<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 APRIL 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-15810
OSICOM TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEW JERSEY 22-2367234
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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)
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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, $.10 par value per share, Outstanding: 21,462,388
shares at May 31, 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.
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TABLE OF CONTENTS
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Page
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PART I: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheet at April 30, 1998 and
Consolidated Balance Sheet at January 31, 1998 3
Unaudited Consolidated Statements of Operations for the Three Months
ended April 30, 1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows for the Three Months
ended April 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations/Comparison of the Three Months ended April 30,
1998 and 1997 10
Liquidity and Capital Resources 11
Impact of Recent Accounting Pronouncements 11
Other Matters 12
Fluctuations in Revenue and Operating Results 12
Forward-Looking Statements - Cautionary Statement 12
ITEM 3: QUANITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 12-13
PART II: OTHER INFORMATION 14
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 15
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2
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OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
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<CAPTION>
======================================================================================================================
April 30, January 31,
1998 1998
- ----------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 778 $ 1,912
Restricted cash 2,206 2,159
Accounts receivable, net 16,046 19,286
Inventory, net 19,888 21,922
Prepaid expenses and other current assets 4,852 5,319
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 43,770 50,598
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PROPERTY AND EQUIPMENT, NET 17,412 17,008
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OTHER ASSETS
Purchased technology, net 2,045 2,138
Excess of cost over net assets acquired, net 6,622 6,743
Capitalized software, net 4,382 4,144
Other assets 9,524 9,056
- ----------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 22,573 22,081
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 83,755 $ 89,687
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 13,282 $ 14,905
Current maturities of long term debt 669 742
Accounts payable 17,116 21,768
Accrued liabilities 5,815 4,628
Other current liabilities 830 913
Income taxes payable 182 339
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TOTAL CURRENT LIABILITIES 37,894 43,295
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Long-term debt and capital lease obligations 3,307 3,294
Deferred income taxes 378 378
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TOTAL LIABILITIES 41,579 46,967
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; cumulative dividends; liquidation
preference $8,569 including accumulated dividends 1 1
Common stock, $.10 par value; 50,000 shares authorized; 21,462 shares issued
21,452 shares outstanding at April 30, 1998; 20,687 shares issued and
20,677 shares outstanding at January 31, 1998 2,146 2,069
Additional paid-in capital 84,060 74,003
Accumulated deficit (36,009) (33,331)
Treasury stock, 10 shares, at cost (22) (22)
Stock subscription receivable (8,000) -
- ----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 42,176 42,720
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,755 $ 89,687
======================================================================================================================
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3
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OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share amounts)
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========================================================================================
Quarter Ended April 30,
-----------------------
1998 1997
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NET SALES $ 25,548 $ 32,632
COST OF SALES 16,719 22,618
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GROSS PROFIT 8,829 10,014
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OPERATING EXPENSES
Selling and marketing 4,448 4,071
Engineering, research and development 2,251 1,490
General and administrative 4,254 3,052
Other operating expenses 213 467
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TOTAL OPERATING EXPENSES 11,166 9,080
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INCOME (LOSS) FROM OPERATIONS (2,337) 934
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OTHER INCOME (CHARGES)
Investment income 60 100
Interest expense (502) (434)
Gain (loss) on disposal of assets - 426
Other income (charges) 101 (93)
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TOTAL OTHER INCOME (CHARGES) (341) (1)
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LOSS BEFORE INCOME TAXES (2,678) 933
PROVISION FOR INCOME TAXES - 16
- ----------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (2,678) $ 917
========================================================================================
NET LOSS PER COMMON SHARE
ACCRUED UNDECLARED PREFERRED DIVIDENDS 38 38
NET LOSS APPLICABLE TO COMMON SHARES $ (2,716) $ 879
========================================================================================
BASIC
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 20,802 11,380
NET INCOME (LOSS) PER COMMON SHARE: $ (0.13) $ 0.08
========================================================================================
DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING n/a 14,078
NET INCOME (LOSS) PER COMMON SHARE: n/a $ 0.06
========================================================================================
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4
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OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
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Quarter ended April 30,
------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(2,678) $ 917
- -------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,041 1,349
Accounts receivable and inventory reserves (152) (1,695)
Gain on disposal of fixed assets - (419)
Expenses paid through issuances of securities 156 39
Changes in assets and liabilities net of effects of business entity
acquisitions and divestiture:
Increase in restricted cash (47) (128)
Decrease in accounts receivable 3,342 13
(Increase) decrease in inventories 2,082 (952)
(Increase) decrease in other current assets 467 (417)
Increase (decrease) in accounts payable (4,651) 3,306
Increase in accrued expenses 1,182 329
Decrease in other current liabilities (240) (18)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 502 2,324
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (867) (2,637)
Software development costs (546) (1,293)
Proceeds from disposal of fixed assets - 729
Other receivables - (2,455)
Cash outlays for acquired companies in excess of cash acquired (Note A) - (15)
Other assets 48 (43)
- -------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,365) (5,714)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,989 -
Proceeds from issuance of convertible preferred stock - 6,176
Proceeds from issuance of short-term debt, net of repayments (1,623) 185
Proceeds from long-term debt 301 -
Repayment of long-term debt (362) (294)
Proceeds from stock option exercises - 28
Other (576) (90)
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (271) 6,005
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,134) 2,615
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,912 4,055
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 778 $ 6,670
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</TABLE>
See accompanying notes to consolidated financial statements
5
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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 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 April 30, 1998 and January 31,
1998, for the quarters ended April 30, 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, but does not include all disclosures required by generally
accepted accounting principles. However, the Company believes that the
disclosure 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 (which include
only normal recurring adjustments) necessary to present fairly the fianancial
position, results of operations and cash flows as of April 30, 1998 and for the
quarter ended April 30, 1998, have been made. The results of operations for the
quarter ended April 30, 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 ended April 30, 1998 as they would be anti-dilutive.
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 basic EPS
for the quarter ended April 30, 1997 and diluted EPS declined from $0.07 per
share to $0.06 per share.
6
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OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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.
BALANCE SHEET DETAIL
Inventories at April 30, 1998 and January 31, 1998 consist of:
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April 30, 1998 January 31, 1998
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Raw material $ 14,720 $ 17,470
Work in process 6,798 6,045
Spare parts 385 432
Finished goods 3,331 2,859
---------- ----------
25,235 26,806
Less: Valuation reserve 5,346 4,884
---------- ----------
$ 19,888 $ 21,922
========== ==========
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STOCKHOLDERS' EQUITY
The Company is authorized to issue the following shares of stock:
50,000,000 shares of Common Stock ($.10 par value)
2,000,000 shares of Preferred Stock ($.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:
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Shares Par Liquidation
Outstanding Value Preference
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Series A 2,500 $ 1 $ 2,500
Accrued, unpaid dividends -- -- 850
Series B 1,000 -- 2,366
Series D 2,853 -- 2,853
-------- -------- --------
6,353 $ 1 $ 8,569
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OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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). 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 $3.50 during any period of ten consecutive trading
days.
OTHER CAPITAL STOCK TRANSACTIONS
During the quarter ended April 30, 1998, the Company issued 611,995
common shares receiving net proceeds of $1,989. The holders have the right 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 $3.268 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. If the market value of the common stock is greater than
$5.00 per share on the 150th day from issue the holder is required to return a
portion of shares not previously price adjusted to the Company for cancellation
or make an additional cash payment.
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 April 30, 1998 there were 3,784,026 shares under option at prices
varying from $1.00 to $14.00 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 $5.3125 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 $10.00 per share or greater. Employees holding 599,053 options
with exercise prices varying from $6.44 to $15.00 elected to have their options
re-priced.
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OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic earnings
per share for the quarters ended April 30, 1998 and 1997.
