<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 JULY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File number: 0-15810
OSICOM TECHNOLOGIES, INC.
(Exact name of Registrant as specified in charter)
New Jersey 22-2367234
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2800 28th Avenue, Suite 100
Santa Monica, California
90405
(Address of principal executive offices)
(Zip Code)
(310) 581-4030
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.30 par value per share, Outstanding: 7,384,005 shares at
September 14, 1998.
This Form 10-Q, future filings of the registrant, and oral statements made with
the approval of an authorized executive officer of the Registrant may contain
forward looking statements. In connection therewith, please see the cautionary
statements and risk factors contained in Item 2. "Fluctuations in Revenue and
Operating Results" and "Forward Looking Statements - Cautionary Statement",
which identify important factors which could cause actual results to differ
materially from those in any such forward-looking statements.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheet at July 31, 1998 and Consolidated Balance
Sheet at January 31, 1998 3
Unaudited Consolidated Statements of Operations for the Three and Six Months
ended July 31, 1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows for the Six Months ended July
31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations/Comparison of the Three and Six Months ended July 31,
1998 and 1997 12
Liquidity and Capital Resources 13
Impact of Recent Accounting Pronouncements 14
Other Matters 15
Fluctuations in Revenue and Operating Results 15
Forward-Looking Statements - Cautionary Statement 15
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 16
PART II: OTHER INFORMATION 17-18
ITEM 1: LEGAL PROCEEDINGS
ITEM 2: CHANGES IN SECURITIES
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
ITEM 4: SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
ITEM 5: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE 19
</TABLE>
2
<PAGE> 3
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, 1998 January 31, 1998
------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH AND EQUIVALENTS $ 1,936 $ 1,912
RESTRICTED CASH 2,161 2,159
ACCOUNTS RECEIVABLE, NET 16,843 19,286
INVENTORY, NET 20,726 21,922
PREPAID EXPENSES AND OTHER CURRENT ASSETS 5,483 5,319
-------- --------
TOTAL CURRENT ASSETS 47,149 50,598
-------- --------
PROPERTY AND EQUIPMENT, NET 16,936 17,008
-------- --------
OTHER ASSETS
PURCHASED TECHNOLOGY, NET 1,952 2,138
EXCESS OF COST OVER NET ASSETS ACQUIRED, NET 6,502 6,743
CAPITALIZED SOFTWARE, NET 4,792 4,144
OTHER ASSETS 9,077 9,056
-------- --------
TOTAL OTHER ASSETS 22,323 22,081
-------- --------
TOTAL ASSETS $ 86,408 $ 89,687
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
SHORT-TERM DEBT $ 15,601 $ 14,905
CURRENT MATURITIES OF LONG TERM DEBT 594 742
ACCOUNTS PAYABLE 15,530 21,768
ACCRUED LIABILITIES 5,457 4,628
OTHER CURRENT LIABILITIES 798 913
INCOME TAXES PAYABLE -- 339
-------- --------
TOTAL CURRENT LIABILITIES 37,980 43,295
-------- --------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 3,318 3,294
DEFERRED INCOME TAXES 378 378
-------- --------
TOTAL LIABILITIES 41,676 46,967
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $.01 PAR VALUE; CUMULATIVE DIVIDENDS; LIQUIDATION
PREFERENCE $14,241 INCLUDING ACCUMULATED DIVIDENDS 1 1
COMMON STOCK, $.30 PAR VALUE; 16,667 SHARES AUTHORIZED; 7,448 SHARES ISSUED
7,384 SHARES OUTSTANDING AT JULY 31, 1998; 6,895 SHARES ISSUED AND
6,892 SHARES OUTSTANDING AT JANUARY 31, 1998 2,234 2,069
ADDITIONAL PAID-IN CAPITAL 83,416 74,003
ACCUMULATED DEFICIT (40,474) (33,331)
TREASURY STOCK, AT COST; 64 SHARES AND 3 SHARES AT JULY 31, 1998 AND
JANUARY 31, 1998, RESPECTIVELY (445) (22)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 44,732 42,720
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 86,408 $ 89,687
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31 JULY 31
--------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 20,320 $ 32,649 $ 45,868 $ 65,281
COST OF SALES 12,980 22,250 29,699 44,868
-------- -------- -------- --------
GROSS PROFIT 7,340 10,399 16,169 20,413
-------- -------- -------- --------
OPERATING EXPENSES
SELLING AND MARKETING 4,387 5,017 8,835 9,088
ENGINEERING, RESEARCH AND DEVELOPMENT 2,716 1,883 4,967 3,373
GENERAL AND ADMINISTRATIVE 4,193 4,885 8,447 7,937
OTHER OPERATING EXPENSES 213 11,026 426 11,493
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 11,509 22,811 22,675 31,891
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (4,169) (12,412) (6,506) (11,478)
-------- -------- -------- --------
OTHER INCOME (CHARGES)
INVESTMENT INCOME 140 153 200 253
INTEREST EXPENSE (508) (530) (1,010) (964)
GAIN ON DISPOSAL OF ASSETS -- -- -- 426
OTHER INCOME (CHARGES) 72 36 173 (57)
-------- -------- -------- --------
