UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
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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 September 30, 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
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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
incorporation or organization) Identification Number)
12525 Chadron Avenue
Hawthorne, California 90250
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 978-0516
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
YES X N0
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As of November 8, 1999 there were 9,406,695 shares of common stock outstanding.
OSI SYSTEMS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1999 3
and June 30, 1999 (Unaudited)
Consolidated Statements of Operations for the three months 4
ended September 30, 1999 and September 30, 1998
(Unaudited)
Consolidated Statements of Cash Flows for the three months 5
ended September 30, 1999 and September 30, 1998
(Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 15
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
September 30, June 30,
1999 1999
------------ ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,683 $ 7,241
Marketable securities available for sale 1,769 1,708
Accounts receivable, net of allowance for doubtful accounts of $1,091 and $860
at September 30, 1999 and June 30, 1999, respectively 27,095 29,330
Other receivables 2,323 1,862
Inventory 24,822 24,481
Prepaid expenses 1,429 1,018
Deferred income taxes 1,108 1,108
Income taxes receivable 2,463 1,853
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Total current assets 68,692 68,601
Property and Equipment, Net 14,465 14,486
Intangible and Other Assets, Net 9,124 8,581
Deferred income taxes 1,703 1,703
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Total $93,984 $93,371
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank lines of credit $12,930 $ 8,678
Current portion of long-term debt 297 292
Accounts payable 6,836 9,145
Accrued payroll and related expenses 2,171 2,399
Income taxes payable 786 717
Advances from customers 843 996
Accrued warranties 2,070 1,984
Other accrued expenses and current liabilities 3,843 2,922
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Total current liabilities 29,776 27,133
Long-Term Debt 71 117
Deferred Income Taxes 324 339
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Total liabilities 30,171 27,589
Shareholders' Equity
Preferred stock, no par value; authorized, 10,000,000 shares; none issued and
outstanding at September 30, 1999 and June 30, 1999, respectively
Common stock, no par value; authorized, 40,000,000 shares; issued and outstanding
9,739,195 and 9,732,415 shares at September 30, 1999 and June 30, 1999, respectively 49,256 49,230
Treasury stock (1,605) (438)
Retained earnings 16,779 18,160
Accumulated other comprehensive income (617) (1,170)
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Total shareholders' equity 63,813 65,782
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Total $93,984 $93,371
============ =========
See accompanying notes to consolidated financial statements
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OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(Unaudited)
Three months ended September 30,
--------------------------------
1999 1998
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Revenues $24,955 $21,404
Cost of goods sold 17,759 14,988
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Gross profit 7,196 6,416
Operating expenses:
Selling, general and administrative 5,183 3,363
Research and development 1,637 1,024
Goodwill amortization 127 26
Restructuring costs 1,898
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Total operating expenses 8,845 4,413
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(Loss)/income from operations (1,649) 2,003
Interest expense/(income), net 123 (167)
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(Loss)/income before provision for income taxes (1,772) 2,170
(Benefit) provision for income taxes (391) 510
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Net (loss)/income $(1,381) $ 1,660
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(Loss) earnings per common share $ (0.15) $ 0.17
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(Loss) earnings per common share,assuming dilution $ (0.15) $ 0.17
======= =======
See accompanying notes to consolidated financial statements
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OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended September 30,
--------------------------------
1999 1998
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Cash flows from operating activities:
Net (loss) income $(1,381) $ 1,660
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 983 645
Deferred income taxes (17) -
Changes in operating assets and liabilities:
Accounts receivable 2,379 2,384
Other receivables (222) (487)
Inventory (227) (1,837)
Prepaid expenses (413) (335)
Accounts payable (2,422) (54)
Accrued payroll and related expenses (174) (912)
Income taxes payable 53 112
Increase in prepaid income taxes receivable (540) -
Advances from customers (166) (260)
Accrued warranty 69 (115)
Other accrued expenses and current liabilities 793 340
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Net cash (used in) provided by operating activities (1,285) 1,141
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Cash flows from investing activities:
Additions to property and equipment (616) (1,594)
Addition to marketable securities available for sale - (1,431)
Gain on sale of marketable securities available for sale (2)
Decrease in equity investments 39 -
Cash paid for business acquisitions, net of cash acquired (776) (8,663)
Other assets - (487)
