<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 APRIL 30, 2000
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: 11,582,232 shares at
June 9, 2000.
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
April 30, 2000 January 31, 2000
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 46,092 $ 13,511
Accounts receivable, net 10,506 11,639
Inventory, net 10,687 13,004
Prepaid expenses and other current assets 1,898 1,503
Investment in marketable securities 132,188 168,750
-------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 201,371 208,407
-------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 8,588 5,520
-------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Purchased technology, net 1,302 1,395
Capitalized software, net 1,075 1,773
Other assets 7,137 3,337
Net investment in discontinued operations 2,740 2,833
------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 12,254 9,338
-------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 222,213 $ 223,265
===============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 3,337 $ 5,407
Current maturities of long-term debt 487 721
Accounts payable 5,144 6,417
Accrued liabilities 10,329 5,882
Other current liabilities 464 494
-------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 19,761 18,921
-------------------------------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations 1,678 1,806
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 21,439 20,727
-------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST
Preferred stock of subsidiary; 8,954 shares issued and
outstanding; subsidiary liquidation preference $48,800 46,998 -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; cumulative dividends; liquidation
preference $6,503 including accumulated dividends 1 1
Common stock, $.30 par value; 16,667 shares authorized; 11,562 shares
issued and 11,553 shares outstanding at April 30, 2000; 11,483 shares
issued and 11,474 shares outstanding at January 31, 2000 3,469 3,445
Additional paid-in capital 103,392 102,418
Accumulated deficit (80,968) (67,771)
Accumulated unrealized gain on marketable securities 127,951 164,514
Treasury stock, at cost; 9 shares and 9 shares at April 30, 2000 and
January 31, 2000, respectively (69) (69)
-------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 153,776 202,538
-------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 222,213 $ 223,265
===============================================================================================================================
</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
April 30
----------------------------------
2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $ 10,048 $ 19,129
COST OF SALES 8,193 10,251
--------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 1,855 8,878
---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and marketing 3,714 4,107
Engineering, research and development 5,921 2,237
General and administrative 3,165 3,033
Other operating expenses 2,162 93
---------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 14,962 9,470
---------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (13,107) (592)
---------------------------------------------------------------------------------------------------------------------
OTHER INCOME (CHARGES)
Investment income 488 17
Interest expense (223) (470)
Other income 5 2
---------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (CHARGES) 270 (451)
---------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (12,837) (1,043)
Provision for Income Taxes - -
---------------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (12,837) (1,043)
LOSS FROM DISCONTINUED OPERATIONS
(NET OF INCOME TAX OF $-0- AND $-0-) - (1,229)
NET LOSS $ (12,837) $ (2,272)
=====================================================================================================================
INCOME (LOSS) PER COMMON SHARE:
PREFERRED STOCK DIVIDENDS 398 339
NET LOSS APPLICABLE TO COMMON SHARES $ (13,235) $ (2,611)
=====================================================================================================================
BASIC
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 11,517 8,881
NET INCOME (LOSS) PER COMMON SHARE:
Continuing Operations $ (1.15) $ (0.15)
Discontinued Operations n/a (0.14)
---------------------------------------------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE: $ (1.15) $ (0.29)
=====================================================================================================================
DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 11,517 8,881
NET INCOME (LOSS) PER COMMON SHARE:
Continuing Operations $ (1.15) $ (0.15)
Discontinued Operations n/a (0.14)
---------------------------------------------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE: $ (1.15) $ (0.29)
=====================================================================================================================
</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
April 30
----------------------------------
2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMPREHENSIVE INCOME AND ITS COMPONENTS
CONSIST OF THE FOLLOWING:
Net loss $ (12,837) $ (2,272)
Change in unrealized gains on marketable securities (36,563) -
--------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (49,400) $ (2,272)
==========================================================================================================================
</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>
==============================================================================================================================
Three Months Ended
April 30
---------------------------------
2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $ (12,837) $ (1,043)