TOTAL OTHER INCOME (CHARGES) (296) (341) (637) (342)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (4,465) (12,753) (7,143) (11,820)
PROVISION FOR INCOME TAXES -- -- -- 16
-------- -------- -------- --------
NET INCOME (LOSS) $ (4,465) $(12,753) $ (7,143) $(11,836)
======== ======== ======== ========
INCOME (LOSS) PER COMMON SHARE
ACCRUED UNDECLARED DIVIDENDS 38 38 75 75
NET INCOME (LOSS) APPLICABLE
TO COMMON SHARES $ (4,503) $(12,791) $ (7,218) $(11,911)
======== ======== ======== ========
PRIMARY
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 7,235 4,206 7,087 4,003
NET INCOME (LOSS) PER COMMON SHARE: $ (0.62) $ (3.04) $ (1.02) $ (2.98)
======== ======== ======== ========
FULLY DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 7,235 4,206 7,087 4,003
NET INCOME (LOSS) PER COMMON SHARE: $ (0.62) $ (3.04) $ (1.02) $ (2.98)
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 31
---------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $ (7,143) $(11,836)
-------- --------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING
ACTIVITIES:
INTANGIBLE ASSETS VALUATION ALLOWANCES -- 8,530
DEPRECIATION AND AMORTIZATION 2,607 2,329
ACCOUNT AND NOTE RECEIVABLE RECOVERIES -- 154
EXPENSES PAID THROUGH ISSUANCES OF SECURITIES 253 121
GAIN ON DISPOSALS OF FIXED ASSETS -- (419)
CHANGES IN ASSETS AND LIABILITIES NET OF EFFECTS OF BUSINESS ENTITY
ACQUISITIONS:
INCREASE IN RESTRICTED CASH (2) (152)
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE 2,443 (2,559)
DECREASE IN INVENTORIES 1,195 360
INCREASE IN OTHER CURRENT ASSETS (164) (76)
DECREASE IN ACCOUNTS PAYABLE (6,237) (187)
INCREASE IN ACCRUED EXPENSES 491 3,492
DECREASE IN OTHER CURRENT LIABILITIES (115) (4)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (6,672) (247)
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (1,628) (4,349)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS (1,127) (2,446)
PROCEEDS FROM DISPOSAL OF FIXED ASSETS -- 729
OTHER ASSETS (21) 28
CASH OUTLAYS FOR ACQUIRED COMPANIES IN EXCESS OF CASH ACQUIRED -- (14)
OTHER RECEIVABLES -- (2,537)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (2,776) (8,589)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF CONVERTIBLE PREFERRED STOCK 7,420 6,175
PROCEEDS FROM ISSUANCE OF COMMON STOCK 1,989 5,528
PROCEEDS FROM ISSUANCE OF SHORT-TERM DEBT, NET OF REPAYMENTS 696 1,298
PROCEEDS FROM LONG TERM DEBT 443 --
REPAYMENT OF LONG-TERM DEBT (569) (535)
REPAYMENT OF ACQUISITION LIABILITIES -- (3,274)
REPAYMENT OF LIABILITY DUE ON CASHLESS WARRANT EXERCISE -- (1,567)
PROCEEDS FROM STOCK OPTION EXERCISES -- 28
PURCHASE OF TREASURY STOCK (490) --
OTHER (17) (238)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,472 7,415
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24 (1,421)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,912 4,055
-------- --------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,936 $ 2,634
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Osicom Technologies, Inc. (the "Company") through its subsidiaries designs,
manufactures and markets integrated networking and bandwidth aggregation
products for enhancing the performance of data and telecommunications networks.
The Company's products are deployed in telephone companies, Internet Service
Providers, governmental bodies and the corporate/campus networks that make up
the "enterprise" segment of the networking marketplace. The Company has
facilities in Annapolis Junction, Maryland, Waltham, Massachusetts, Naperville,
Illinois, San Diego, California and Guandong, China. The Company markets and
sells its products and services through a broad array of channels including
worldwide distributors, value added resellers, original equipment manufacturers
("OEM's"), local and long distance carriers and governmental agencies.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial data as of July 31, 1998 and January 31,
1998, for the quarter and six months ended July 31, 1998 and 1997, have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange 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. The January 31, 1998 balance sheet was
derived from audited financial statements. However, the Company believes that
the disclosures are adequate to make the information presented not misleading.
These consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended January 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amounts of assets, liabilities, revenues and expenses, the
disclosure of contingent assets and liabilities and the values of purchased
assets and assumed liabilities in acquisitions. Actual results could differ from
these estimates. In the opinion of Management, all adjustments necessary to
present fairly the financial position, results of operations and cash flows as
of July 31, 1998 and for the quarter and six months ended July 31, 1998, have
been made. The results of operations for the quarter and six months ended July
31, 1998 are not necessarily indicative of the operating results for the full
year.
EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128 which requires dual presentation of basic and diluted earnings
per shares ("EPS") on the face of the income statement. SFAS No. 128 also
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic net income and loss per common share is computed by dividing net income or
loss available to common shareholders by the weighted average number of common
shares outstanding during each period presented. Diluted EPS is based on the
weighted average number of common shares outstanding as well as dilutive
potential common shares, which in the Company's case consist of convertible
securities outstanding, shares issuable pursuant to contracts that may be
settled in stock, shares issuable under stock benefit plans, and shares issuable
pursuant to warrants. In computing diluted EPS, net income or loss available to
common shareholders is adjusted for the after-tax amount of interest expense
recognized in the period associated with convertible debt. Potential common
shares are not included in the diluted loss per share computation for the
quarter and six months ended July 31, 1998 and 1997 as they would be
anti-dilutive.
6
<PAGE> 7
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
The Company has restated all prior period per share data presented as
required by SFAS No. 128. There was no effect from the restatement on either
basic or diluted EPS for the quarter and six months ended July 31, 1997.
All references in the financial statement to common share and per share
data give affect to the one for three stock split effective July 24, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued several
SFAS effective for fiscal years beginning after December 15, 1997 including SFAS
No. 129 "Disclosure of Information about Capital Structure", SFAS No. 130
"Reporting Comprehensive Income", SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information", and SFAS No. 132 "Employers' Disclosures
about Pensions and other Postretirement Benefits". The adoption of these
standards has had no material effects, if any, on Company's financial position
or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for financial statements with
fiscal years beginning after June 15, 1999. SFAS 133 provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities and requires all derivatives to be recorded on the balance
sheet at fair value. The Company does not expect the adoption of SFAS 133 to
have a material impact, if any, on its results of operations, financial position
or cash flows.
BALANCE SHEET DETAIL
Inventories at July 31, 1998 and January 31, 1998 consist of:
<TABLE>
<CAPTION>
July 31, 1998 January 31, 1998
<S> <C> <C>
Raw material $15,266 $ 17,470
Work in process 6,663 6,045
Spare parts 317 432
Finished goods 3,411 2,859
------ -------
25,657 26,806
Less: Valuation reserve 4,931 4,884
------- -------
$ 20,726 $ 21,922
====== ======
</TABLE>
7
<PAGE> 8
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
The Company is authorized to issue the following shares of stock:
16,666,667 shares of Common Stock ($.30 par value)
2,000,000 shares of Preferred Stock ($.01 par value) of which
the following series have been designated:
2,500 shares of Preferred Stock, Series A 1,000 shares of
Preferred Stock, Series B 100,000 shares of Preferred
Stock, Series C 3,000 shares of Preferred Stock, Series D
1,000,000 shares of Preferred Stock, Series E
The Company has outstanding the following shares of preferred stock:
<TABLE>
<CAPTION>
Shares Par Liquidation
Outstanding Value Preference
<S> <C> <C> <C>
Series A 2,500 $ 1 $ 2,500
Accrued, unpaid dividends 888
Series C 8,000 - 8,000
Series D 2,853 - 2,853
------ -- ------
13,353 $ 1 $ 14,241
======= == =======
</TABLE>
In May 1998, the Company issued 8 shares of Series C preferred stock
with a $.01 par value and a $1 liquidation value receiving net proceeds of
$7,420. The Series C Preferred Stock does not bear dividends and the holders are
not entitled to vote. Each share of Series C Preferred Stock is convertible into
common shares at the earlier of 90 days from issuance or the date the underlying
common shares issuable upon conversion are registered. For any conversion before
November 11, 1998 the conversion price is the lesser of (i) 86% of the average
of the three lowest closing bid prices for the common stock during the 22 days
immediately prior to conversion, and (ii) 200% of the average closing bid price
for the common stock during the 22 days immediately prior to the May 14, 1998
issuance date (or $7.99 on a post reverse split basis). The conversion price
after November 10, 1998 is the lesser of (i) above, (ii) above, and the average
closing bid price for the common stock during the period of 22 trading days
immediately prior to November 10, 1998. Any shares of Series C preferred stock
unconverted as of May 14, 2001 are subject to mandatory conversion at the then
conversion price. In no event shall a conversion result in a holder owning, or
deemed to beneficially own, more than 4.99% of the then issued and outstanding
common stock of Osicom.
Osicom has the right to redeem the then outstanding shares of Series C
Preferred Stock at 116.28% of face value if the average closing bid price for
the common stock is less than $10.50 during any period of ten consecutive
trading days.
OTHER CAPITAL STOCK TRANSACTIONS
In July 1998, approval was granted for a one for three stock split
effective July 24, 1998. The effect of this change was reflected in the
financial statements retroactively as if the stock split occurred at the
beginning of the earliest period reported.