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<CAPTION>
1998 1997
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Net income (loss) $ (2,678) $ 917
Less: preferred dividends (38) (38)
------------ ------------
Net loss available to common shareholders used in basic EPS $ (2,716) $ 879
============ ============
Average number of common shares used in basic EPS 20,802,312 11,380,476
============ ============
</TABLE>
The Company had a net loss for the quarter ended April 30, 1998.
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.
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1998 1997
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Net income (loss) available to common shareholders used in basic EPS $ (2,716) $ 879
Interest on convertible debt (net of tax) 11 --
------------ ------------
Net income (loss) available to common shareholders after assumed
conversions of dilutive securities $ (2,705) $ 879
============ ============
Average number of common shares used in basic EPS 20,802,312 11,380,476
Effect of dilutive securities:
Shares issuable pursuant to contracts that may be settled in stock -- 62,764
Convertible preferred stock 502,145 963,433
Convertible debentures 116,743 55,231
Stock benefit plans 464,598 1,183,761
Warrant exercises 30,748 432,585
------------ ------------
Average number of common shares and dilutive potential
common stock used in diluted EPS 21,916,546 14,078,250
============ ============
</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 ended April 30, 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 basic EPS for the quarter ended April 30, 1997 and diluted EPS
declined from $0.07 per share to $0.06 per share.
9
<PAGE> 10
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 APRIL 30, 1998 AND 1997
Net sales of the Company for the quarter ended April 30, 1998 were $25.5 million
compared to $32.6 million for the quarter ended April 30, 1997. This decline in
net sales is 90% attributable to the Company's network access products,
primarily in its Far East facility which was partially offset by a 106% increase
in the net sales attributable to the Company's transmission products. As a
result of recent unfavorable economic conditions, sales to certain countries in
Asia and the Pacific Rim have declined as a percentage of the Company's total
revenue. The Company anticipates that sales in Asia will remain weak for or
decline in the foreseeable future. Sales growth in these markets has generally
been impacted by a variety of factors including weaker economic conditions,
delayed government spending, a stronger dollar versus the local currencies,
and slower adoption of networking technologies. If the economic conditions in
these markets worsen, or if these unfavorable conditions result in a wider
regional or global economic slowdown, this may have a material adverse impact
on the Company's business, operations and financial condition.
Gross profit for the quarter ended April 30, 1998 was $8.8 million compared to
$10.0 million for the quarter ended April 30, 1997. This decline in gross
profit relates directly to the decline in net sales discussed previously
however the 12% decline in gross profit is substantially less than the 22%
decline in net sales. This resulted from the increased gross profit earned by
the Company on transmission products as well as the decline in the sales of
lower margin products by the Far East facility. Gross margins increased to
34.5% for the quarter ended April 30, 1998 from 30.7% for the quarter ended
April 30, 1997. The improvement in the gross margins was the result of the
shift in product sales to higher margin items, transmission products, which
resulted from the decline in sales by the Far East facility as noted
previously as well as operational efficiencies achieved through the
integration of the various acquisitions of the Company during prior years.
Selling and marketing expense totaled $4.4 million, or 17.3% of net sales for
the quarter ended April 30, 1998. This compares to $4.1 million, or 12.5% of net
sales for the quarter ended April 30, 1997. The increase in the dollar amount of
these expenses resulted from marketing efforts related to the introduction of
new products as well as efforts to expand the Company's domestic and
international sales channels. The increase in these expenses as a percentage of
net sales during the quarter ended April 30, 1998 reflects the reduced net sales
during the period.
Engineering, research and development expenses totaled $2.3 million, or 8.8% of
net sales for the quarter ended April 30, 1998. This compares to $1.5 million,
or 4.6% of net sales for the quarter ended April 30, 1997. The increase in these
expenses as a percentage of net sales for the quarter ended April 30, 1998
reflects the reduced net sales during the period. For the near future,
engineering, research and development expenses are expected to increase at a
greater rate than the sales growth rate, as the Company continues to invest in
technology to address potential market opportunities. All the Company's research
and development costs are expensed as incurred.
