 458 -- 458 --
------- ------- ------- -------
Total operating expenses 7,302 4,101 19,401 12,293
------- ------- ------- -------
Income from operations 205 2,426 1,945 7,648
Interest expense/(income) 125 (303) (125) (261)
------- ------- ------- -------
Income before provision for income taxes 80 2,729 2,070 7,909
(Benefit)/provision for income taxes (300) 667 633 2,036
------- ------- ------- -------
Net income $ 380 $ 2,062 $ 1,437 $ 5,873
======= ======= ======= =======
Earnings per common share $0.04 $0.21 $0.15 $0.69
======= ======= ======= =======
Earnings per common share -assuming dilution $0.04 $0.21 $0.15 $0.68
======= ======= ======= =======
See accompanying notes to consolidated financial statements
-4-
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share amounts)
(unaudited)
Nine months ended March 31,
------------------------------------------
1999 1998
----------------- ----------------
Cash flows from operating activities:
Net income $ 1,437 $ 5,873
Adjustments to reconcile net income to net cash used in
operating activities:
Provision for losses on accounts receivable 73 54
Deferred income taxes 93
Depreciation and amortization 2,533 1,898
Charge for in-process research and development 2,579 -
Changes in operating assets and liabilities:
Accounts receivable (73) (9,959)
Other receivables (764) 878
Inventory (2,413) (5,975)
Prepaid expenses (713) (402)
Accounts payable (205) 1,509
Accrued payroll and related expenses (1,023) 720
Income taxes payable (1,042) 526
Advances from customers (401) (336)
Accrued warranties (375) 517
Other accrued expenses and current liabilities (50) (92)
----------------- ----------------
Net cash used in operating activities (437) (4,696)
----------------- ----------------
Cash flows from investing activities:
Additions to property and equipment (3,676) (2,607)
Addition to marketable securities available for sale (2,193) -
Cash paid for business acquisitions, net of cash acquired (17,397) -
Other assets (513) 164
----------------- ----------------
Net cash used in investing activities (23,779) (2,443)
----------------- ----------------
Cash flows from financing activities:
Net proceeds from (repayment of) bank lines of credit 8,661 (9,409)
Payments on long-term debt (660) (2,573)
Proceeds from issuance of stock 78 41,338
----------------- ----------------
Net cash provided by financing activities 8,079 29,356
----------------- ----------------
Effect of exchange rate changes on cash 305 237
----------------- ----------------
Net (decrease)/increase in cash and cash equivalents (15,832) 22,454
Cash and cash equivalents, beginning of period 22,447 553
----------------- ----------------
Cash and cash equivalents, end of period $ 6,615 $23,007
================= ================
Supplemental disclosures of cash flow information - Cash (received) / paid
during the period for:
Interest ($90) ($256)
Income taxes $1,674 $1,540
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 and silicon pressure-sensor micro-structure
technology. The Company designs and manufactures optoelectronic and silicon
pressure-sensor devices and value-added subsystems for original equipment
manufacturers in a broad range of applications, including security, medical
diagnostics, telecommunications, 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. The Company has also, through the acquisition of Osteometer MediTech
A/S ("Osteometer"), expanded into the manufacture and sale of bone densitomers,
which are used to provide bone loss measurements in the diagnosis of
osteoporosis.
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, 1999, the consolidated statements of
operations for the three-month and nine-month periods ended March 31, 1999 and
1998 and the consolidated statements of cash flows for the nine month periods
ended March 31, 1999 and 1998 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, 1998
included in the Company's Annual Report on Form 10K as filed with the Commission
on September 28, 1998. The results of operations for the nine months ended March
31, 1999 are not necessarily indicative of the results to be expected for the
fiscal year ending June 30, 1999.
-6-
Acquisitions. On January 31, 1999, the Company acquired a medical product line
for approximately $277,000 in cash, including professional fees associated with
the acquisition.
On December 11, 1998, the Company acquired most of the assets and assumed
certain liabilities of a Canadian security products manufacturer for
approximately $476,000 in cash, including professional fees associated with the
acquisition.
On November 17, 1998, the Company acquired all the outstanding stock of Silicon
Microstructures, Inc. ("SMI"), a silicon pressure-sensor manufacturer, from Exar
Corporation of Fremont, California. The Company paid $2.7 million in cash,
including professional fees associated with the acquisition. The Company may pay
up to an additional $3.9 million in cash, at a later date, based on future
sales. The acquisition has been accounted for by the purchase method of
accounting, and accordingly, based on the valuation, the purchase price has been
allocated to the assets acquired of $806,000, in-process research and
development of $418,000 and identified intangible assets of $1.5 million.