In April 1998, the Company issued 203,999 common shares receiving net
proceeds of $1,989. The holders have the right during the quarter to request
additional shares ("price adjustment shares") to be issued by the Company to the
extent that 86% of the ten day average trading price of the shares issued in
respect to this transaction is below
8
<PAGE> 9
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
$9.80 per share at the time of the request; such request may be made only once
with respect to the original shares which have been continuously held by the
holder from the original issue date. During the quarter ended July 31, 1998 the
Company issued 17,494 shares pursuant to such request. If the market value of
the common stock had been greater than $15.00 per share on the 150th day from
issue the holder would have been required to return a portion of shares not
previously price adjusted to the Company for cancellation or to make an
additional cash payment.
In June 1998, the Company issued 274,888 shares of its common stock in
complete conversion of the outstanding Series B preferred stock.
STOCK OPTION PLANS
The Company has three stock options plans in effect: The 1988 Stock
Option Plan, the 1997 Incentive and Non-Qualified Stock Option Plan and the 1997
Director Stock Option Plan. The stock options have been made available to
certain employees and consultants. All options are granted at not less than fair
value at the date of grant and have terms varying from 3 to 10 years. The
purpose of these plans is to attract, retain, motivate and reward officers,
directors, employees and consultants of the Company to maximize their
contribution towards the Company's success.
At July 31, 1998 there were 1,225,385 shares under option at prices
varying from $3.00 to $42.00 per share. As of April 30, 1998 employees were
allowed to elect to re-price their most recent grant only to an exercise price
of $15.9375 on a post reverse split basis. Upon the condition that such
re-priced options will not be exercisable unless the closing price as reported
by Nasdaq for the Company's common stock is $30.00 per share or greater.
Employees holding 213,230 options with exercise prices varying from $19.32 to
$45.00 elected to have their options re-priced.
EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic earnings
per share for the quarters and six months ended July 31, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net loss $ (4,465) $ (12,753) $ (7,143) $ (11,836)
Less: preferred dividends (38) (38) (75) (75)
-------- ------- -------- -------
Net loss available to common
shareholders used in basic EPS $ (4,503) $ (12,791) $ (7,218) $ (11,911)
====== ======= ====== =======
Average number of common shares
used in basic EPS 7,235,336 4,205,988 7,087,216 4,003,159
========= ========= ========= =========
</TABLE>
The Company had a net loss for the quarters and six months ended July
31, 1998 and 1997. Accordingly, the effect of dilutive securities including
convertible debentures, convertible preferred stock, vested and nonvested stock
options and warrants to acquire common stock are not included in the calculation
of EPS because their effect would be antidilutive. The following data shows the
effect on income and the weighted average number of shares of dilutive potential
common stock had such securities been dilutive:
9
<PAGE> 10
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net loss available to common
shareholders used in basic EPS $ (4,503) $ (12,791) $ (7,218) $ (11,911)
Interest on convertible debt
(net of tax) 11 11 22 22
------- --------- ------- ---------
Net loss available to common
shareholders used in basic EPS $ (4,492) $ (12,780) $ (7,196) $ (11,889)
====== ======= ====== =======
Average number of common shares
used in basic EPS 7,235,336 4,205,988 7,087,216 4,003,159
Effect of dilutive securities:
Shares issuable pursuant to
contracts that may be settled in
stock 172,039 28,825 86,020 24,874
Convertible preferred stock 157,249 362,528 162,316 341,838
Convertible debentures 59,059 25,366 48,987 21,889
Stock benefit plans 47,329 247,404 100,818 320,996
Warrant exercises -0- 44,011 5,125 94,103
--------- --------- --------- ---------
Average number of common shares
and dilutive potential common
stock used in diluted EPS 7,671,012 4,914,122 7,490,482 4,806,859
========= ========= ========= =========
</TABLE>
The shares issuable upon exercise of options and warrants represents
the quarterly average of the shares issuable at exercise net of the shares
assumed to have been purchased, at the average market price for the period, with
the assumed exercise proceeds. Accordingly, options and warrants with exercise
prices in excess of the average market price for the period are excluded because
their effect would be antidilutive.
Income per share for the quarter and six months ended July 31, 1997 has
been restated to give effect to the application of SFAS 128 which was adopted by
the Company for periods ending after December 15, 1997. There was no effect from
the restatement on either basic or diluted EPS for the quarter and six months
ended July 31, 1997.
