<PAGE>
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, 1999
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)
<TABLE>
<S> <C>
New Jersey 22-2367234
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
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: 11,107,666 shares at
December 1, 1999.
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>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Unaudited
October 31, 1999 January 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 7,297 $ 3,480
Accounts receivable, net 13,932 17,164
Due from affiliates 5,217 -
Inventory, net 13,257 14,465
Other current assets 2,131 2,480
Investment in marketable securities 94,688 -
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 136,522 37,589
- ------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 5,854 6,715
- ------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Purchased technology, net 1,487 1,766
Capitalized software, net 4,014 5,105
Notes receivable and other assets 2,496 803
Net assets of discontinued operations 7,000 14,818
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 14,997 22,492
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $157,373 $ 66,796
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 7,544 $ 10,678
Current maturities of long-term debt 685 284
Accounts payable 7,677 9,022
Due to affiliates 90 724
Accrued liabilities 4,739 4,551
Other current liabilities 592 931
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 21,327 26,190
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations 1,887 1,748
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 23,214 27,938
- ------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; cumulative dividends; liquidation
preference $9,088 including accumulated dividends 1 1
Common stock, $.30 par value; 16,667 shares authorized; 9,996 shares
issued and 9,976 shares outstanding at October 31, 1999; 8,924 shares
issued and 8,844 shares outstanding at January 31, 1999 2,999 2,677
Additional paid-in capital 90,530 85,183
Accumulated deficit (50,267) (48,479)
Unrealized gain on marketable securities 91,049 -
Treasury stock, at cost; 20 shares and 80 shares at October 31, 1999 and
January 31, 1999, respectively (153) (524)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 134,159 38,858
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $157,373 $ 66,796
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
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
------------------------------- -----------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $18,948 $14,094 $55,283 $ 43,983
COST OF SALES 9,620 8,178 28,957 24,095
- -------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 9,328 5,916 26,326 19,888
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and marketing 3,999 3,787 12,629 12,172
Engineering, research and development 2,171 2,448 6,934 7,377
General and administrative 2,639 2,113 8,564 7,793
Other operating expenses 93 93 279 279
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 8,902 8,441 28,406 27,621
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS 426 (2,525) (2,080) (7,733)
- -------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (CHARGES)
Investment income 53 62 85 218
Interest expense (454) (342) (1,518) (994)
Other income (charges) 51 14 53 59
Gain on sales of marketable securities 14,170 - 14,170 -
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (CHARGES) 13,820 (266) 12,790 (717)
- -------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 14,246 (2,791) 10,710 (8,450)
Provision for Income Taxes 3,406 - 3,406 -
- -------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 10,840 (2,791) 7,304 (8,450)
LOSS FROM DISCONTINUED OPERATIONS
(NET OF INCOME TAX OF $-0-,$-0-,$-0- AND $-0-) (1,271) (797) (2,620) (2,281)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS
(NET OF INCOME TAX BENEFIT OF $3,406 AND $3,406) (8,036) - (8,036) -
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,533 $(3,588) $(3,352) $(10,731)
===============================================================================================================================
INCOME (LOSS) PER COMMON SHARE:
BASIC
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 9,552 7,687 9,046 7,289
NET INCOME (LOSS) PER COMMON SHARE:
Continuing Operations $ 1.10 $ (0.39) $ 0.72 $ (1.37)
Discontinued Operations (0.97) (0.11) (1.18) (0.32)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ 0.13 $ (0.50) $ (0.46) $ (1.69)
===============================================================================================================================
DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 10,405 7,687 10,416 7,289
NET INCOME (LOSS) PER COMMON SHARE:
Continuing Operations $ 1.04 $ (0.39) $ 0.68 $ (1.37)
Discontinued Operations (0.90) (0.11) (1.02) (0.32)
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ 0.14 $ (0.50) $ (0.34) $ (1.69)
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31 October 31
------------------------------- -----------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME AND ITS COMPONENTS
CONSIST OF THE FOLLOWING:
Net income (loss) $ 1,533 $(3,588) $(3,352) $(10,731)
Change in unrealized gains on marketable securities 91,049 - 91,049 -
- ----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $92,582 $(3,588) $87,697 $(10,731)
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
October 31
--------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations $ 7,304 $ (8,450)
- -------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization 3,235 2,585
Accounts receivable and inventory reserves 749 (280)
Expenses paid through issuances of securities 548 253
Gain on sale of marketable securities (14,170) -
Provision for income taxes 3,406 -
Changes in assets and liabilities net of effects of partial disposition of affiliate:
(Increase) decrease in accounts receivable (2,444) 267
Increase in inventories (2,978) (1,040)
(Increase) decrease in other current assets (1,268) 379
Increase in accounts payable 3,203 551
Increase in accrued expenses 2,586 1,008
Decrease in other current liabilities (341) (101)
- -------------------------------------------------------------------------------------------------------------------
NET CASH USED IN CONTINUING OPERATING ACTIVITIES (170) (4,828)
NET CASH PROVIDED BY DISCONTINUED OPERATING ACTIVITIES 1,779 140
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,609 (4,688)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of property and equipment (1,661) (1,498)
Capitalized software development costs (894) (1,633)
Other assets (2,755) (231)
Cash received for sale of subsidiary shares in excess of cash disposed 13,717 -
Advances to affiliates, net of repayments (8,528) (2,120)
Investing activities of discontinued operations 351 (586)
