<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 OCTOBER 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: 8,711,869 shares at December 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 October 31, 1998 and Consolidated
Balance Sheet at January 31, 1998 3
Unaudited Consolidated Statements of Operations for the Three and Nine Months
ended October 31, 1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows for the Nine Months ended
October 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 Nine Months ended
October 31, 1998 and 1997 12
Liquidity and Capital Resources 13
Impact of Recent Accounting Pronouncements 15
Other Matters 15
Fluctuations in Revenue and Operating Results 15
Forward-Looking Statements - Cautionary Statement 15
ITEM 3: QUANITATIVE 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>
===============================================================================================================================
OCTOBER 31, 1998 JANUARY 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
CASH AND EQUIVALENTS $ 1,250 $ 1,912
RESTRICTED CASH 2,515 2,159
ACCOUNTS RECEIVABLE, NET 17,783 19,286
INVENTORY, NET 19,859 21,922
PREPAID EXPENSES AND OTHER CURRENT ASSETS 4,434 5,319
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 45,841 50,598
- -------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 16,563 17,008
- -------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
PURCHASED TECHNOLOGY, NET 1,859 2,138
EXCESS OF COST OVER NET ASSETS ACQUIRED, NET 6,381 6,743
CAPITALIZED SOFTWARE, NET 4,979 4,144
OTHER ASSETS 9,330 9,056
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 22,549 22,081
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 84,953 $ 89,687
===============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
SHORT-TERM DEBT $ 16,402 $ 14,905
CURRENT MATURITIES OF LONG TERM DEBT 666 742
ACCOUNTS PAYABLE 16,499 21,768
ACCRUED LIABILITIES 5,852 4,628
OTHER CURRENT LIABILITIES 813 913
INCOME TAXES PAYABLE -- 339
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 40,232 43,295
- -------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 3,052 3,294
DEFERRED INCOME TAXES 378 378
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 43,662 46,967
- -------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
PREFERRED STOCK, $.01 PAR VALUE; CUMULATIVE DIVIDENDS; LIQUIDATION
PREFERENCE $12,738 INCLUDING ACCUMULATED DIVIDENDS 1 1
COMMON STOCK, $.30 PAR VALUE; 16,667 SHARES AUTHORIZED; 8,779 SHARES ISSUED
8,699 SHARES OUTSTANDING AT OCTOBER 31, 1998; 6,896 SHARES ISSUED AND
6,892 SHARES OUTSTANDING AT JANUARY 31, 1998 2,634 2,069
ADDITIONAL PAID-IN CAPITAL 83,242 74,003
ACCUMULATED DEFICIT (44,062) (33,331)
TREASURY STOCK, AT COST; 80 SHARES AND 22 SHARES AT OCTOBER 31, 1998 AND
JANUARY 31, 1998, RESPECTIVELY (524) (22)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 41,291 42,720
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 84,953 $ 89,687
===============================================================================================================================
</TABLE>
3
<PAGE> 4
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
============================================================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31 OCTOBER 31
------------------------ ------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES 19,035 $ 23,350 $ 64,903 $ 88,631
COST OF SALES 12,092 15,910 41,791 60,778
- ----------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 6,943 7,440 23,112 27,853
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
SELLING AND MARKETING 4,071 4,433 12,906 13,521
ENGINEERING, RESEARCH AND DEVELOPMENT 2,466 1,944 7,433 5,317
GENERAL AND ADMINISTRATIVE 3,384 4,912 11,831 12,849
OTHER OPERATING EXPENSES 213 349 639 11,842
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 10,134 11,638 32,809 43,529
- ----------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (3,191) (4,198) (9,697) (15,676)
- ----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (CHARGES)
INVESTMENT INCOME 98 115 298 368
INTEREST EXPENSE (552) (567) (1,562) (1,531)
GAIN (LOSS) ON DISPOSAL OF ASSETS -- (2) -- 424
OTHER INCOME (CHARGES) 57 46 230 (11)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (CHARGES) (397) (408) (1,034) (750)
- ----------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (3,588) (4,606) (10,731) (16,426)
PROVISION FOR INCOME TAXES -- -- -- 16
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (3,588) $ (4,606) $(10,731) $(16,442)
============================================================================================================================
LOSS PER COMMON SHARE
ACCRUED UNDECLARED DIVIDENDS 38 38 113 113
NET INCOME (LOSS) APPLICABLE
TO COMMON SHARES (3,626) $ (4,644) $(10,844) $(16,555)