On November 4, 1998, the Company purchased the security products business of
Metorex International Oy ("Metorex Security") of Espoo, Finland. The Company
paid $4.7 million in cash, including professional fees associated with the
acquisition. The Company may pay up to an additional $1.5 million in cash, at a
later date, based on future sales. The acquisition has been accounted for by the
purchase method of accounting, and accordingly, based on the valuation, the
purchase price has been allocated to the assets acquired of $914,000, in-process
research and development of $204,000, and goodwill and identified intangible
assets of $3.6 million.
On September 2, 1998, the Company acquired all the outstanding capital stock of
Osteometer a Danish manufacturer of bone densitometers for diagnosing
osteoporosis. The Company paid $7.9 million in cash, including professional fees
associated with the acquisition. The acquisition has been accounted for by the
purchase method of accounting, and accordingly, based on the valuation, the
purchase price has been allocated to the assets acquired of $3.6 million ($1.9
million net of liabilities assumed of $1.7 million), in-process research and
development of $2.0 million and identified intangible assets of $4.0 million.
During the period ended September 30, 1998, the Company also made investments in
the aggregate amount of approximately $800,000 in cash in two other businesses.
On February 5, 1999, the Company made an additional investment of $500,000 in
one of these businesses. These investments are accounted for under the equity
method and, as of March 31, 1999, the equity in the earnings of these
investments has not been significant.
The results of operations for Osteometer, Metorex Security, SMI and the Canadian
security products manufacturer are included in the Company's consolidated
financial statements from their respective dates of acquisition.
-7-
Had these acquisitions occurred as of July 1, 1997, pro forma revenues for the
quarter and nine months ended March 31, 1999 and 1998 would have been as follows
(in thousands):
Quarter Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
Revenues $24,606 $27,655 $75,450 $88,434
As of March 31, 1999, reliable pro forma net income and earnings per common
share information is not available.
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, 1999 and
June 30, 1998 consisted of the following (in thousands):
March 31, June 30,
1999 1998
Raw Materials............................. $13,941 $12,200
Work-in-process........................... 7,782 6,030
Finished goods............................ 6,071 3,475
------- -------
Total.................................. $27,794 $21,705
======= =======
Earnings Per Share. Earnings per common share is computed using the weighted
average number of shares outstanding during the period. Earnings per common
share-assuming dilution is computed using the weighted average number of shares
outstanding during the period and dilutive common stock equivalents from the
Company's stock option plans.
The following table reconciles the numerator and denominator used in calculating
earnings per common share and earnings per common share-assuming dilution.
-8-
For the Quarter ended March 31, 1999
-----------------------------------------------------------------------
1999 1998
------------------- -----------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Earnings per common share
Income available to
common shareholders $ 380,000 9,718,125 $ 0.04 $2,062,000 9,661,265 $0.21
====== =====
Effect of Dilutive
Securities
Options, treasury
stock method 126,082 247,247
---------- --------- ---------- ---------
Earnings per common share --
assuming dilution
Income available to common
shareholders, assuming
dilution $ 380,000 9,844,207 $ 0.04 $2,062,000 9,908,512 $0.21
========== ========= ====== ========== ========= =====
For the Nine months ended March 31, 1999
----------------------------------------------------------------------------
1999 1998
----------------------- ---------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Earnings per common share
Income available to
common shareholders $1,437,000 9,707,943 $ 0.15 $5,873,000 8,471,278 $0.69
====== =====
Effect of Dilutive
Securities
Options, treasury
stock method 142,433 184,451
---------- --------- ---------- ---------
Earnings per common share --
assuming dilution
Income available to common
shareholders, assuming
dilution $1,437,000 9,850,376 $ 0.15 $5,873,000 8,655,729 $0.68
========== ========= ====== ========== ========= =====
Comprehensive Income - In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 130 "Reporting for
Comprehensive Income" (SFAS No. 130), which the Company adopted in the first
quarter of fiscal 1999. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is computed as follows (in
thousands):
For the Quarter ended For the Nine months ended
March 31, 1999 March 31, 1999
1999 1998 1999 1998
---------- ------ ---------- --------
Net income $ 380 $2,062 $ 1,437 $ 5,873
---------- ------ ---------- --------
Other comprehensive income, net of
taxes:
Foreign currency translation
adjustments (166) 229 247 (373)
Unrealized loss on marketable
securities available for sale (196) (29)
---------- ------ ---------- --------
Other comprehensive income (362) 229 218 (373)
Comprehensive income $ 18 $2,291 $ 1,655 $ 5,500
========== ====== ========== ========
-9-
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 increased by 12.4% to $24.6 million for the three months
ended March 31, 1999, compared to $21.9 million for the comparable prior year
period. For the nine months ended March 31, 1999, revenues increased by 2.5% to
$70.9 million from $69.1 million in the comparable prior year period. Revenues
for the three months ended March 31, 1999 from optoelectronic devices,
subsystems and medical imaging systems were $14.3 million, or approximately
58.1% of the Company's revenues, and revenues from security and inspection
products were $10.3 million, or approximately 41.9% of the Company's revenues.