(Increase) decrease in cash of discontinued operations 943 (258)
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,173 (6,326)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock - 7,420
Proceeds from issuance of common stock - 2,389
Proceeds from issuance of short-term debt, net of repayments 1,353 555
Proceeds from long term debt 907 489
Repayment of long-term debt (45) (569)
Proceeds from stock option exercises 2,599 -
Preferred stock dividends (481) -
Purchase of treasury stock (153) (743)
Other (73) (150)
Financing activities of discontinued operations (3,072) 703
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,035 10,094
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,817 (920)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,480 1,422
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 7,297 $ 502
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
Osicom Technologies, Inc. (the "Company," "We," "Our," or "Us") through its
subsidiaries designs, manufactures and markets integrated networking and
bandwidth aggregation products for enhancing the performance of data and
telecommunications networks. Our 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. We
have facilities in Annapolis Junction, Maryland, San Diego, California and
Santa Monica, California. In addition, we have various sales offices located in
the United States and Europe. Our discontinued operation has facilities in
China. Our former subsidiary, NETsilicon, Inc., is located in Waltham,
Massachusetts. We market and sell our 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, 1999 and January 31,
1999, for the three and nine months ended October 31, 1999 and 1998, have been
prepared by us, 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, 1999 balance sheet was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. However, we believe that the
disclosures are adequate to make the information presented not misleading. These
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in our Annual Report on Form
10-K for the year ended January 31, 1999.
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 financial
position, results of operations and cash flows as of October 31, 1999 and for
the three and nine months ended October 31, 1999, have been made. The results of
operations for the three and nine months ended October 31, 1999 are not
necessarily indicative of the operating results for the full year.
NETSILICON, INC.
In connection with the initial public offering by NETsilicon, Inc.
("NSI"), our remaining 55.4% interest became non-voting shares. Accordingly, the
accompanying financial statements reflect the results of operations of NSI
through September 14, 1999 at which time our remaining interest is accounted for
as an "available for sale" security." Under this accounting, the 7.5 million
shares of NSI held by us are marked-to-market at the end of each reporting
period with the difference between our basis and the fair market value as
reported on Nasdaq reported as a separate element of stockholders' equity and is
included in the computation of comprehensive income. Balances due from and to
NSI are included in "due from affiliates" and "due to affiliates" in the
accompanying balance sheets.
DISCONTINUED OPERATIONS
Our Far East business unit has been accounted for as a discontinued
operation pursuant to our plan to sell the division. During the quarter ended
October 31, 1999, we recorded a reduction to the estimated realizable value of
the net assets of discontinued operations of $8,036, net of the tax benefit
from the loss. Balances due from and to
6
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
the Far East business unit are included in "due from affiliates" and "due to
affiliates" in the accompanying balance sheets.
EARNINGS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128
requires dual presentation of basic and diluted earnings per share ("EPS")
on the face of the income statement and 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
our 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 three and nine months ended October 31, 1998 as they would
be anti-dilutive. The dilutive effect of potential common shares is measured
with respect to income from continuing operations.
All references in the financial statements to common shares and per
share data give effect to the one for three stock split effective July 24, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, is effective for financial statements with fiscal
quarters beginning after June 15, 2000. The statement established standards for
accounting for derivatives and hedging instruments. We do not currently have any
of these instruments. The adoption of SFAS 133 will have no impact on our
results of operations, financial position or cash flows.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," is effective for
financial statements with years beginning after December 15, 1998. The SOP
provides guidance on accounting for the costs of computer software developed or
purchased for internal use. The SOP requires that we continue to capitalize
certain costs of software developed for internal use once certain criteria are
met. The adoption of SOP 98-1 had no effect on our financial position or results
of operations.
SOP 98-5, "Reporting on the Costs of Start-up Activities," is effective
for financial statements for fiscal years beginning after December 31, 1998. The
SOP provides guidance and examples of the types of expenses associated with
one-time (start-up) activities which, under this SOP, must be expensed as
incurred. The adoption of SOP 98-5 had no effect on our financial position or
results of operations.
SFAS 135, "Rescission of FASB Statement No. 75 and Technical
Corrections," is effective for financial statements issued for fiscal years
ending after February 15, 1999. The adoption of SFAS No. 135 had no effect on
our financial position or results of operations.
7
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
October 31, January 31,
1999 1999
<S> <C> <C>
Inventories:
Raw material $ 9,070 $ 9,547
Work in process 3,635 5,430
Spare parts 180 190
Finished goods 3,794 2,787
------- -------
16,679 17,954
Less: Valuation reserve 3,422 3,489
------- -------
$13,257 $14,465
======= =======
Due from affiliates:
Far East business unit $ 4,896 $ -
NSI 321 -
------- -------
$ 5,217 $ -
======= =======
Due to affiliates:
Far East business unit $ 90 $ 538
NSI - 186
------- -------
$ 90 $ 724
======= =======
</TABLE>
SHORT-TERM DEBT
The company's promissory note dated March 26, 1999 was extended to
August 31, 1999 and September 30, 1999. Principal of $1,400 and the loan fee of
$250 was repaid on August 31, 1999 and September 30, 1999. The remaining balance
of $1,100 was converted into 125,000 shares of common stock on September 30,
1999.