============================================================================================================================
BASIC
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 7,687 5,449 7,289 4,490
NET INCOME (LOSS) PER COMMON SHARE: (0.47) $ (0.85) $ (1.49) $ (3.69)
============================================================================================================================
DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 7,687 5,449 7,289 4,490
NET INCOME (LOSS) PER COMMON SHARE: (0.47) $ (0.85) $ (1.49) $ (3.69)
============================================================================================================================
</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>
==================================================================================================================
NINE MONTHS ENDED
OCTOBER 31
----------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $(10,731) $(16,442)
- ------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING
ACTIVITIES:
INTANGIBLE ASSETS VALUATION ALLOWANCES -- 8,530
DEPRECIATION AND AMORTIZATION 4,035 3,365
ACCOUNT AND NOTE RECEIVABLE RECOVERIES -- 157
EXPENSES PAID THROUGH ISSUANCES OF SECURITIES 266 859
GAIN ON DISPOSALS OF FIXED ASSETS -- (419)
CHANGES IN ASSETS AND LIABILITIES NET OF EFFECTS OF BUSINESS
ENTITY ACQUISITIONS:
INCREASE IN RESTRICTED CASH (356) (376)
DECREASE IN ACCOUNTS RECEIVABLE 1,497 3,029
DECREASE IN INVENTORIES 2,063 586
DECREASE IN OTHER CURRENT ASSETS 688 20
DECREASE IN ACCOUNTS PAYABLE (5,267) (2,098)
INCREASE IN ACCRUED EXPENSES 1,230 3,242
DECREASE IN OTHER CURRENT LIABILITIES (440) (109)
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (7,015) 344
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
PURCHASE OF PROPERTY AND EQUIPMENT (2,173) (5,358)
CAPITALIZED SOFTWARE DEVELOPMENT COSTS (1,610) (3,280)
PROCEEDS FROM DISPOSAL OF FIXED ASSETS -- 729
OTHER ASSETS 4 (198)
CASH OUTLAYS FOR ACQUIRED COMPANIES IN EXCESS OF CASH ACQUIRED -- (14)
OTHER RECEIVABLES -- (2,408)
- ------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,779) (10,529)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF CONVERTIBLE PREFERRED STOCK 7,420 6,175
PROCEEDS FROM ISSUANCE OF COMMON STOCK 1,989 6,556
PROCEEDS FROM ISSUANCE OF SHORT-TERM DEBT, NET OF REPAYMENTS 1,497 21
PROCEEDS FROM LONG TERM DEBT 895 --
REPAYMENT OF LONG-TERM DEBT (803) (407)
REPAYMENT OF ACQUISITION LIABILITIES -- (3,274)
REPAYMENT OF LIABILITY DUE ON CASHLESS WARRANT EXERCISE -- (1,567)
PROCEEDS FROM STOCK OPTION EXERCISES -- 63
PURCHASE OF TREASURY STOCK (569) --
OTHER (297) (174)
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,132 7,393
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (662) (2,792)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 1,912 4,055
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,250 $ 1,263
==================================================================================================================
</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 October 31, 1998 and
January 31, 1998, for the quarters and nine months ended October 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 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 were
normal and recurring in nature, necessary to present fairly the financial
position, results of operations and cash flows as of October 31, 1998 and for
the quarter and nine months ended October 31, 1998, have been made. The results
of operations for the quarter and nine months ended October 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 nine months ended October 31, 1998 and 1997 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 either basic or diluted EPS for the quarter and nine months ended October 31,
1997.
6
<PAGE> 7
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
All references in the financial statement to common share and per
share data give affect to the three for one 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 October 31, 1998 and January 31, 1998 consist of:
<TABLE>
<CAPTION>
October 31, 1998 January 31, 1998
<S> <C> <C>
Raw material $14,105 $17,470
Work in process 6,544 6,045
Spare parts 248 432
Finished goods 3,369 2,859
------- -------
24,266 26,806
Less: Valuation reserve 4,407 4,884
------- -------
$19,859 $21,922
======= =======
</TABLE>
STOCKHOLDERS' EQUITY
The Company is authorized to issue the following shares of stock:
16,666,667 shares of Common Stock ($.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
7
<PAGE> 8
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
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 925
Series C 6,460 -- 6,460
Series D 2,853 -- 2,853
------- ------- -------
11,813 $1 $12,738
======= ======= =======
</TABLE>
In May 1998, the Company issued 8,000 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 ($5.81). 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.