Revenues for the nine months ended March 31, 1999 from optoelectronic devices,
subsystems and medical imaging systems were $41.6 million, or approximately
58.7% of the Company's revenues, and revenues from security and inspection
products were $29.3 million, or approximately 41.3% of the Company's revenues.
The increase in revenues from sales of optoelectronic devices, subsystems and
medical imaging systems for the quarter and nine months ended March 31, 1999 was
primarily due to an increase in sales to the oil exploration industry and sales
of medical imaging systems and silicon pressure sensors through the recent
acquisitions of Osteometer and SMI, respectively. Nonetheless, revenue from
Osteometer's medical diagnostic devices for osteoporosis were below the
Company's expectations, a trend which is expected to continue for the
foreseeable future primarily as a result of general weakness in the industry and
the Company's continuing efforts to establish brand recognition in the United
States market. The increase in revenues from the sale of security and inspection
products for the quarter ended March 31, 1999 was primarily due to an increase
in sales of walk-through metal detection systems through the recent acquisition
of Metorex Security. The decrease in revenues from the sale of security and
inspection products for the nine months ended March 31, 1999 was due to the
timing of shipment of certain large orders and weakness in the security and
inspection products market, which was offset in part by an increase in sales of
walk-through metal detection systems through the recent acquisition of Metorex
Security.
Gross Profit. Cost of goods sold consists of material, labor and manufacturing
overhead. Gross profit increased by 15.0% to $7.5 million for the three months
ended March 31,
-10-
1999, compared to $6.5 million for the comparable prior year period. For the
nine months ended March 31, 1999, gross profit increased by 7.0% to $21.3
million, compared to $19.9 million for the comparable prior year period. As a
percentage of revenues, gross profit increased in the quarter and nine months to
30.5% and 30.1% this year, from 29.8% and 28.8% last year, respectively. The
increase in gross profit was due to a change in product mix and increased
efficiencies in manufacturing.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of compensation paid to sales, marketing, and
administrative personnel, professional service fees and marketing expenses. For
the three months ended March 31, 1999, such expenses increased 65.8% to $5.1
million, compared to $3.1 million for the comparable prior year period. For the
nine months ended March 31, 1999, such expenses increased 25.8% to $11.9
million, compared to $9.4 million for the comparable prior year period. As a
percentage of revenues, selling, general and administrative expenses increased
in the three month and nine months periods to 20.7% and 16.7% this year, from
14.1% and 13.6% last year, respectively. The increase in expenses for the three
and nine months ended March 31, 1999 was due primarily to the inclusion of
selling, general and administrative expenses of recent acquisitions in the
Company's consolidated financial statements, exchange rate fluctuation losses
due to currency translation relating to the relatively strong U.S. dollar
compared to European currencies and an increase in marketing expenses to
penetrate new markets for the Company's existing products. For the
three and nine months ended March 31, 1999, $1.2 million and $2.5 million,
respectively, of selling, general and administrative expenses of recent
acquisitions were included in the Company's consolidated financial statements.
Exchange rate losses for the three and nine months ended March 31, 1999 were
$410,000 and $464,000, compared to $107,000 and $40,000 for the comparable prior
year periods, respectively. For the nine months ended March 31, 1999, the
increase in these expenses was offset in part by the proceeds from the
settlement of certain material litigation.