10
<PAGE> 11
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
INTER
NETWORK EMBEDDED TRANS- FAR DIVISION
ACCESS NETWORK MISSION EAST SUBTOTAL ELIMINATIONS TOTAL
------ ------- ------- ---- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JULY 31, 1998:
NET SALES $ 8,513 $ 3,199 $ 3,389 $ 6,028 $21,129 $ (809) $20,320
COST OF SALES 4,650 1,497 2,213 5,429 13,789 (809) 12,980
======= ======= ======= ======= ======= ======= =======
GROSS PROFIT $ 3,863 $ 1,702 $ 1,176 $ 599 $ 7,340 $ -- $ 7,340
======= ======= ======= ======= ======= ======= =======
GROSS MARGIN 45.4% 53.2% 34.7% 9.9% 34.7% 36.1%
======= ======= ======= ======= ======= ======= =======
THREE MONTHS ENDED APRIL 30, 1998:
NET SALES $ 7,996 $ 2,185 $ 4,607 $11,310 $26,098 $ (550) $25,548
COST OF SALES 4,240 1,037 2,280 9,712 17,269 (550) 16,719
======= ======= ======= ======= ======= ======= =======
GROSS PROFIT $ 3,756 $ 1,148 $ 2,327 $ 1,598 $ 8,829 $ -- $ 8,829
======= ======= ======= ======= ======= ======= =======
GROSS MARGIN 47.0% 52.5% 50.5% 14.1% 33.8% 34.6%
======= ======= ======= ======= ======= ======= =======
THREE MONTHS ENDED JULY 31, 1997:
NET SALES $10,944 $ 2,703 $ 2,922 $16,843 $33,412 $ (763) $32,649
COST OF SALES 5,836 1,376 1,812 13,989 23,013 (763) 22,250
======= ======= ======= ======= ======= ======= =======
GROSS PROFIT $ 5,108 $ 1,327 $ 1,110 $ 2,854 $10,399 $ -- $10,399
======= ======= ======= ======= ======= ======= =======
GROSS MARGIN 46.7% 49.1% 38.0% 16.9% 31.1% 31.9%
======= ======= ======= ======= ======= ======= =======
SIX MONTHS ENDED JULY 31, 1998:
NET SALES $16,509 $ 5,384 $ 7,996 $17,338 $47,227 $(1,359) $45,868
COST OF SALES 8,890 2,534 4,493 15,141 31,058 (1,359) 29,699
======= ======= ======= ======= ======= ======= =======
GROSS PROFIT $ 7,619 $ 2,850 $ 3,503 $ 2,197 $16,169 $ -- $16,169
======= ======= ======= ======= ======= ======= =======
GROSS MARGIN 46.2% 52.9% 43.8% 12.7% 34.2% 35.3%
======= ======= ======= ======= ======= ======= =======
SIX MONTHS ENDED JULY 31, 1997:
NET SALES $22,247 $ 5,174 $ 5,150 $33,590 $66,161 $ (880) $65,281
COST OF SALES 11,949 2,745 3,027 28,027 45,748 (880) 44,868
======= ======= ======= ======= ======= ======= =======
GROSS PROFIT $10,298 $ 2,429 $ 2,123 $ 5,563 $20,413 $ -- $20,413
======= ======= ======= ======= ======= ======= =======
GROSS MARGIN 46.3% 46.9% 41.2% 16.6% 30.9% 31.3%
======= ======= ======= ======= ======= ======= =======
</TABLE>
11
<PAGE> 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated unaudited
financial statements and related notes thereto. Further reference should be made
to the Company's Form 10-KSB for the year ended January 31, 1998.
RESULTS OF OPERATIONS/COMPARISON OF THE QUARTER ENDED AND SIX MONTHS ENDED
JULY 31, 1998 AND 1997
Net sales of the Company for the quarter ended July 31, 1998 were $20.3 million
compared to $32.6 million for the quarter ended July 31, 1997. For the six
months period ended July 31, 1998, net sales were $45.9 million compared to
$65.2 million for the same period one year ago. This decline in net sales is
primarily attributable to the Company's Far East Division which had a reduction
in net sales of $10.8 million and $16.2 million for the three month and six
month periods, respectively. The decline of revenue in the Far East Division
("FED") is the result of both the recent unfavorable economic conditions in Asia
and the Pacific Rim as well as the reliance on a single customer in the past.
Approximately one year ago, this customer began the process of reducing orders
for its hub and transceiver products leading to the significant decline in
revenues. The Company is managing FED's transition away from reliance on this
single customer by actively pursuing a broader customer base and extending FED's
business into the development of new, proprietary product lines.
Gross profit for the quarter ended July 31, 1998 was $7.3 million compared to
$10.4 million for the quarter ended July 31, 1997. For the six month period
ended July 31, 1998, gross profit was $16.2 million compared to $20.4 million
for the same period one year ago. This decline in gross profit for both the
three and six month periods relate directly to the decline in net sales
discussed above. The gross margin for the three month period ended July 31, 1998
was 36.1% of net sales compared to 31.9% for the same period one year ago, and
35.3% compared to 31.3% for the six month periods ended July 31, 1998 and 1997
respectively. This improvement in gross margin is a result of a change in the
product mix towards higher margin items, the decline in sales of FED and the
continued improvement resulting from operational efficiencies through the
integration of the various acquisitions of the Company.