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Net cash used in investing activities (1,355) (12,175)
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Cash flows from financing activities:
Net proceeds from bank lines of credits 4,245 6,400
Payments on long-term debt (46) (356)
Proceeds from exercise of stock options and warrants 26 9
Treasury stock (1,167) -
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Net cash provided by financing activities 3,058 6,053
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Effect of exchange rate changes on cash 24 24
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Net increase (decrease) in cash 442 (4,957)
Cash or cash equivalents, beginning of period 7,241 22,455
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Cash or cash equivalents, end of period $ 7,683 $ 17,498
======= ========
Supplemental disclosures of cash flow information - Cash
paid/(received) during the period for:
Interest $ 47 $ (239)
Income taxes $ 95 $ 394
See accompanying notes to consolidated financial statements
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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 September 30, 1999, the consolidated
statements of operations and the consolidated statements of cash flows for the
three-month periods ended September 30, 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, 1999 included in the Company's Annual Report on Form 10K as
filed with the Commission on September 28, 1999. The results of operations for
the three months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the fiscal year ending June 30, 2000.
Recent Developments - On October 4, 1999, the Company acquired an additional
equity interest, representing 15.3% of the stock ownership of TFT Medical, Inc.
for $1.2 million, including professional fees associated with the acquisition.
With this additional
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equity investment, the Company has increased its equity share in TFT Medical,
Inc. to 55.6%. TFT Medical Inc. develops new generation pulse oximeter
instruments and probes for use in the medical field.
Foreign Exchange Instruments - The Company's use of derivatives is limited to
the purchase of foreign exchange contracts in order to minimize foreign exchange
transaction gains and losses. The Company purchases forward contracts to hedge
commitments to acquire inventory for sale and does not use the contracts for
trading purposes. Realized gains and losses on these contracts are recognized in
the same period as the hedged transactions. The forward exchange contracts
related to inventory purchases are recognized as adjustments to the basis of the
underlying assets. As of September 30, 1999 and June 30, 1999 there was
approximately $211,000 and $200,000, respectively, in outstanding foreign
exchange contracts. At September 30, 1999 and June 30, 1999, there were no
carrying amounts related to foreign currency contracts on the consolidated
balance sheets. The fair values of foreign exchange contracts are estimated by
obtaining quotes from brokers. At September 30, 1999 and June 30, 1999, the
carrying amount and fair value of these contracts were not material to the
consolidated financial statements.
Inventory - Inventory is stated at the lower of cost or market; cost is
determined on the first-in, first-out method.
Inventory at September 30, 1999 and June 30, 1999 consisted of the following (in
thousands):
September 30, June 30,
1999 1999
Raw Materials..... $11,747 $11,963
Work-in-process... 8,221 8,000
Finished goods.... 4,854 4,518
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Total.......... $24,822 $24,481
======= =======
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.
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For the Quarter ended September 30,
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1999 1998
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Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Earnings per common share
Income available to
common stockholders $(1,381,000) 9,521,695 $(0.15) $1,660,000 9,693,165 $0.17
======== ========
Effect of Dilutive Securities
Options, treasury stock method 0 153,506
------------------------- ------------------------
Earnings per common share assuming dilution
Income available to common
stockholder, assuming dilution $(1,381,000) 9,521,695 $(0.15) $1,660,000 9,846,671 $0.17
====================================== =========================================
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 September 30,
-----------------------------------
1999 1998
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Net income $(1,381) $1,660
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Other comprehensive income, net of taxes:
Foreign currency translation adjustments 493 (103)
Unrealized gains on marketable securities available for sale 59 167
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Other comprehensive income 552 64
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Comprehensive income $( 829) $1,724
======= ======
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Cautionary Statement
Statements in this report that are forward-looking are based on current
expectations, and actual results may differ materially. Forward-looking
statements involve numerous risks and uncertainties that could cause actual
results to differ materially, including, but not limited to, the possibilities
that the demand for the Company's products may decline as a result of possible
changes in general and industry specific economic conditions and the effects of
competitive pricing and such other risks and uncertainties as are described in
this report on Form 10-Q and other documents previously filed or hereafter filed
by the Company from time to time with the Securities and Exchange Commission.