General and administrative expenses increased to $4.3 million for the quarter
ended April 30, 1998 from $3.1 million for the quarter ended April 30, 1997.
This increase reflects increased personnel and consulting costs necessary to
support the Company's business infrastructure and increased costs for
development of information systems.
Net other charges for the quarters ended April 30, 1998 and 1997 were $341,000
and $1,000, respectively. The fluctuation is the result of the one-time gains
from sales of fixed assets by the Company during the quarter ended April 30,
1997.
There was no provision for income taxes for the quarter ended April 30, 1998
as compared to a provision of $16,000 for the quarter ended April 30, 1997.
The tax provision resulted from the operations of the Company's Far East
facility. The Company has carryforwards of domestic federal net operating
losses which may be available, in part, to reduce future taxable income in
the United
10
<PAGE> 11
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 April 30, 1998, the Company's working capital was $5.9 million
including $3.0 million in cash and cash equivalents including restricted cash
of $2.2 million.
The Company's operating activities provided a net cash flow of $502,000 during
the quarter ended April 30, 1998, as compared to a $2.3 million operating cash
flow during the quarter ended April 30, 1997. This decrease in cash flows
provided by operations reflects decline in accounts payable resulting from the
non-recurring integration costs, increased costs associated with the Company's
efforts in launching its new products, and increased infrastructure costs
reported in prior periods partially offset by the decline in accounts receivable
and inventories resulting from lower net sales discussed previously.
Investing activities during the quarter ended April 30, 1998 consisted primarily
of purchases of property and equipment of $867,000 and expenditures for software
development costs capitalized of $546,000. During the quarter ended April 30,
1997 the Company's investing activities included $2.6 million in purchased of
property and equipment, $1.3 million in expenditures for capitalized software
development costs and other receivables (primarily Asia Broadcasting
Communications Network, Ltd.).
The financing activities of the Company during the quarter ended April 30, 1998
utilized net cash flows of $271,000 as compared with net cash flows of $6.0
million during the quarter ended April 30, 1997. This $6.3 million decrease is
primarily the result of declines in equity financing by the Company of $4.2
million, and net repayments of short term debt as compared with net borrowings
of $1.8 million.
At April 30, 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 April 30, 1998, a decline of $1.6 million from January 31,
1998. These credit facilities were in place at January 31, 1998 and remain
unchanged as to terms.
Subsequent to April 30, 1998 the Company completed an equity financing by a
placement of convertible preferred stock with a face value of $8.0 million to an
investment group led by a subsidiary of Credit Suisse First Boston, Inc.
receiving net proceeds of $7.4 million.
The Company has taken actions to understand the nature and extent of the work
required to make its systems, products and infrastructure Year 2000 compliant.
During fiscal 1998 the Company commenced, for all of its systems, a year 2000
date conversion project to address all necessary code changes, testing and
implementation. Project completion is planned for the middle of fiscal 1999; the
cost of this project has not yet been determined. 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 will be timely converted or that any such failure to convert
by another company would not have an adverse effect on the Company's systems.
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 and the need capital will have to be obtained 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.
11
<PAGE> 12
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 and 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," "will continue," "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 DWDM,
network management, all 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.
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 current 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.
12
<PAGE> 13
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.
13
<PAGE> 14
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 April 14, 1998 the Company issued 611,995 shares of its common
stock to an investor (existing shareholder) receiving $1,989,453 in
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 purchaser
was an accredited investor or sophisticated investor 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 Registration Statement on Form S-3 covering the
resale of these shares.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
Not Applicable
ITEM 5: OTHER INFORMATION
Not Applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
20 Consolidated Financial Statements for the Quarter Ended
April 30, 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.
14
<PAGE> 15
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: June 15, 1998
---------------------------------
John H. Gorman,
Chief Financial Officer
15
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