Selling and marketing expenses totaled $4.4 million, or 21.5% of net sales for
the three month period ended July 31, 1998, compared to $5.0 million, or 15.4%
of net sales for the same period a year ago. For the six months ended July 31,
1998, selling and marketing expenses were $8.8 million or 19.3% of net sales
compared to $9.0 million or 13.9% of net sales for the six month ended July 31,
1997. The increase in these expenses as a percentage of net sales for both the
three month and six month periods resulted from lower sales during each period.
For the quarter ended July 31, 1998 included in the selling and marketing
expenses were $200,000 in severance costs related to a reduction in the sales
support staff. This reduction resulted from the shift in the Company's Network
Access customer base of end-users to distributors. As the distributors receive
their training directly from the Company, they are well equipped to address the
needs of the end-users. As a result, the Company considered it's overall
requirements for a related support staff to be diminished.
Engineering, research and development expenses totaled $2.7 million or 13.4% of
net sales for the quarter ended July 31, 1998. This compares to $1.9 million, or
5.7% of net sales for the quarter ended July 31, 1997. For the six months ended
July 31, 1998, engineering, research and development expenses were $5.0 million
or 10.8% of net sales compared to $3.4 million or 5.2% of net sales for the same
period a year ago. Included in these expenses for the quarter ended July 31,
1998 were $200,000 of costs related to the closure of the Company's Santa
Barbara, California facility. For the balance of the fiscal year engineering,
research and development expenses are expected to increase as the Company
continues to invest in developing technology to address potential market
opportunities. All the Company's research and development cost are expensed as
incurred.
General and administrative expenses for the quarter ended July 31, 1998 were
$4.2 million or 20.6% of net sales compared to $4.9 million or 15.0% of net
sales for the same period a year ago. During the six month period ended July 31,
1998, general and administrative expenses were $8.4 million or 18.4% of net
sales compared to $8.0 million or 12.2% for the same period ended July 31, 1997.
12
<PAGE> 13
The reduction in the dollar amount of these expenses is related to the
reduction of personnel as well as the elimination of duplicate services and
expenditures, partially offset by a charge of $600,000 related to closing the
Santa Barbara California Facility.
Other operating expenses for the three month period ended July 31, 1998 were
$200,000 compared to $11.0 million for the same period last year. For the six
months ended July 31, 1998, other operating expenses were $.4 million compared
to $11.5 million for the six month period ended July 31, 1997. The expenses for
both the three and six month periods ended July 31, 1998 reflect amortization of
purchased technology and excess cost over net book value of assets acquired both
of which resulted from acquisitions in prior years.
Other operating expenses of $11.0 million for the quarter ended July 31, 1997
included $200,000 of the amortization of purchased technology and excess cost
over net book value of assets acquired, $5.8 million of valuation adjustments
related to purchased technologies and assets, software capitalization valuation
adjustments of $2.7 million, and $2.3 million related to the horizontal and
vertical integration of the Company's acquisitions during prior fiscal years.
The operating loss for the quarter ended July 31, 1998 was $4.2 million.
Included in this loss was approximately $1.0 million related to the closure of
the Company's Santa Barbara facility plus costs associated with a labor force
reduction. The labor force reduction included the reduction of sales support
staff as discussed above plus staff reductions in the area of manufacturing and
manufacturing support which reflects the Company's increased reliance on product
out-sourcing. The operating loss for the quarter ended July 31, 1997 was $12.4
million, which reflected charges of $10.8 million in valuation adjustments
related to purchased technologies and assets as well as the horizontal and
vertical integration of the Company's acquisitions as described above.
Net other charges for the quarter ended July 31, 1998 remained relatively
unchanged at $300,000. The $300,000 increase in net other charges for the six
month period ended July 31, 1998 over the comparable period of the prior year
was the result of a gain on disposal of fixed assets.
There was no provision for income taxes for the three month or six month ended
July 31, 1998 or for the three month period ended July 31, 1997. There was a
$16,000 income tax provision for the quarter ended April 30, 1997. The tax
provision resulted from the operations of the Company's Far East Division. The
Company has carryforwards of domestic federal net operating losses which may be
available, in part, to reduce future taxable income in the United States.
However, due to potential adjustments to net operating loss carryforwards as
provided by the Internal Revenue Code with respect to ownership changes, future
availability of the tax benefits is not assured. In addition, the Company
provides a valuation allowance for a deferred tax asset when in management's
opinion it is more likely than not that some portion or all of the assets will
not be realized.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations through a combination of debt and equity
financing. At July 31, 1998, the Company's working capital was $9.1 million
including $4.1 million in cash and cash equivalents including restricted cash of
$2.2 million.
The Company's operating activities incurred a net cash flow deficit of $6.7
million during the six months ended July 31, 1998, as compared to a $300,000
operating cash flow deficit during the six months ended July 31, 1997. The
increase in cash flows used by operations reflects the substantial decline in
accounts payable partially offset by a decrease in accounts receivable.