Results of Operations
Revenues. Revenues consist of sales of optoelectronic and pressure sensor
devices, subsystems, medical imaging systems and security and inspection
products. Revenues are recorded net of all inter-company transactions. Revenues
increased by 16.6% to $25.0 million for the three months ended September 30,
1999, compared to $21.4 million for the comparable prior year period. Revenues
for the three months ended September 30, 1999 from optoelectronic and pressure
sensor devices, subsystems and medical imaging systems were $13.8 million or
approximately 55.1% of the Company's revenues and revenues from security and
inspection products were $11.2 million, or approximately 44.9% of the Company's
revenues. The increase in revenues from sales of optoelectronic and pressure
sensor devices, subsystems and medical imaging systems for the three months
ended September 30, 1999 was primarily due to sales of pressure sensors through
the recent acquisition of Silicon Microstructures Inc. ("SMI") and was partially
offset by a decrease in sales to the oil exploration industry. The increase in
revenues from the sale of security and inspection products for the three months
ended September 30, 1999 was primarily due to sales of walk-through metal
detection systems through the recent acquisition of the security products
business of Metorex International Oy ("Metorex Security").
Gross Profit. Cost of goods sold consists of material, labor and manufacturing
overhead. Gross profit increased by $780,000, or 12.2%, to $7.2 million for the
three months ended September 30, 1999 from $6.4 million for the three months
ended September 30, 1998. As a percentage of revenues, gross profit decreased to
28.8% for the three months ended September 30, 1999 from 30.0% for the three
months ended September 30, 1998. The decrease in gross margin was mainly due to
product mix and manufacturing inefficiencies due to acquisitions.
-9-
Selling, General and Administrative. Selling, general and administrative
expenses consisted primarily of compensation paid to sales, marketing, and
administrative personnel, professional service fees, and marketing expenses. For
the three months ended September 30, 1999, such expenses increased by $1.8
million or 54.1%, to $5.2 million from $3.4 million for the three months ended
September 30, 1998. As a percentage of revenues, selling, general and
administrative expenses increased to 20.8% for the three months ended September
30, 1999 from 15.7% for the three months ended September 30, 1998. The increase
in expenses was due primarily to the inclusion of selling, general and
administrative expenses of recent acquisitions in the Company's consolidated
financial statements, increase in provision for doubtful accounts receivables,
increase in legal expenses and other administrative expenses. For the three
months ended September 30, 1999, the Company's recently acquired subsidiaries
incurred $1.0 million of selling, general and administrative expenses.
Research and Development. Research and development expenses include research
related to new product development and product enhancement expenditures. For the
three months ended September 30, 1999, such expenses increased by $613,000 or
60.0% to $1.6 million from $1.0 million for the three months ended September 30,
1998. As a percentage of revenues, research and development expenses increased
to 6.6% for the three months ended September 30, 1999 from 4.8% for the three
months ended September 30, 1998. The increase was due primarily to the increase
in personnel costs resulting from the Company's recently acquired subsidiaries
and continued enhancement of Rapiscan X-ray systems. For the three months ended
September 30, 1999, $510,000 of research and development expenses incurred by
the acquired companies were included in the Company's consolidated financial
statements.
Goodwill Amortization. Amortization of goodwill increased to $127,000 for the
three months ended September 30, 1999 from $26,000 for the three months ended
September 30, 1998. The increase in goodwill amortization was primarily due to
the amortization of goodwill associated with the acquisition of Metorex Security
and SMI. In the prior periods, goodwill amortization was included as a component
of selling, general and administration expenses.