STOCKHOLDERS' EQUITY
We are authorized to issue the following shares of stock:
16,666,667 shares of Common Stock ($.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
8
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
We have 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 1,075
Series C 2,660 - 2,660
Series D 2,853 - 2,853
----- -- -----
8,013 $ 1 $ 9,088
===== == =====
</TABLE>
Preferred stock dividends during the three and nine months ended
October 31, 1999 and 1998 consist of:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Accrued, unpaid dividends (Series A) $ 38 $ 38 $ 113 $ 113
Deemed dividends (Series C) - 195 103 1,459
Dividends paid (Series C) 257 - 564 -
---- --- --- -----
$ 295 $ 233 $ 780 $ 1,572
==== === === =====
</TABLE>
OTHER CAPITAL STOCK TRANSACTIONS
In July 1998, approval was granted for a one for three stock split
effective July 24, 1998. The effect of this change was reflected in the
financial statements retroactively as if the reverse stock split occurred at the
beginning of the earliest period reported.
During the quarter and nine months ended October 31, 1999, 401,307 and
606,987 shares, respectively, of our common stock were issued upon conversion of
2,700 and 3,895 shares, respectively, of our Series C preferred stock.
STOCK OPTION PLANS
We have 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 our officers,
directors, employees and consultants to maximize their contribution towards our
success. At October 31, 1999 there were 2,322,741 shares under option at prices
varying from $3.00 to $37.25 per share.
9
<PAGE>
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, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income (loss) $ 1,533 $ (3,588) $ (3,352) $ (10,731)
Less: preferred dividends (295) (233) (780) (1,572)
------- -------- -------- ---------
Net income (loss) available to common
shareholders used in basic EPS $ 1,238 $ (3,821) $ (4,132) $ (12,303)
======= ======== ======== =========
Average number of common shares
used in basic EPS 9,552,001 7,686,551 9,045,872 7,289,189
========= ========= ========= =========
</TABLE>
We had a net loss for the quarters and nine months ended October 31,
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. Our Series A preferred stock is not
currently convertible, accordingly its effect is antidilutive in the calculation
of diluted EPS for the quarter and nine months ended October 31, 1999. The
following data shows the effect on income and the weighted average number of
shares of dilutive potential common stock.
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income (loss) available to common
shareholders used in basic EPS $ 1,238 $ (3,821) $ (4,132) $ (12,303)
Dividends on convertible preferred
stock excluding deemed dividends
and Series A dividends 257 - 564 -
Interest on convertible debt (net of tax) - 9 - 31
------- -------- -------- ---------
Net loss available to common
shareholders used in diluted EPS $ 1,495 $ (3,812) $ (3,568) $ (12,272)
======= ======== ======== =========
Average number of common shares
used in basic EPS 9,552,001 7,686,551 9,045,872 7,289,189
Effect of dilutive securities:
Shares issuable pursuant to
contracts that may be settled in
stock - - - 57,346
Convertible preferred stock 489,722 2,188,041 607,709 837,557
Convertible debentures - 139,344 - 79,106
Stock benefit plans 350,228 4,022 645,890 68,519
Warrant exercises 13,089 - 116,611 3,417
---------- ---------- --------- ---------
Average number of common shares
and dilutive potential common
stock used in diluted EPS 10,405,040 10,017,958 10,416,082 8,335,134
========== ========== ========== =========
</TABLE>
10
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(In Thousands, except share and per share amounts)
- ------------------------------------------------------------------
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.
SUPPLEMENTAL CASH FLOW DISCLOSURES
Common shares issued on conversion of short term debt during the
quarter and nine months ended October 31, 1999 neither provided nor used cash.
Accordingly, the $1,100 value assigned to such stock has been excluded from the
statement of cash flows.
SUBSEQUENT EVENTS
During November, 1999, 441,453 shares of common stock were issued upon
conversion of the remaining 2,660 shares of our Series C preferred stock. After
these conversions no shares of our Series C preferred stock remain outstanding.
On December 1, 1999, the Company issued 679,483 unregistered shares of
common stock receiving net proceeds of $6,850. The holder may request us to
register their shares upon the earlier of December 1, 2000 or the disposition of
substantially all of our NSI shares. The holder has the right to nominate one
member of the Board of Directors to serve until the annual meeting in 2001 and
has the right to participate in any stock offering by our Optical Networking
subsidiary to the extent of $7,500 subject to certain limitations.