Investing activities during the six months ended July 31, 1998 consisted
primarily of purchases of property and equipment of $1.6 million and
expenditures for software development costs capitalized of $1.1 million. During
the six month period ended July 31, 1997 the Company's investing activities
included $4.3 million in purchased of property and equipment, $2.4 million in
expenditures for capitalized software development costs and $2.5 million of
other receivables (including interest bearing advances to Asia Broadcasting
Communications Network, Ltd.).
13
<PAGE> 14
The financing activities of the Company during the six month period ended July
31, 1998 provided net cash flows of $9.5 million, including net proceeds of $7.4
million from the issuance of convertible preferred stock to an investment group
led by a subsidiary of Credit Suisse First Boston and $2.0 million from the
issuance of the Company's common stock. In addition, the Company increased its
short term borrowings by $700,000. These cash inflows were offset by purchases
of treasury stock and reduction to the Company's net long term debt. The
financing activities of the Company during the six month period ended July 31,
1997 provided net cash inflow of $7.4 million, including $6.2 million of net
proceeds of convertible preferred stock, $5.5 million from the issuance of
common stock, and $1.3 million from increased short term borrowings partially
offset by repayments of long term debt, acquisition liabilities and the
liability due on cashless warrant exercise.
At July 31, 1998, the Company had various lines of credit totaling $28.3
million. Outstanding short term borrowings against these credit facilities was
$13.2 million at July 31, 1998, a decline of $1.6 million from January 31, 1998.
During fiscal 1998 the Company commenced, for all of its systems, products and
suppliers, a year 2000 date conversion project to address all necessary code
changes, testing, implementation and exposure areas. The Company has completed
its analysis of its internal information technology systems and product lines,
and has ascertained that these systems and products are year 2000 compliant.
Project completion is planned for the middle of 1999; the remaining cost of this
project has not yet been determined, but it is not expected to be significant.
The Company expects its year 2000 date conversion project to be completed on a
timely basis. However, there can be no assurance that the systems of other
companies on which the Company's systems also rely on will be converted in a
timely manner or that any such failure to convert by another company would not
have an adverse effect on the Company's results of operations or financial
condition.
The Company is assisting its wholly owned subsidiary NETsilicon, Inc. ("NSI",
formally Digital Products, Inc.) to complete an offering of NSI's common stock
through a distribution of common stock purchase rights to holders of the
Company's outstanding securities. After this offering, it is anticipated that
the Company will own approximately 53% of the outstanding commons stock of NSI.
The estimated minimum net proceeds of this offering of $12.8 million will be
used to repay approximately $3.8 million owed to the Company and NSI's $2.5
million outstanding under its short term line of credit. The remaining funds
will be used for NSI's product development, marketing, capital expenditures,
working capital and general corporate purposes.
The Company believes it has sufficient working capital to meet its planned level
of operations for fiscal 1999. However, there can be no assurance that the
Company's working capital requirements for fiscal 1999 will not exceed the
Company's ability to generate sufficient cash internally to support its
requirements. Should cash requirements exceed internally generated cash, the
Company will need to obtain capital from external sources. The Company cannot
give any assurances that sufficient capital, at terms acceptable to the Company,
will be available when needed.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued several SFAS effective for
fiscal years beginning after December 15, 1997 including, SFAS No. 129
"Disclosure of Information about Capital Structure", SFAS No. 130 "Reporting
Comprehensive Income", SFAS No. 131 "Disclosure about Segments of an Enterprise
and Related Information", and SFAS No. 132 "Employers' Disclosures about
Pensions and other Postretirement Benefits". The adoption of these standards has
had no material effects, if any, on Company's financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" effective for financial statements with
fiscal years beginning after June 15, 1999. SFAS 133 provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities and requires all derivatives to be recorded on the balance
sheet at fair value. The Company does not expect the adoption of SFAS 133 to
have a material impact, if any, on its results of operations, financial position
or cash flows.
14
<PAGE> 15
OTHER MATTERS
From time to time the Company is involved in various legal proceedings
incidental to the conduct of its business. The Company believes that none of
these proceedings will have a material adverse impact on the financial condition
or results of operations of the Company.
FLUCTUATIONS IN REVENUE AND OPERATING RESULTS
The networking and bandwidth aggregation industry is subject to fluctuation and
the declines recently experienced by the Company are not necessarily indicative
of the operating results for any future periods. The Company's operating results
may fluctuate as a result of a number of factors, including the timing of orders
from, and shipments to, customers; the timing of new product introductions and
the market acceptance of those products; increased competition; changes in
manufacturing costs; availability of parts; changes in the mix of product sales;
the rate of end user adoption; carrier and private network deployment of WAN
data, video and audio communication services; factors associated with
international operations; and changes in world economic conditions.