On November 6, 1998, the Company notified the holder of 2,760
shares of the Series C preferred stock that it had assigned the Company's right
to redeem 2,000 of the shares to a non-affiliate and that the Company intended
to redeem the remaining 760 shares. The holder disputed the Company's right of
assignment and redemption and filed a lawsuit against the Company. On December
3, 1998, in resolution of that dispute, the Company withdrew its notice of
redemption with respect to the 760 shares, and agreed to convert the redemption
value of these shares at the conversion price in effect of $5.81 into 151,738
shares of the Company's common stock. Additionally, the holder agreed to
transfer its remaining 2,000 shares of Series C preferred stock to the new
holder in return for the new holder's payment of $2,500.
In consideration of the $2,500 paid by the new holder, and in
consideration for the acceptance of new terms with respect to the conversion and
other features of the Series C preferred stock, the Company has agreed to issue
an additional 500 shares of Series C preferred stock to the new holder. The new
terms include a conversion price which is the lesser of $8.53 or 86% of the
average closing bid for the five days immediately preceding conversion,
limitation on conversions during the 150 days following registration of the
underlying common shares, and the ability of the Company to delay conversions at
prices below $5.00 in return for 1% cash payments per month.
During the quarter ended October 31, 1998 the Company issued
767,131 shares of common stock in conversions of 1,540 shares of Series C
preferred stock.
8
<PAGE> 9
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
OTHER CAPITAL STOCK TRANSACTIONS
In July 1998, approval was granted for a three for one 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 $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 quarters ended July 31 and October 31, 1998 the Company issued 431,951
shares pursuant to such requests and no original shares remain for which price
adjustment shares may be requested by the holder. 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.
In September and October 1998, the Company issued 143,115 shares
of its common stock in complete conversion of the outstanding convertible
debentures.
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 October 31, 1998 there were 1,364,240 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.
9
<PAGE> 10
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 and nine months ended October 31, 1998 and
1997.
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net loss $ (3,588) $ (4,606) $ (10,731) $ (16,442)
Less: preferred dividends (38) (38) (113) (113)
----------- ----------- ----------- -----------
Net loss available to common
shareholders used in basic EPS $ (3,626) $ (4,644) $ (10,844) $ (16,555)
=========== =========== =========== ===========
Average number of common shares
used in basic EPS 7,686,551 5,449,204 7,289,189 4,490,470
=========== =========== =========== ===========
</TABLE>
The Company had a net loss for the quarters and nine months ended
October 31, 1998 and 1997. Accordingly, the effect of dilutive securities
including convertible debentures, convertible preferred stock, vested and
non-vested 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:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1998 1997 1998 1997
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net loss available to common
shareholders used in basic EPS $ (3,626) $ (4,644) $ (10,844) $ (16,555)
Interest on convertible debt (net of tax) 9 11 31 33
--------- -------- --------- ---------
Net loss available to common
shareholders used in basic EPS $ (3,617) $ (4,633) $ (10,813) $ (16,522)
====== ====== ========= +========
Average number of common shares
used in basic EPS 7,686,551 5,449,204 7,289,189 4,490,470
Effect of dilutive securities:
Shares issuable pursuant to
contracts that may be settled in
stock - 47,094 57,346 32,280
Convertible preferred stock 2,188,041 422,431 837,557 368,703
Convertible debentures 139,344 41,445 79,106 28,408
Stock benefit plans 4,022 99,194 68,519 247,062
Warrant exercises - 6,315 3,417 64,840
--------- --------- --------- ---------
Average number of common shares
and dilutive potential common
stock used in diluted EPS 10,017,958 6,065,683 8,335,134 5,231,763
========== ========= ========= =========
</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 nine months ended October
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 nine months ended October 31, 1997.