11
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PER SHARE AMOUNTS)
- -----------------------------------------------------------------
SEGMENT INFORMATION
<TABLE>
<CAPTION>
Network Optical
Access NETsilicon Networking Other Total
------ ---------- ---------- ----- -----
<S> <C> <C> <C> <C> <C>
Three months ended October 31, 1999:
Revenues from external customers $ 8,030 $ 6,807 $ 4,111 $ - $ 18,948
Intersegment revenues - - - - -
----- ----- ----- ----- ------
Total revenues 8,030 6,807 4,111 - 18,948
----- ----- ----- ----- ------
Operating income (loss) from
continuing operations 507 1,803 (934) (950) 426
Depreciation & amortization expense 512 164 617 - 1,293
Valuation allowance additions
(reductions) (131) 61 94 - 24
Capital asset additions, net 222 157 383 - 762
Total assets 23,037 (*) 33,061 101,275 157,373
Three months ended October 31, 1998:
Revenues from external customers $ 7,191 $ 3,030 $ 3,873 $ - $ 14,094
Intersegment revenues - - - - -
----- ----- ----- ----- ------
Total revenues 7,191 3,030 3,873 - 14,094
----- ----- ----- ----- ------
Operating income (loss) from
continuing operations (3) (1,466) (574) (482) (2,525)
Depreciation & amortization expense 549 210 177 - 936
Valuation allowance additions
(reductions) (1,336) 202 3 - (1,131)
Capital asset additions, net 217 33 95 - 345
Total assets 18,772 8,901 28,173 14,007 69,853
</TABLE>
(*) Total assets of NSI are not included as this segment is no longer
consolidated as a result of its initial public offering.
12
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PER SHARE AMOUNTS)
- -----------------------------------------------------------------
SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Network Optical
Access NETsilicon Networking Other Total
------ ---------- ---------- ----- -----
<S> <C> <C> <C> <C> <C>
Nine months ended October 31, 1999:
Revenues from external customers $ 21,034 $ 20,137 $ 14,112 $ - $ 55,283
Intersegment revenues - - - - -
------ ------ ------ ------- ------
Total revenues 21,034 20,137 14,112 - 55,283
------ ------ ------ ------- ------
Operating income (loss) from
continuing operations (27) 2,540 (1,734) (2,859) (2,080)
Depreciation & amortization expense 1,501 660 1,074 - 3,235
Valuation allowance additions
(reductions) (58) 735 72 - 749
Capital asset additions, net 140 721 800 - 1,661
Total assets 23,037 (*) 33,061 101,275 157,373
Nine months ended October 31, 1998:
Revenues from external customers $ 23,700 $ 8,414 $ 11,869 $ - $ 43,983
Intersegment revenues - - - - -
------ ------ ------ ------- ------
Total revenues 23,700 8,414 11,869 - 43,983
------ ------ ------ ------- ------
Operating income (loss) from
continuing operations (3,589) (1,855) (55) (2,233) (7,732)
Depreciation & amortization expense 1,579 465 541 - 2,585
Valuation allowance additions
(reductions) (1,224) 126 818 - (280)
Capital asset additions, net 527 265 706 - 1,498
Total assets 18,772 8,901 28,173 14,007 69,853
</TABLE>
(*) Total assets of NSI are not included as this segment is no longer
consolidated as a result of its initial public offering.
13
<PAGE>
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 our Form 10-K for the year ended January 31, 1999.
RESULTS OF OPERATIONS/COMPARISON OF THE QUARTER ENDED AND SIX MONTHS ENDED
OCTOBER 31, 1999 AND 1998
In connection with the initial public offering by NETsilicon, Inc. ("NSI"), our
remaining 55.4% interest became non-voting shares. Accordingly, our financial
statements reflect the results of operations of NSI only through September 14,
1999. The amounts included in our quarter and nine-month period ending October
31, 1999 are not comparable with the amounts included in the prior year periods
ending October 31, 1998. Readers should refer to NSI's quarterly report on Form
10-Q for information concerning NSI.
Our consolidated net sales from continuing operations increased to $18.9 million
for the quarter ended October 31, 1999 compared to $14.1 million for the same
quarter ended October 31, 1998, an increase of 34%. During the nine months ended
October 31, 1999, our consolidated net sales from continuing operations
increased to $55.3 million from $44 million for the nine months ended October
31, 1998, an increase of 25.7%. Net sales for our Optical Networking and Network
Access business units increased by 6.1% and 11.7% respectively for the quarter
ended October 31, 1999 from the same quarter last year. Net sales in our Optical
Networking business unit increased by $2.2 million or 18.9% for the nine months
ended October 31, 1999 from the comparable nine months last year. Net sales for
our Network Access business unit decreased by 11.2% for the nine months ended
October 31, 1999 from the comparable period last year. Our backlog from Optical
Networking and Network Access business units increased to $13.2 million as of
October 31, 1999 from $9.2 million as of October 31, 1998.
Our consolidated gross margins from continuing operations increased to 49.2%
during the quarter ended October 31, 1999 from 42.0% for the quarter ended
October 31, 1998. Gross margins in our Optical Networking business unit
decreased to 41.2% from 45.0% for the quarter ended October 31, 1999 compared to
the same quarter last year. Gross margins in our Networking Access business unit
decreased to 44.5% for the quarter ended October 31, 1999 from 45.3% for the
same quarter ended a year ago. Our gross margins increased to 47.6% for the nine
months ended October 31, 1999 from 45.2% for the same nine months ended October
31, 1998.