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, 1999, such expenses increased 54.5% to $1.5
million, compared to $995,000 for the comparable prior year period. For the nine
months ended March 31, 1999, such expenses increased 47.4% to $4.1 million,
compared to $2.8 million for the comparable prior year period. As a percentage
of revenues, research and development expenses increased in the three month and
nine month periods to 6.2% and 5.8% this year, from 4.5% and 4.0% last year,
respectively. The increase was primarily due to the increase in personnel cost
resulting from the recent acquisitions. For the three and nine months ended
March 31, 1999, $588,000 and $1.2 million, respectively, of research and
development expenses incurred by the acquired companies were included in the
Company's consolidated financial statements.
-11-
In-Process Research and Development. The Company used a total of $15.3 million
for the acquisitions of Osteometer, Metorex Security and SMI, including
professional fees associated with these acquisitions. Out of the total of $15.3
million, the Company incurred an aggregate of $2.6 million in in-process
research and development charges in the nine months ended March 31, 1999,
related to these acquisitions. In September 1998, the Company acquired the
assets, including the developmental technology, and assumed the liabilities, of
Osteometer. The Company paid $7.9 million in cash, including professional fees
associated with the acquisition. In November 1998, the Company acquired the
assets, including developmental technology, of Metorex Security. The Company
paid $4.7 million in cash, including professional fees associated with the
acquisition, and may pay up to $1.5 million in additional contingent purchase
payments based on future sales. Also in November 1998, the Company acquired the
assets, including the developmental technology, of SMI. The Company paid $2.7
million in cash, including professional fees associated with the acquisition,
and may pay up to $3.9 million in additional contingent purchase payments based
on future sales.
Based on the valuations, the Company allocated the excess of the non-contingent
purchase price over the fair value of net tangible assets acquired to goodwill
and identified intangible assets. In performing this allocation, the Company
considered, among other factors, the attrition rate of the active users of the
technology at the date of acquisition and the research and development projects
in process at the date of acquisition. With regard to the in-process research
and development projects, the Company considered, among other factors, the stage
of development of each project at the time of acquisition, the importance of
each project to the overall development plan, and the projected incremental cash
flows from the projects when completed and any associated risks. Associated
risks include the inherent difficulties and uncertainties in completing each
project and thereby achieving technological feasibility and risks related to the
impact of potential changes in future target markets. As of March 31, 1999, the
above mentioned research and development projects were progressing as planned.
Goodwill Amortization. Amortization of goodwill increased to $203,000 in the
three months ended March 31, 1999 from $27,000 in the three months ended March
31, 1998. Amortization of goodwill increased to $391,000 in the nine months
ended March 31, 1999 from $79,000 in the nine months ended March 31, 1998. The
increase in amortization expense in the three and nine months ended March 31,
1999 is primarily due to amortization of goodwill associated with the
acquisitions of Osteometer, Metorex Security and SMI. In the prior periods,
goodwill amortization was included as a component of selling, general and
administrative expenses.
Restructuring Costs. During the quarter ended March 31, 1999, the Company
adopted a restructuring plan to consolidate certain subsidiaries and, in
connection therewith, the Company recorded a non-recurring expense of $458,000.
These costs were associated primarily with the termination of certain employees,
in the amount of $395,000, and consolidation of certain subsidiaries, in the
amount of $63,000.
Income from Operations. Income from operations for the three and nine months
ended
-12-
March 31, 1999 was $205,000 and $1.9 million, compared to $2.4 million and $7.6
million for the comparable prior year periods, respectively. Excluding the non-
recurring restructuring costs of $458,000 in the three and nine months ended
March 31, 1999 and the in-process research and development charges of $2.6
million in the nine months ended March 31, 1999, income from operations for the
three and nine months ended March 31, 1999 was $663,000 and $5.0 million,
compared to $2.4 million and $7.6 million for the comparable prior year periods,
respectively. Excluding the non-recurring restructuring costs and in-process
research and development charges, as a percentage of revenues, income from
operations decreased in the three and nine month periods to 2.7% and 7.0% this
year, from 11.1% and 11.1% in the three and nine month periods last year,
respectively. Income from operations decreased due to increased selling, general
and administrative expenses, increased research and development expenses and
increased goodwill amortization.