10
<PAGE> 11
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
================================================================================================================================
NETWORK EMBEDDED TRANS- FAR SUBTOTAL INTER TOTAL
ACCESS NETWORK MISSION EAST DIVISION
ELIMINATIONS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED OCTOBER 31, 1998:
NET SALES $ 7,204 $ 3,016 $ 3,873 $ 5,860 $19,953 $ (918) $19,035
COST OF SALES 4,000 2,047 2,129 4,834 13,010 (918) 12,092
- --------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT $ 3,204 $ 969 $ 1,744 $ 1,026 $ 6,943 $ -- $ 6,943
================================================================================================================================
GROSS MARGIN 44.5% 32.1% 45.0% 17.5% 34.8% 36.5%
================================================================================================================================
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 OCTOBER 31, 1997:
NET SALES $10,320 $ 891 $ 3,133 $ 9,524 $23,868 $ (518) $23,350
COST OF SALES 5,690 442 2,219 8,077 16,428 (518) 15,910
- --------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT $ 4,630 $ 449 $ 914 $ 1,447 $ 7,440 $ -- $ 7,440
================================================================================================================================
GROSS MARGIN 44.9% 50.4% 29.2% 15.2% 31.2% 31.9%
================================================================================================================================
NINE MONTHS ENDED OCTOBER 31, 1998:
NET SALES $23,713 $ 8,400 $11,869 $23,198 $67,180 $(2,277) $64,903
COST OF SALES 12,890 4,581 6,622 19,975 44,068 (2,277) 41,791
- --------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT $10,823 $ 3,819 $ 5,247 $ 3,223 $23,112 $ -- $23,112
================================================================================================================================
GROSS MARGIN 45.6% 45.5% 44.2% 13.9% 34.4% 35.6%
================================================================================================================================
NINE MONTHS ENDED OCTOBER 31, 1997:
NET SALES $32,566 $ 6,065 $ 8,283 $43,115 $90,029 $(1,398) $88,631
COST OF SALES 17,638 3,187 5,246 36,105 62,176 (1,398) 60,778
- --------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT $14,928 $ 2,878 $ 3,037 $ 7,010 $27,853 $ -- $27,853
================================================================================================================================
GROSS MARGIN 45.8% 47.5% 36.7% 16.3% 30.9% 31.4%
================================================================================================================================
</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 OCTOBER 31, 1998 AND 1997
Net sales of the Company for the quarter ended October 31, 1998 were $19.0
million compared to $23.4 million for the quarter ended October 31, 1997. For
the nine months period ended October 31, 1998, net sales were $64.9 million
compared to $88.6 million for the same period one year ago. This decline in net
sales is primarily attributable to the Company's Far East operation which
experienced a reduction in net sales of $3.7 million and $19.9 million for the
three month and nine month periods, respectively. This reduction is attributable
to both the continuing unfavorable economic conditions in Asia and the Pacific
Rim, as well as the reliance on a single customer in the past. Approximately a
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 the Far East operation's transition away from reliance on this
single customer by actively pursuing a broader customer base and extending its
business into the development of new, proprietary product lines. The remaining
$3.8 million decline in net sales from the nine months ended October 31, 1997 to
the nine months ended October 31, 1998 resulted from the $8.9 million decline in
net sales by the Network Access operation partially offset by the continuing
growth from new product introductions in Embedded Network and Transmission
operations.
Gross profit for the quarter ended October 31, 1998 was $6.9 million compared to
$7.4 million for the quarter ended October 31, 1997. For the nine month period
ended October 31, 1998, gross profit was $23.1 million compared to $27.9 million
for the same period one year ago. This decline in gross profit for both the
three and nine month periods relates directly to the decline in net sales
discussed previously. The gross margin for the three month period ended October
31, 1998 was 36.5% of net sales compared to 31.9% for the same period one year
ago, and 35.6% compared to 31.4% for the nine month periods ended October 31,
1998 and 1997 respectively. This improvement in gross margins reflects the
change in the product mix towards the higher margin items sold by the
Transmission, Embedded Network and Network Access operations from the
predominantly OEM products sold by the Far East operation. In a period of
declining sales, the Far East operation improved its gross margin to 17.5% for
the quarter ended October 31, 1998 from 15.2% for the same period one year ago
through shipments of new orders with higher gross margins and continued
improvements resulting from operational efficiencies through the integration of
the various acquisitions of the Company.
Selling and marketing expenses totaled $4.1 million, or 21.4% of net sales for
the three month period ended October 31, 1998, compared to $4.4 million, or
19.0% of net sales for the same period a year ago. For the nine months ended
October 31, 1998, selling and marketing expenses were $12.9 million or 19.9% of
net sales compared to $13.5 million or 15.3% of net sales for the nine months
ended October 31, 1997. The increase in these expenses as a percentage of net
sales for both the three month and nine month periods resulted from lower sales
during each period. The dollar amount of these expenses declined from the prior
year as a result of cost reduction initiatives implemented in the second quarter
of this year as well as developing more efficient sales channels through a shift
in the Company's Network Access customer base of end-users to distributors.