Our consolidated selling and marketing expenses increased slightly to $4
million for the quarter ended October 31, 1999 from $3.8 million for the same
quarter last year. As a percentage of net sales, selling and marketing expenses
decreased to 21.1% for the quarter ended October 31, 1999 from 26.9% for the
quarter ended a year ago. Our selling and marketing expenses increased by
$457,000 or 3.7% for the nine months ended October 31, 1999 from the comparable
nine-month period last year. As a percentage of net sales, selling and marketing
expenses decreased to 22.8% for the nine months ended October 31, 1999 from
27.7% for the comparable nine months last year. The moderate increase in selling
and marketing expenses reflects an increase at our Optical Networking business
unit, significant reductions at our Network Access business unit, and the
inclusion of NSI for only a portion of periods presented.
Our consolidated engineering, research and development expenses decreased
slightly to $2.2 million for the quarter ended October 31, 1999 from $2.4
million for the same comparable quarter last year. During the nine-month period
ended October 31, 1999, these expenses decreased to $6.9 million from $7.4
million, a reduction of $443,000, for the nine months ended October 31, 1998.
Our engineering, research and development costs as a percentage of net sales
decreased to 11.5% and 12.5% for the quarter and nine months ended October 31,
1999, respectively, from 17.4% and 16.8% for the same comparable periods ended
October 31, 1998. The moderate decrease in engineering, research and
development expenses reflects an increase at our Optical Networking business
unit, significant reductions at our Network Access business unit, and the
inclusion of NSI for only a portion of periods presented.
14
<PAGE>
Our consolidated general and administrative expenses increased to $2.6 million
for the quarter ended October 31, 1999 from $2.1 million for the same quarter
ended October 31, 1998. As a percentage of net sales, however, our general and
administrative expenses decreased to 13.9% from 15.0% for the comparable quarter
last year. Our general and administrative expenses for the nine months ended
October 31, 1999 increased $771,000 to $8.6 million, a 9.9% increase over the
nine months ended October 31, 1998. As a percentage of net sales, however, our
general and administrative expenses decreased to 15.5% for the nine months ended
October 31, 1999 from 17.7% for the comparable nine-month period last year.
These increases include legal fees and costs associated with the class action
litigation discussed in Part II, Item 1, "Legal Proceedings", increases at our
Optical Networking business unit, and the inclusion of NSI for only a portion of
the periods presented.
Other operating expenses of $93,000 and $279,000 from continuing operations
remained unchanged during the quarter and nine months ended October 31, 1999
compared to the quarter and nine-month periods ended October 31, 1998. These
charges represent amortization of purchased technology costs related to
acquisitions.
Net other income (charges) from continuing operations increased to $13.8 million
and $12.8 million for the three and nine-month periods ended October 31, 1999
from $(266,000) and $(717,000) for the comparable periods ended October 31,
1998. The increase included a recognized gain of $14.2 million related to
the sale of a portion of our investment in our NSI business unit. The sale
was completed during the initial public offering of NSI common shares on
September 15, 1999. The gain was offset by increases in interest expense
incurred on increased borrowings on our lines of credit, short term
borrowing facilities and long term debt.
The provision for income taxes on continuing operations is equal to the tax
benefit from the loss on the disposition of discontinued operations. We have
carry forwards 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 the net operating loss carry forwards as provided by
the Internal Revenue Code with respect to future ownership changes, future
availability of the tax benefits is not assured. In addition, we provide 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.
The loss from discontinued operations, our Far East business unit, increased to
$1.3 million for the quarter ended October 31, 1999 from $797,000 for the
quarter ended October 31, 1998. The increased loss is the result of a 34%
decrease in net sales. We also reported an $8.0 million estimated loss (net of
income tax benefit) on the disposal of our Far East business unit.
OPTICAL NETWORKING
Net sales in our Optical Networking business unit were $4.1 million for the
quarter ended October 31, 1999 compared to $3.9 million for the quarter ended
October 31, 1998. During the nine months ended October 31, 1999 our net sales
increased to $14.1 million from $11.9 million for the comparable nine-month
period last year. The continued growth in sales of our GigaMux product family
was the primary reason for this increase.
Our gross margins decreased to 41.2% for the quarter ended October 31, 1999 from
45% for the same quarter ended a year ago. Our gross margins increased to 47.8%
during the nine months ended October 31, 1999 from 44.2% for the same comparable
nine months last year. Our gross margins increased during the nine months ended
October 31, 1999 as a direct result of the increased sales of our GigaMux
products.
Our selling and marketing expenses were $1.4 million for the quarter ended
October 31, 1999 compared to $1.3 million for the quarter ended October 31,
1998. For the nine months ended October 31, 1999 our selling and marketing
expenses increased to $4.5 million from $2.3 million for the comparable
nine-month period last year. The increased expenditures during the quarter and
the nine-month periods resulted from the continuing growth of our GigaMux
product family. Our means of supporting this growth include increasing the staff
size of our sales force, greater trade show participation, and increased travel
and sales commissions for external sales representatives.