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENT
When used anywhere in this Form 10-Q, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer of the
Company, the words or phrases, "will likely result, "are expected to," "is
anticipated," "estimated," "project," or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements include the Company's plans to introduce Dense Wavelength Division
Multiplexing (DWDM), Network Management, Optical Networking Equipment, Gigabit
Ethernet, scaleable remote access servers with broad practical support and
aggregation possibilities, and the Company's plans to develop new products,
expand its sales force, expand its customer base, make acquisitions, establish
strategic relationships and expand within international markets. Such
forward-looking statements also include the Company's expectations concerning
factors affecting the markets for its products, such as demand for increased
bandwidth, the migration from private to public networks, growth in corporate
use of the Internet, expansion of switches between LANs, remote access for
corporate networks, deregulation and increased competition, the introduction of
a wide range of new communication services and technologies and growth in the
domestic and international market for network access solutions. Further
reference should be made to the "Risk Factors" section contain in Part I, Item 1
of the Company's Annual Report on Form 10-KSB for the year ended January 31,
1998.
The Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks and uncertainties are described in the
following section. The Company specifically declines any obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect anticipated or unanticipated events or circumstances
occurring after the date of such statements, or to update the reasons why actual
results could differ from those projected in the forward-looking statements.
15
<PAGE> 16
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, including changes in interest
rates and foreign exchange currency exchange rates. The Company believes that
the relatively moderate rate of inflation in the United States over the past few
years and the relatively stable interest rates incurred on short term financing
have not had a significant impact on the Company's sales, operating results or
prices of raw materials. There can be no assurance, however, that inflation or
an upward trend in short term interest rates will not have a material adverse
effect on the Company's operating results in the future.
A substantial majority of the Company's revenues, expenses and capital
purchasing activities are transacted in U.S. dollars and to date the Company has
not been significantly affected by currency fluctuations. However, the Company
conducts business in several different countries and fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive in particular countries, leading to a reduction in sales in that
country.
16
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
From time to time the Company is involved in various legal proceedings
incidental to the conduct of its business. The Company believes that
none of these proceedings will have a material adverse impact on the
financial condition or results of operations of the Company.
ITEM 2: CHANGES IN SECURITIES
On May 14, 1998 the Company issued 8,000 shares of its series C
preferred stock to two investors receiving $7,420,000 net proceeds to
be used for general corporate purposes. This sale was made without
general solicitation or advertising and no underwriters received fees
in connection with this security sale. The purchasers were all
accredited investors or sophisticated investors with access to all
relevant information necessary. The shares were issued pursuant to
exemptions from registration under Rules 505 and 506 of Regulation D
and Section 4(2) of the Securities Exchange Act of 1933. The Company
has filed a Registration Statement on Form S-3 covering the resale of
the common shares issuable upon conversion of these preferred shares.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
The Company held its annual meeting on June 29, 1998 to vote upon the following
matters:
1. Election of the Board of Directors
2. Approve the appointment of BDO Seidman, LLP as the Company's independent
auditors
The following table summarizes the results of the voting at the meeting:
<TABLE>
<CAPTION>
Broker
Votes For Votes Against Abstentions Non-Votes
<S> <C> <C> <C> <C>
Director Nominees:
Par Chadha 5,705,766 469,408 0 0
Leonard N. Hecht 5,724,757 450,417 0 0
Humbert B. Powell III 5,724,757 450,417 0 0
Xin Cheng 5,724,740 450,433 0 0
Renn Zaphiropoulos 5,723,899 451,274 0 0
Auditor appointment 6,109,774 43,411 21,988 0
</TABLE>
ITEM 5: OTHER INFORMATION
Not Applicable
17
<PAGE> 18
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
20 Consolidated Financial Statements for the
Quarter Ended July 31, 1998
(included in Part I, Item 1)
27 Financial Data Schedule
B. Reports on Form 8-K
May 14, 1998 Private placement of Series C Preferred Stock
May 18, 1998 Proposed initial public offering of the
Company's embedded networking business unit
through distribution of common stock purchase
rights to holders of the Company's outstanding
securities.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OSICOM TECHNOLOGIES, INC.
(Registrant)
By: /s/ John H. Gorman Date: September 14, 1998
-------------------------------
John H. Gorman,
Chief Financial Officer
19
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 4,097,000
<SECURITIES> 0
<RECEIVABLES> 17,549,000
<ALLOWANCES> 706,000
<INVENTORY> 20,726,000
<CURRENT-ASSETS> 47,149,000
<PP&E> 43,930,000
<DEPRECIATION> 26,994,000
<TOTAL-ASSETS> 86,408,000
<CURRENT-LIABILITIES> 37,980,000
<BONDS> 3,318,000
0
1
<COMMON> 2,234,000
<OTHER-SE> 42,497,000
<TOTAL-LIABILITY-AND-EQUITY> 86,408,000
<SALES> 20,320,000
<TOTAL-REVENUES> 20,320,000
<CGS> 12,980,000
<TOTAL-COSTS> 12,980,000
<OTHER-EXPENSES> 11,805,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 296,000
<INCOME-PRETAX> (4,465,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,465,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,465,000)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
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