Since 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 was able to reduce the technical support staff without affecting the
quality customer service.
Engineering, research and development expenses totaled $2.5 million or 13.0% of
net sales for the quarter ended October 31, 1998. This compares to $1.9 million,
or 8.3% of net sales for the quarter ended October 31, 1997. For the nine months
ended October 31, 1998, engineering, research and development expenses were $7.4
million or 11.4% of net sales compared to $5.3 million or 6.0% of net sales for
the same period a year ago. The increase in these expenses as a percentage of
net sales for both the three month and nine month periods resulted from lower
12
<PAGE> 13
sales during each period. The increase in the dollar amount of engineering,
research and development expenses reflects the Company's efforts to introduce
three new families of products primarily through the internal development of new
technologies. The Company will continue to invest in the development of
technologies to address potential market opportunities as they arise. All the
Company's research and development costs are expensed as incurred.
General and administrative expenses for the quarter ended October 31, 1998 were
$3.4 million or 17.8% of net sales compared to $4.9 million or 21.0% of net
sales for the same period a year ago. During the nine month period ended October
31, 1998, general and administrative expenses were $11.8 million or 18.2% of net
sales compared to $12.8 million or 14.5% for the same period ended October 31,
1997. The decline in expenses from the prior year quarter resulted primarily
from cost reduction initiatives implemented in the second quarter of last year
including reductions in personnel. The decline in the expenses for the nine
month period resulted from both cost reduction initiatives as well as reductions
in legal fees and costs associated with the settlement of the lawsuit against
Builders Warehouse Association, Inc.
Other operating expenses for the three month period ended October 31, 1998 were
$200,000 compared to $300,000 for the same period last year. For the nine months
ended October 31, 1998, other operating expenses were $600,000 compared to $11.8
million for the nine month period ended October 31, 1997. These expenses for
nine month periods ended October 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. For the nine months ended October 31,
1997 other operating expenses included amortization of purchased technology and
excess cost over net book value of assets acquired ($1.1 million), capitalized
software costs valuation adjustments ($2.7 million), costs related to the
horizontal and vertical integration of the Company's acquisitions during fiscal
1997 ($2.3 million) as well as valuation allowances recorded against purchased
intangibles including purchased technology ($4.6 million), customer lists
($812,000), excess cost over net book value of assets acquired ($233,000) and
other intangible assets ($82,000).
The operating loss for the quarter ended October 31, 1998 was $3.2 million
compared to an operating loss of $4.2 million for the same period last year.
This decline in the loss from operations was achieved through the cost reduction
initiatives of the Company as well as reductions in legal fees and costs which
more than fully offset the impact of the 18.5% decline in net sales for the
period. The operating loss for the nine month period ended October 31, 1998
declined to $9.7 million from $15.7 million for the same period a year ago.
This reduction is attibutable to the decline in other operating expenses
discussed previously and the Company's cost reduction initiatives partially
offset by the decline in gross profit and increased engineering, research and
development expenses.
Net other charges for the quarter ended October 31, 1998 remained relatively
unchanged at $400,000. The $300,000 increase in net other charges for the nine
month period ended October 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 nine month ended
October 31, 1998. There was no provision for income taxes for the three month
period ended October 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 operation. 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 October 31, 1998, the Company's working capital was $5.6 million
including $3.8 million in cash and cash equivalents including restricted cash of
$2.5 million.
The Company's operating activities incurred a net cash flow deficit of $7.0
million during the nine months ended October 31, 1998, as compared to a $344,000
operating cash inflow during the nine months ended October 31,
13
<PAGE> 14
1997. The increase in cash flows used by operations reflects the substantial
decline in accounts payable partially offset by a decrease in accounts
receivable and inventories.
Investing activities during the nine months ended October 31, 1998 consisted
primarily of purchases of property and equipment of $2.2 million and
expenditures for software development costs capitalized of $1.6 million. During
the nine month period ended October 31, 1997 the Company's investing activities
included $5.4 million in purchased of property and equipment, $3.3 million in
expenditures for capitalized software development costs and $2.4 of other
receivables (including interest bearing advances to Asia Broadcasting
Communications Network, Ltd.).