Our engineering, research and development expenses were $509,000 during the
quarter ended October 31, 1999 compared to $534,000 for the comparable quarter
last year. As a percentage of net sales, our engineering, research
15
<PAGE>
and development expenses decreased during the quarter ended October 31, 1999 to
12.4% from 13.8% for the comparable quarter last year. During the nine months
ended October 31, 1999, our engineering, research and development spending
increased to $1.7 million from $1.4 million for the nine months ended
October 31, 1998. Our engineering, research and development expenses remained
relatively unchanged at 11.8% of net sales for the nine months ended
October 31, 1999 from the comparable period last year. We continue to invest
our efforts in the research and development in our GigaMux product family as
well as other new products.
Our general and administrative expenses increased to $655,000 from $479,000 for
the quarter ended October 31, 1999 compared to the comparable quarter last year.
As a percentage of net sales, these expenses increased to 15.9% for the quarter
ended October 31, 1999 from 12.3% for the comparable quarter last year. During
the nine months ended October 31, 1999 our general and administrative expenses
increased to $2.1 million from $1.4 million for the nine months ended
October 31, 1998. These increases reflect the ongoing implementation of our
strategic plan to strengthen the infrastructure and provide sufficient
administrative support to achieve the planned growth of our GigaMux business
both domestically and internationally.
Other operating expenses of $93,000 and $279,000 for the quarter and nine months
ended October 31, 1999 remained unchanged compared to the same periods ended
October 31, 1998. These costs represent the amortization of purchased technology
related to prior acquisitions.
NETWORK ACCESS
Net sales were $8.0 million for our Network Access business unit for the quarter
ended October 31, 1999 compared to $7.2 million for the comparable quarter ended
October 31, 1998. Sales in our LAN-adapter card product lines increased, more
than offsetting the decrease in the Remote Access and Print Server product lines
during the quarter. Our net sales decreased to $21.0 million for the nine months
ended October 31, 1999 from $23.7 million for the same period ended October 31,
1998. Lower sales in our Remote Access and Print Server product categories were
the primary reasons for the decline. Our net sales decline during the nine
months corresponds directly to a shift towards our new generation of products
and the planned phase out of our legacy products.
Our gross margins decreased slightly to 44.5% for the quarter ended October 31,
1999 from 45.3% for the same period ended a year ago. For the nine months ended
October 31, 1999, our gross margins decreased to 42.9% from 45.9% for the same
nine-month period ended a last year. These decreases in gross margins were a
result of higher raw material costs associated with shipments of our LAN-adapter
product group.
Our selling and marketing expenses remained unchanged at $1.5 million for the
quarter ended October 31, 1999 compared to the same quarter last year. As a
percentage of net sales, our expenses decreased to 18.7% from 21.1% for the
quarter ended October 31, 1999 as compared to the comparable quarter last year.
During the nine months ended October 31, 1999 our selling and marketing expenses
decreased to $4.0 million from $7.6 million for the comparable nine-month period
last year. Selling and marketing expenses as a percentage of net sales decreased
to 18.8% for the nine months ended October 31,1999 from 32.2% for the comparable
nine-month period last year. During the past fiscal year, we completed a
realignment of our sales organization, which resulted in a net personnel
reduction of 22. Employee related costs were reduced by $1.9 million for the
nine months ended October 31, 1999.
Our engineering, research and development expenses decreased slightly to $1.1
million for the quarter ended October 31, 1999 from $1.2 million for the
comparable quarter last year. During the nine months ended October 31, 1999,
our engineering, research and development expenses decreased to $3.4 million
from $4.4 million for the nine months ended October 31, 1998. Our expenses as a
percentage of net sales were 13.1% and 16.0% for the quarter and nine months
ended October 31, 1999, respectively, compared to 17.0% and 18.4% for the same
periods ended October 31, 1998. The declines for the quarter and nine months
ended October 31, 1999 is the result of cost savings achieved by consolidation
of our facilities partially offset by increased amortization of capitalized
software costs.
Our general and administrative expenses increased slightly to $508,000 for the
quarter ended October 31, 1999 from $467,000 for the quarter ended October 31,
1998. As a percentage of net sales these expenses decreased to 6.3% for the
quarter ended October 31, 1999 from 6.5% for the comparable quarter last year.
During the nine months ended October 31, 1999 our general and
16
<PAGE>
administrative expenses decreased to $1.7 million from $2.7 million for the same
nine months ended October 31, 1998. This decrease is the result of cost savings
achieved through the consolidation of our various facilities.
NETSILICON
In connection with the initial public offering by NSI, our remaining 55.4%
interest became non-voting shares. Accordingly, our financial statements reflect
the results of operations of NSI only through September 14, 1999. The amounts
included in our quarter and nine-month periods ending October 31, 1999 are not
comparable with the amounts included in the prior year periods ending
October 31, 1998. Readers should refer to NSI's quarterly report on Form 10-Q
for information concerning NSI.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations through a combination of debt and equity financing. At
October 31, 1999, our working capital was $115.2 million including $94.7 million
of investments in marketable securities which are subject to restrictions as to
marketability until September 15, 2000 and $7.3 million in cash and cash
equivalents.
Our continuing operating activities used cash flows of $170,000 and discontinued
operating activities provided cash of $1.8 million during the nine months ended
October 31, 1999. During the same period last year, we incurred a $4.8 million
cash flow deficit from continuing operations and discontinued operating
activities provided cash of $140,000. The decrease in cash flows used by
operations reflects a substantial decline in our net loss as well as increases
in accounts payable and accrued liabilities, partially offset by increases in
accounts receivable, inventories and other current assets.