Restructuring Costs. In August 1999, the Company decided to close the operations
of Osteometer in Denmark, and relocate certain of these operations to the
Company's U.S. facilities. Based on current estimates, for the three months
ended September 30, 1999, the Company recorded restructuring costs of $1.9
million related to the closure of the Osteometer facility in Denmark. These
costs were associated primarily with the termination of certain employees,
commitments and other facility closure costs. Of that amount, $623,000 was paid
during the quarter and $1.3 million was included in other accrued expenses and
current liabilities at September 30, 1999. The restructuring costs include
$698,000 attributable to employee termination benefits for approximately 32
employees, of which $353,000 was paid during the quarter and $345,000 is
included in other accrued expenses and current liabilities.
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(Loss)Income from Operations. For the three months ended September 30, 1999,
loss from operations was $1.6 million compared to income of $2.0 million for the
three months ended September 30, 1998. Excluding the non-recurring restructuring
costs of $1.9 million, income from operations for the three months ended
September 30, 1999 decreased by $1.8 million or 87.7% to $249,000 from $2.0
million for the three months ended September 30, 1998. Income from operations
decreased due to increased selling, general and administrative expenses,
increased research and development expenses and increased goodwill amortization
and was partially offset by increase in gross profit.
Interest Expense (Income). For the three months ended September 30, 1999, the
Company incurred net interest expense of $123,000, compared to net interest
income of $167,000 for the three months ended September 30, 1998. The net
interest expense for the three months ended September 30, 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.
(Benefit) Provision for Income Taxes. For the three months ended September 30,
1999, the Company had an income tax benefit of $391,000 compared to a provision
for income taxes of $510,000 for the three months ended September 30, 1998. As a
percentage of loss before benefit for income taxes, the benefit for income taxes
was 22.1% for the three months ended September 30, 1999 compared to a provision
for income taxes of 23.5% as a percentage of income before provision for income
taxes for the three months ended September 30, 1998. The reduction in the
Company's effective tax rate was primarily due to non-recurring restructuring
costs and a mix in income from U.S. and foreign operations.
Net(Loss)/Income. For the reasons outlined above, including the non-recurring
restructuring costs for the three months ended September 30, 1999, the Company
had a net loss of $1.4 million, compared to net income of $1.7 million for the
three months ended September 30, 1998.
Liquidity and Capital Resources
The Company's operations used net cash of $1.3 million during the three months
ended September 30, 1999. The amount of net cash used in operations reflects
increases in inventory, other receivables, prepaid expenses and reduction in
accounts payable, accrued payroll and related expenses and advances from
customers. Net cash used in operations was offset in part by reduction in
accounts receivables and increases in other accrued expenses and current
liabilities.
Net cash used in investing activities was $1.4 million and $12.2 million for the
three months ended September 30, 1999 and 1998, respectively. In the three
months ended September 30, 1999, the net cash used in investing activities
reflects primarily cash used in business acquisitions and purchases of property
and equipment. In the period ended September 30, 1998, the net cash used in
investing activities reflects primarily cash used
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in business acquisitions, purchase of property and equipment and purchase of
marketable securities available for sale. In the period ended September 30,
1999, the Company paid 4.4 million Finnish markka (approximately $776,000 on
September 30, 1999), in lieu of a contingent payment, based on future sales of
up to $1.5 million for the acquisition of Metorex Security. The payment was
recorded as goodwill.
Net cash provided by financing activities was $3.1 million and $6.1 million for
the three months ended September 30, 1999 and 1998, respectively, in each case
primarily in the form of net borrowing from bank lines of credit. In the three
months ended September 30, 1999, net cash provided by financing activities was
offset in part by the purchase of treasury stock.
In March 1999, the Company announced a stock repurchase program of up to
2,000,000 shares of its common stock. Through November 8, 1999, the Company
repurchased 332,500 shares at an average price $4.83 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.