Interest Expense (Income). For the three months ended March 31, 1999, the
Company incurred net interest expenses of $125,000, compared to net interest
income of $303,000 for the three months ended March 31, 1998. For the nine
months ended March 31, 1999, the Company earned net interest income of $125,000,
compared to net interest income of $261,000 for the nine months ended March 31,
1998. The net interest expense in the three months ended March 31, 1999 and the
reduction in net interest income for the nine months ended March 31, 1999 was
due to increased borrowing on the Company's lines of credit and a reduction in
short term investments used for working capital and acquisitions.
Provision for Income Taxes. For the three months ended March 31, 1999, the
Company had an income tax benefit of $300,000 compared to provision for income
taxes of $667,000 for the three months ended March 31, 1998. For the nine months
ended March 31, 1999, provision for income taxes decreased to $633,000, from
$2.0 million in the nine month period last year. Excluding the non-recurring
restructuring costs and in-process research and development charges, as a
percentage of income before provision for income taxes, provision for income
taxes was 12.4% and 26.6% for the three and nine months ended March 31, 1999,
respectively. The tax credit for the three months ended March 31, 1999 and the
reduction in the Company's effective tax rate was primarily due to a mix in
income from U.S. and foreign operations, utilization of previously unrealized
foreign net operating losses and a one year tax holiday in Malaysia for the
fiscal year ending June 30, 1999.
Net Income. For the reasons discussed above, including the non-recurring
restructuring costs and in-process research and development charges, the Company
had net income of $380,000 for the three months ended March 31, 1999, compared
to net income of $2.1 million for the three months ended December 31, 1998. Net
income for the nine months ended March 31, 1999 was $1.4 million, compared to
$5.9 million for the comparable prior year period. Excluding the non-recurring
restructuring costs of $458,000 ($391,000 net of taxes) in the three and nine
months ended March 31, 1999 and the in-process research and development charges
of $2.6 million in the nine months ended March 31,
-13-
1999, net income for the three months ended March 31, 1999 decreased 62.6% to
$771,000, compared to $2.1 million for the comparable prior year period. Net
income for the nine months ended March 31, 1999 decreased 25% to $4.4 million,
compared to $5.9 million for the comparable prior year period.
Liquidity and Capital Resources
The Company's operations used net cash of $437,000 during the nine months ended
March 31, 1999. The amount of net cash used by operations reflects increases in
accounts receivable, other receivables, inventory, prepaid expenses and
reductions in accounts payable, accrued payroll and related expenses, income
taxes payable, advances from customers, accrued warranties and other accrued
expenses and current liabilities.
Net cash used in investing activities was $23.8 million and $2.4 million for the
nine months ended March 31, 1999 and 1998, respectively. In the nine month
period ended March 31, 1999, net cash used in investing activities reflects
primarily cash used in business acquisitions and professional fees associated
with these acquisitions of $17.4 million, purchase of marketable securities, and
the purchase of property and equipment. In the nine months ended March 31, 1998,
the net cash used in investing activities reflects primarily the purchase of
property and equipment.
Net cash provided by financing activities was $8.1 million and $29.4 million for
the nine months ended December 31, 1999 and 1998, respectively. During the nine
months ended March 31, 1999, net cash provided by financing activities resulted
primarily from borrowings under the Company's acquisition and working capital
lines of credit. For the nine months ended March 31, 1998, net cash provided by
financing activities resulted primarily from the Company's initial public
offering in October 1997 and was offset in part by repayment of the majority of
the Company's debt.
On March 19, 1999, the Board of Directors of the Company authorized the
repurchase of up to 2,000,000 shares, or approximately 20.6%, of the Company's
outstanding common stock in the open market or through privately negotiated
transactions. As of March 31, 1999, no shares had been repurchased.
The Company anticipates that current cash balances, anticipated cash flows from
operations and current borrowing arrangements will be sufficient to meet its
working capital, capital expenditure needs and repurchases of its outstanding
common stock for the foreseeable future.
Foreign Currency Translation. The accounts of the Company's operations in
Singapore, Malaysia, Canada, England, Norway, Denmark and Finland are maintained
in Singapore dollars, Malaysian ringgits, Canadian dollars, U.K. pounds
sterling, Norwegian kroner, Danish kroner and Finnish marks, 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
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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 shareholders' equity. Net transaction
losses of approximately $464,000 and $40,000 were included in the Company's
consolidated statement of operations for the nine months ended March 31, 1999
and 1998, respectively.