Investing activities of continuing operations during the nine months ended
October 31, 1999 consisted primarily of net proceeds from the sale of a portion
of our shares in NSI of $15.4 million net of cash held by NSI at the time of the
sale of $1.7 million partially offset by purchases of property and equipment of
$1.6 million, expenditures for software development costs capitalized of
$894,000, increases in notes receivable and other assets of $2.8 million, and
net advances to affiliates of $8.5 million. During the nine-month period ended
October 31, 1998 our investing activities included $1.5 million in purchases of
property and equipment, $1.6 million in expenditures for capitalized software
development costs and $2.1 million in net advances to affiliates.
Our continuing operations financing activities during the nine-month period
ended October 31, 1999 provided net cash flows of $4.1 million and the financing
activities of discontinued operations used cash of $3.1 million. The net cash
provided by the financing activities of continuing operations included $1.4
million from net proceeds from short-term borrowings, $2.6 million from stock
option exercises, $907,000 from proceeds from long-term debt offset by $481,000
of dividends paid to our preferred shareholders.
At October 31, 1999, our continuing operations had various lines of credit and
short term borrowing facilities totaling $15 million. Our outstanding short-term
borrowings against these credit facilities was $7.5 million at October 31, 1999.
These credit facilities include $15 million of credit lines are collateralized
by accounts receivable, inventory and equipment. During the nine months
ended October 31, 1999, the credit facilities were increased from $13 million to
$15 million. Discontinued operations have additional credit facilities of
$3.2 million provided by various institutions in the Far East which are
collateralized by our Far East business unit's leasehold land and buildings,
fixed bank deposits and inventories.
17
<PAGE>
YEAR 2000 COMPLIANCE
The Year 2000 issue refers generally to the problems that some software may have
in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
distinguish whether `00' means 1900 or 2000, which may result in failures or the
creation of erroneous results. During fiscal 1998 we commenced taking steps to
address potential Year 2000 problems, including (i) identifying the computer
systems and products affected; (ii) contacting vendors and customers; (iii)
determining the Year 2000 compliance status of each of its systems and products;
and (iv) implementing any necessary changes. Although we do not currently expect
the Year 2000 issue will be material to our systems or products, we could
discover (or fail to discover) Year 2000 issues in the course of our evaluation
process that would have a material adverse effect on our business, results of
operations or financial condition if not properly addressed.
We have completed a review of our products and have ascertained that our
products are Year 2000 compliant. We have tested software obtained from third
parties that is incorporated into our products, and we are seeking assurances
from our vendors that their licensed software is Year 2000 compliant.
Furthermore, we surveyed all vendors requesting information concerning exposure
to Year 2000 problems. We have received representation from certain vendors,
including some of our sole source vendors, as to the Year 2000 compliance of
their systems and products. Despite our testing and our current and potential
customers, and assurances from the vendors of the software and hardware
incorporated into the products, our products may contain undetected errors or
defects associated with Year 2000 date functions. Known or unknown errors or
defects in such products could severely disrupt our operations and have a
material adverse effect on our business, financial condition, cash flows and
results of operations.
Our internal systems include both information technology ("IT") and non-IT
systems. We have completed an assessment of our material internal IT and non-IT
systems, including software and hardware technology. Necessary remediation of
identified non-Year 2000 compliant technology has been completed. To the extent
we cannot test the technology, we seek assurances from such vendors that their
systems are Year 2000 compliant. We are not aware of any material operational
issues or costs associated with preparing our internal IT and non-IT systems for
the Year 2000; however, we may experience material unanticipated problems and
costs caused by undetected errors or defects in the technology used in our
internal IT and non-IT systems.
We are surveying our customers requesting information concerning exposure to
Year 2000 problems, and not all customers have responded. Our current and
potential customers may incur significant expense to achieve Year 2000
compliance. If such customers are not Year 2000 compliant, they may incur
material costs to remedy problems or face litigation costs. As a result, such
customers and potential customers could reduce or eliminate plans that they
have to purchase our products or services. Such events could have a material
effect on our business, financial condition, cash flows and results of
operations.
The efforts to address the Year 2000 issue have been funded from available cash
and we have not separately accounted for these costs in our financial
statements. The costs of addressing this issue are currently estimated to be
approximately $400,000, but the final cost has not yet been determined. All
costs, excluding third party vendor software upgrades costing $200,000, have
been expensed as incurred.
We do not believe the risks of Year 2000 compliance are material, therefore we
have not yet established a contingency plan in the event that we or our
customers or vendors cannot correct the Year 2000 problem. In the event that we
or our customers or vendors cannot correct the Year 2000 problem we will
allocate the appropriate resources at that time. However, we are subject to
external forces that may affect industry and commerce generally, such as utility
or transportation company Year 2000 compliance failures and related service
interruptions.
We believe we have sufficient working capital to meet its planned level of
operations for fiscal 2000. However, there can be no assurance that our working
capital requirements for fiscal 2000 will not exceed our ability to generate
sufficient cash internally to support our requirements and the needed capital
will have to be obtained from external sources. We cannot give any assurances
that sufficient capital, at terms acceptable to us, will be available when
needed.