Foreign Currency Translation. The accounts of the Company's operations in
Singapore, Malaysia, England, Denmark, Finland, Norway and Canada are maintained
in Singapore dollars, Malaysian ringgits, U.K. pounds sterling, Danish kroner,
Finnish markka, Norwegian kroner 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 shareholder's equity. Net transaction gains of approximately
$89,000 and $47,000 were included in income for the three months ended September
30, 1999 and 1998, respectively.
Inflation. The Company does not believe that inflation has had a material impact
on its September 30, 1999 results of operations.
Year 2000 Compliance.
Overview:
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
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remediation and contingency plans, and (4) implementation and testing.
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.
Status:
The Company's Year 2000 project status is that identification of risks, and
assessment of risks has been substantially completed. Development of remediation
and contingency plans has either been completed or is underway and
implementation and testing are either completed or in stages of completion.
Systems Compliance:
The Company has upgraded its critical database and believes that it is Year 2000
compliant. The financial systems of the Company's principal U.S. subsidiaries
have been upgraded and are Year 2000 compliant. The financial systems of the
Company's principal foreign subsidiaries are either Year 2000 compliant or in
the process of being upgraded in order to be Year 2000 compliant. The Enterprise
Resource Planning software used by several of the Company's operating
subsidiaries has been certified by software vendors as Year 2000 compliant. The
Company has completed 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. The necessary upgrading has been
identified and necessary hardware purchased or redeployment of existing systems
has been performed to ensure that all critical systems will be functional. The
costs of such assessment and upgrading have not been material. The Company has
obtained Year 2000 compliance statements from the manufacturers of the Company's
hardware and software applications.
Trading Partners:
The Company has obtained, where possible, Year 2000 Compliance Statements or
Certifications from its critical trading partners. This includes but is not
limited to: banks, wire transfer services, electronic transfer services,
utilities, communication systems, and freight carriers. The Company is currently
in the process of obtaining Year 2000 certification from certain trading
partners of its foreign subsidiaries.
Product Compliance:
The Company has completed evaluation of Year 2000 compliance of its own
products. The majority of its products were found not to be affected by Year
2000 compliance issues since they do not utilize logic or a date or clock as
part of their function. Certain products were determined to be impacted by the
Year 2000 date change when "archiving" functions were utilized. The operations
of the equipment itself were not impacted. Where applicable, customer
notification was made and on request software updates will be performed on
request.
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Supplier Compliance:
The Company manufactures many products which are dependent on third party
suppliers and vendors for critical parts. Critical suppliers have been notified
and, where risk is established, contingency plans are in the process of being
developed to assure uninterrupted operations.
Risk Assessment:
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 has substantially completed the assessment of
its operations and infrastructure, and at present time no significant problems
have been identified. The Company has asked its critical vendors and suppliers
to complete a Year 2000 survey to assess the status of their compliance in order
to evaluate the effect it could have on the Company. The Company has completed
distribution of surveys to its critical vendors and suppliers and is in the
process of mailing follow-up requests to those vendors and suppliers who failed
to respond to the initial mailing. The Company is in the process of establishing
contingency planning based on either survey results or lack or response by the
suppliers. Based on the status of the assessments made and remediation plans
developed to date, the Company does not anticipate the cost of these contingency
plans to be material and it expects to be able to fund the total costs through
operating cash flows. However, the Company has not yet developed remediation for
all known problems, or completed all contingency 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 the 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 approaches completion, the Company may discover
additional Year 2000 problems, and 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
continues 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 manner. Additionally, even though the Company has made
every effort to obtain Year 2000 compliance status from its critical suppliers
and customers, it cannot enforce responses. In those cases where risks could
exist, the necessary steps will be taken either by reserve funding, building
inventory or identifying alternate sources prior to the end of 1999.
-14-
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.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27. Financial Data Schedule
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 13th date of November 1999.
OSI Systems, Inc.
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By: /s/ Deepak Chopra
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Deepak Chopra
President and
Chief Executive Officer
By: /s/ Ajay Mehra
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Ajay Mehra
Vice President and
Chief Financial Officer
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