Inflation. The Company does not believe that inflation has had a material impact
on its results of operations for the nine months ended March 31, 1999.
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.
The Company is subject to interest rate risk on its short-term borrowings under
its bank lines of credit. Borrowings under these lines of credit do not give
rise to significant interest rate risk because these borrowings have short
maturities and are borrowed at variable interest rates. Historically, the
Company has not experienced material gains or losses due to interest rate
changes.
The Company from time to time enters into foreign currency forward contracts to
hedge certain foreign currency transactions and commitments. These contracts
were not significant at March 31, 1999 and had a notional value of approximately
$207,000 with a net unrealized gain of approximately $9,000.
Year 2000 Compliance
The Company has a comprehensive Year 2000 project designed to identify and
assess the risks associated with its information systems, products, operations
and infrastructure, suppliers, and customers that are not Year 2000 compliant,
and to develop, implement, and test remediation and contingency plans to
mitigate these risks. The project comprises of four phases: (1) identification
of risks, (2) assessment of risks, (3) development of remediation and
contingency plans, and (4) implementation and testing.
The Company's Year 2000 project is currently in the assessment phase and, with
respect to certain information systems and products, is in the remediation
phase. The Company's Year 2000 project is being spearheaded by a special task
force comprised of a senior management team as well as other key personnel. The
task force meets on a regular basis to determine and implement the steps
necessary to insure that the Company becomes fully Year 2000 compliant.
Additionally, the Company has established task forces in each of its
subsidiaries with designated Year 2000 management representation, which report
status to the Year 2000 committee. This mandate is in effect for foreign
subsidiaries as well as U.S. subsidiaries.
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The Company has upgraded its critical database and believes that it is Year 2000
compliant. The financial records of the Company's principal U.S. subsidiaries,
Rapiscan Security Products (U.S.A.), Inc. ("Rapiscan"), and UDT Sensors, Inc.
("UDT") and SMI have also been upgraded and are Year 2000 compliant. Following
an assessment of the Company's financial records system, it was determined that
each subsidiary will have its own Year 2000 compliant system. The estimated
completion date for this implementation is on or before September 30, 1999. The
Company has completed an upgrade of the telephone systems, including voice-mail
software, for Rapiscan and UDT. The cost of these upgrades to date has not been
material. The Enterprise Resource Planning software used by several of the
Company's operating subsidiaries has been certified as Year 2000 compliant.
The Company is in the assessment and remediation phase of determining Year 2000
compliance of its own products, which are dependent on third party suppliers and
vendors for critical parts. The Company expects to complete this assessment by
June 30, 1999 and expects to be able to complete remediation as required by
September 30, 1999. Based on what the Company knows at this time, DOS and
Windows 95 are not Year 2000 compliant; therefore, the Company's products which
rely on these products are themselves not Year 2000 compliant. The Company is in
the process of acquiring and installing software, within the Company's products,
which is Year 2000 compliant. The Company's products which are not presently
Year 2000 compliant are not affected in terms of performance in any material
respect; however, archiving of information may be affected by Year 2000
noncompliance. The Company's exposure exists with respect to its products under
warranty, which were manufactured prior to the software upgrade. In such cases,
the Company will offer its customers a software upgrade to a Year 2000 compliant
version. Until the assessment phase is completed, the Company is not in a
position to know if the costs of upgrading the software used in the manufacture
of it products or offering its customers such upgrading will be material.
Based on current estimates, the Company expects to have completed by June 30,
1999 a full assessment of all hardware, operating systems and software
applications in use in the Company's information systems, operations and
infrastructure on a worldwide basis. Some upgrading is expected to be required.
The costs of such assessment and upgrading are not expected to be material.
Required upgrading is expected to be completed on or before September 30, 1999.
In addition, the Company is in the process of obtaining Year 2000 compliance
statements from the manufacturers of the Company's hardware and software
products.
The Company believes that its greatest potential risks are associated with (i)
its information systems and systems embedded in its operations and
infrastructure; and (ii) its reliance on Year 2000 compliance by the Company's
vendors and suppliers. The Company is in process of assessments of its
operations and infrastructure, and at present time no significant problems have
been identified. The Company is asking its critical vendors, suppliers and
customers to complete a Year 2000 survey to assess the status of their
compliance in order to assess the effect it could have on the Company. The
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Company has completed distribution of such surveys to most of its critical
vendors and suppliers and expects to complete distribution of surveys to such
vendors and suppliers by June 30, 1999 and the Company is also in the process of
mailing requests to these vendors and suppliers who failed to respond to the
initial mailing. The Company expects to complete mailing the second requests by
June 30, 1999. The Company expects that surveys to all of its critical customers
will be distributed by June 30, 1999. The Company has not yet determined the
full extent of contingency planning that may be required. Based on the status of
the assessments made and remediation plans developed to date, the Company is not
in a position to state the total cost of remediation of all Year 2000 issues.