18
<PAGE>
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued several SFAS effective in
the current and future periods including SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" and SFAS No. 135 "Rescission of FASB
Statement No. 75 and Technical Corrections". The Accounting Standards Executive
Committee issued SOP 98-1 "Accounting for the Costs Computer Software Developed
or Obtained for Internal Use" and SOP 98-5 "Reporting on the Costs of
Start-up Activities" effective in the current or future periods. The adoption of
these standards had no material effects, if any, on our financial position or
results of operations.
OTHER MATTERS
Several purported securities class action lawsuits have been filed against us,
our CEO, our President and our former Chief Financial Officer. See Part II, Item
1, "Other Information - Legal Proceedings".
FLUCTUATIONS IN REVENUE AND OPERATING RESULTS
The networking and bandwidth aggregation industry is subject to fluctuation and
the declines and increases recently experienced by us are not necessarily
indicative of the operating results for any future periods. Our 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 our future filings with the Securities
and Exchange Commission, in our press releases and in oral statements made with
the approval of an authorized executive officer, the words or phrases such as
"plans," "expects," "intends," and variations of such words and similar
expressions (including confirmations by an authorized executive officer of any
such expressions made by a third party with respect to us) are intended to
identify forward-looking statements. The forward-looking statements in this
Form 10-Q are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The occurrence of actual events may
differ materially due to a variety of factors, including without limitation
the following: (1) future stock market conditions relating to initial public
offerings of stock, in general, and for high technology stocks in particular;
(2) the Company's ability, or lack thereof, to make, market and sell optical
networking products that meet with market approval and acceptance; (3) the
greater financial, technical and other resources of the Company's many,
larger competitors in the marketplace for optical networking products;
(4) changed market conditions, new business opportunities or other factors
that might affect Osicom's decision as to the best interests of its
shareholders; and (5) other risks detailed from time to time in the Company's
reports filed with the U.S. Securities and Exchange Commission. Further
reference should be made to the "Risk Factors" section contain in Part I,
Item 1 of our Annual Report on Form 10-K for the year ended January 31, 1999.
We wish 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 more fully
in our Annual Report on Form 10-K. We specifically decline 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.
19
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates
and foreign exchange current exchange rates. We believe 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 our 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 our operating
results in the future.
A substantial majority of our revenues, expenses and capital purchasing
activities are transacted in U.S. dollars and to date we have not been
significantly affected by currency fluctuations. However, we conduct business in
several different countries and fluctuations in currency exchange rates could
cause our products to become relatively more expensive in particular countries,
leading to a reduction in sales in that country.
20
<PAGE>
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The nine purported class action cases filed in the United States
District Court for the Central District of California against the
Company and certain present and former officers and directors have been
consolidated by the court into a single case, and a consolidated
complaint was filed on August 20, 1999. The consolidated complaint
generally alleges that, during the purported class period, the
defendants made false or misleading public statements related to a
contract entered into by our Far East business unit with a Japanese
customer which caused the price of our common stock to be artificially
inflated. The consolidated complaint asserts that the defendants'
conduct violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, and SEC Rule 10b-5 promulgated thereunder, as well as
state common law. The consolidated complaint does not specify an amount
of damages. A motion to dismiss was filed on behalf of all dependants
on October 7, 1999, which motion is currently pending before the court.
We intend to defend the consolidated complaint and any other similar
lawsuits vigorously. An unfavorable outcome in such litigation could
have a material adverse affect on our financial condition and results
of operations.
From time to time we are involved in various legal proceedings
incidental to the conduct of its business. We believe that none of
these proceedings will have a material adverse impact on our financial
condition or results of operations.
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
Not Applicable
ITEM 5: OTHER INFORMATION
Not Applicable
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<S> <C>
20 Consolidated Financial Statements for the Quarter and Nine Months Ended
October 31, 1999 (included in Part I, Item 1)
27 Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
None
21
<PAGE>
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, 1999
____________________________________
Christopher E. Sue,
Vice President Finance
Principal Accounting Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 7,297,000
<SECURITIES> 94,688,000
<RECEIVABLES> 14,726,000
<ALLOWANCES> 794,000
<INVENTORY> 13,257,000
<CURRENT-ASSETS> 136,522,000
<PP&E> 24,461,000
<DEPRECIATION> 18,607,000
<TOTAL-ASSETS> 157,373,000
<CURRENT-LIABILITIES> 21,327,000
<BONDS> 1,887,000
<COMMON> 2,999,000
0
0
<OTHER-SE> 131,160,000
<TOTAL-LIABILITY-AND-EQUITY> 157,373,000
<SALES> 18,948,000
<TOTAL-REVENUES> 18,948,000
<CGS> 9,620,000
<TOTAL-COSTS> 9,620,000
<OTHER-EXPENSES> 8,902,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 454,000
<INCOME-PRETAX> 14,246,000
<INCOME-TAX> 3,406,000
<INCOME-CONTINUING> 10,840,000
<DISCONTINUED> (9,307,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,533,000
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.14
</TABLE>