The financing activities of the Company during the nine month period ended
October 31, 1998 provided net cash flows of $10.0 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 $1.5 million. These cash inflows
were offset by purchases of treasury stock and repayments of the Company's long
term debt. The financing activities of the Company during the nine month period
ended October 31, 1997 provided net cash inflow of $7.4 million, including $6.2
million of net proceeds of convertible preferred stock, $6.5 million from the
issuance of common stock, partially offset by repayments of long term debt,
acquisition liabilities and the liability due on cashless warrant exercise.
At October 31, 1998, the Company had various lines of credit totaling $27.5
million. Outstanding short term borrowings against these credit facilities was
$16.4 million at October 31, 1998, a increase of $1.5 million from January 31,
1998. These credit facilities include $18.0 million provided by Coast Business
Credit, a division of Southern Pacific Bank, an asset based lender,
collateralized by accounts receivable, inventory and equipment and $9.5 million
provided by various financial institutions in the Far East collateralized by the
Far East operation's leasehold land and buildings, fixed bank deposits and
inventories.
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 (i) has
completed a review of its internal information programs and has identified those
systems that are not compliant, (ii) has completed a review of its product lines
and has ascertained that is products are year 2000 compliant, and (iii) is
surveying all vendors and customers for year 2000 compliance and the results are
not yet complete. Project completion is planned for July, 1999; the cost of this
project is currently estimated to be approximately $400,000 but the final cost
has not yet been determined. The Company expects its Year 2000 date conversion
project to be completed on a timely basis. However, although the Company
believes that its systems will be Year 2000 compliant, the Company utilizes
third-party equipment and software in a variety of its activities including
management and engineering systems that may not be Year 2000 compliant. Failure
of such third party equipment or software to properly process dates for the year
2000 and thereafter could require the Company to incur unanticipated expenses to
remedy any problems, which could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company has not yet
established a contingency plan in the event that it or its customers or vendors
cannot correct the Year 2000 problem.
The Company is assisting its wholly owned subsidiary NETsilicon, Inc. ("NSI",
formally Digital Products, Inc.) to complete an initial public offering of NSI's
common stock. The estimated net proceeds from this offering will be used to
repay approximately $5.2 million owed to the Company, $1.7 million outstanding
under its short term line of credit and 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 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.
14
<PAGE> 15
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.
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.
In August 1998, the Company settled its claims against the original defendants
in the class action case against Builders Warehouse Association, Inc. ("BW").
This case was related to events and actions in 1993 and 1994 and was asserted
against the Company subsequent to BW's merger with the Company; none of the
officers and directors of the Company were associated with BW during the period
for which the litigation was filed. In the settlement agreement between the
Company and plaintiffs allowed Osicom to assert the claims brought by the
plaintiffs against the original defendants in the action which included the
former directors of BW, former officers of BW and financial and public relations
advisors to BW. The Company received cash payments from the original defendants
of $315,000 during the quarter ended October 31, 1998.
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, "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 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
15
<PAGE> 16
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.
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.
In August 1998, the Company settled its claims against the
original defendants in the class action case against Builders
Warehouse Association, Inc. ("BW"). This case was related to
events and actions in 1993 and 1994 and was asserted against the
Company subsequent to BW's merger with the Company; none of the
officers and directors of the Company were associated with BW
during the period for which the litigation was filed. In the
settlement agreement between the Company and plaintiffs allowed
Osicom to assert the claims brought by the plaintiffs against the
original defendants in the action which included the former
directors of BW, former officers of BW and financial and public
relations advisors to BW. The Company received cash payments from
the original defendants of $315,000 during the quarter ended
October 31, 1998.
ITEM 2: CHANGES IN SECURITIES
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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 October 31, 1998
(included in Part I, Item 1)
27 Financial Data Schedule
B. Reports on Form 8-K
August 5, 1998 Customer lease financing agreement with
Transamerica Vendor Financial
Corporation
September 30, 1998 Board of Directors authorization to
management to explore sale of Far East
operations, initial public offering of
Transmission and Network Access
operations and distribution of shares in
operating units to shareholders.
Management changes.
December 3, 1998 Assignment of redemption of Series C
Preferred Stock
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/ CHRISTOPHER E. SUE Date: December 15, 1998
----------------------------------
Christopher E. Sue,
Vice President of Finance
Principal Accounting Officer
19
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<RECEIVABLES> 18,685,000
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