Costs identified to date have not been material. The Company does not currently
expect the costs to be material, and it expects to be able to fund the total
costs through operating cash flows. However, the Company has not yet completed
its assessments, developed remediation for all problems, developed any
contingency plans, or completely implemented or tested any of its remediation
plans.
Based on the Company's current analysis and assessment of the state of its Year
2000 compliance, the Company's most reasonably likely worst case scenario
involves delays in shipping of parts, including critical parts, by certain of
the Company's vendors and suppliers. Such delays could cause the Company to
experience delays in shipping its products. The Company is in process of
formulating contingency plans based on review of compliance surveys from its
vendors and suppliers. These plans could include, among other things, increasing
inventory of critical parts in late 1999 to insure an adequate supply is on hand
to minimize shipping delays by the Company of its products.
As the Year 2000 project continues, the Company may discover additional Year
2000 problems, may not be able to develop, implement, or test remediation or
contingency plans, or may find that the costs of these activities exceed current
expectations and become material. In many cases, the Company is relying on
assurances from suppliers that new and upgraded information systems and other
products will be Year 2000 compliant. The Company plans to test such third-party
products, but cannot be sure that its tests will be adequate or that, if
problems are identified, they will be addressed in a timely and satisfactory
way. Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, the Company
cannot be sure that all of its systems will work together in a Year 2000
compliant fashion. Furthermore, the Company cannot be sure that it will not
suffer business interruptions, either because of its own Year 2000 problems or
those of its customers or suppliers whose Year 2000 problems may make it
difficult or impossible for them to fulfill their commitments to the Company. If
the Company fails to satisfactorily resolve Year 2000 issues related to its
products in a timely manner, it could be exposed to liability to third parties.
The Company is continuing to evaluate Year 2000-related risks and will take such
further corrective actions as may be required.
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Item 3. Quantitative and Qualitative Disclosures about Market Risks
The information required by this item is incorporated herein by reference to the
section entitled "Market Risk" in Management's Discussion and Analysis of
Results of Operations and Financial Condition (Part I, Item 2).
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On January 18, 1996, Robert Praski and Sonia Praski filed a lawsuit against the
Company, its wholly-owned subsidiary, Ferson Optics, Inc. ("Ferson"), and others
in the United States District Court for the Southern District of Mississippi,
alleging wrongful termination of the Praskis' employment by Ferson. The
Complaint was served on February 9, 1998. An Amended Complaint For Damages and
Other Relief was filed on April 14, 1998. The plaintiffs alleged that
irregularities occurred at Ferson, including the falsification of test data,
quality control reports and shipping records, resulting in approximately
$560,000 in overpayments in the aggregate by the U.S. Government to Ferson
and/or the Company.
The plaintiffs alleged that approximately 32,000 individual instances of such
overcharges and false claims occurred. The plaintiffs sought, based upon
statutory civil penalty of $10,000 for each false claim under Title 31 USC (S)
3729 et. seq., more popularly known as the False Claims Act, approximately $320
million in civil damages on behalf of the U. S. Government. In addition, the
plaintiffs sought for themselves actual damages of $100,000 and punitive damages
of $2.0 million for their wrongful termination, together with litigation costs
and reasonable attorney fees.
The Company filed a motion to dismiss the suit. Prior to the decision of the
court regarding the motion to dismiss, Sonia Praski voluntarily filed a Notice
of Dismissal of her claims against all of the defendants, thereby leaving Robert
Praski as the sole plaintiff. Subsequently, and prior to the decision of the
court regarding the motion to dismiss, the Company and Robert Praski settled the
lawsuit in February 1999. The Company paid Mr. Praski and his attorneys $30,000
and the suit was dismissed with prejudice.
Item 6. Exhibits and Reports of Form 8-K
a. Exhibits
27. Financial Data Schedule
b. Reports on Form 8-K
None
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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 May 1999.
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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