------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,005 861
Accounts receivable and inventory reserves 4,481 (309)
Valuation allowance on intangible assets 435 -
Changes in assets and liabilities net of effects of business entity acquisitions:
Increase in accounts receivable (2,918) (247)
Increase in inventories (2,084) (1,095)
Decrease in other current assets 361 253
Increase (decrease) in accounts payable (1,033) 1,692
Increase in accrued expenses 4,207 1,486
Decrease in other current liabilities (30) (226)
------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) CONTINUING OPERATING ACTIVITIES (8,413) 1,990
NET CASH USED IN DISCONTINUED OPERATING ACTIVITIES - (264)
-----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (8,413) 1,726
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (2,232) (368)
Capitalized software development costs - (465)
Advances to affiliates, net of repayments - (2,112)
Other assets (2,070) (262)
Investing activities of discontinued operations 93 (317)
-----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (4,209) (3,524)
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt, net of repayments (2,070) 4,265
Proceeds from long term debt - 933
Repayment of long-term debt (362) (118)
Proceeds from preferred stock of subsidiary 46,638 -
Proceeds from stock option and warrant exercises 997 1,354
Preferred stock dividends - (240)
Financing activities of discontinued operations - (4,973)
-----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 45,203 1,221
-----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,581 (577)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 13,511 3,480
------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 46,092 $ 2,903
==============================================================================================================================
</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)
------------------------------------------------------------------------------
Through our subsidiaries we design, manufacture and market integrated
networking and bandwidth aggregation products for enhancing the performance
of data and telecommunications networks. Our products are deployed by
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. Our former 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 April 30, 2000 and January 31,
2000, for the quarters ended April 30, 2000 and 1999, 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, 2000 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, 2000.
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. 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 April 30, 2000
and for the quarter ended April 30, 2000, have been made. The results of
operations for the quarter ended April 30, 2000 are not necessarily indicative
of the operating results for the full year.
DISCONTINUED OPERATIONS
Our Far East business unit, consisting of Uni Precision Industrial
Limited ("FED"), has been accounted for as a discontinued operation pursuant to
our formal adoption on May 15, 1999 of a plan to sell this division. As of
January 31, 2000, we sold FED to a group led by its Hong Kong-based management
for $2,500 in cash in repayment of our advances to FED and a $3,000 non-voting
redeemable preferred security. This security has not been considered uncertainty
of future collection. Net assets disposed, at their expected realizable values,
have been separately classified in the accompanying balance sheets. During the
quarter ended April 30, 2000, we received payments of $93.
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
6
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," is effective for
financial statements with fiscal quarters of all fiscal years beginning after
June 15, 2000. The Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of 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 or future
adoption of these standards has had or will have no material effects, if any, on
our financial position or results of operations.
BALANCE SHEET DETAIL
Inventories at April 30, 2000 and January 31, 2000 consist of:
<TABLE>
<CAPTION>
April 30, 2000 January 31, 2000
-------------- ----------------
<S> <C> <C>
Raw material $ 10,213 $ 9,024
Work in process 3,607 3,677
Spare parts 106 141
Finished goods 3,439 4,232
---------- ---------
17,365 17,074
Less: Valuation reserve 6,678 4,070
---------- ---------
$ 10,687 $ 13,004
========== =========
</TABLE>
OTHER INVESTMENTS
Other investments, included in other assets, include non-marketable
securities held in other companies including a privately held competitive local
exchange carrier. During the quarter ended April 30, 2000 we purchased 166,667
shares of its convertible preferred stock for $2,000 bringing our total equity
investment to $5,000, an 8% equity interest on a fully diluted basis. The newly
purchased shares are entitled to a cumulative dividend of $160 per year, are
entitled to nominate one member to the customer's board of directors, vote as
part of single class for one member of its board of directors and are
convertible into 166,667 shares of its common stock.
During the quarters ended April 30, 2000 and 1999 we made sales of
$3,249 and $1,861, respectively, to this customer of our subsidiary, Sorrento
Networks, Inc. The sales during the quarter ended April 30, 2000 are under a
long-term equipment financing agreement. The purchase agreement with this
customer provides for invoiced installation and other deployment expenses not
to exceed 10% of the equipment cost. The terms of the financing agreement
provide that the customer may convert any balances outstanding longer than
90 days into a level 35-month term note at 11% per annum interest. We
financed $2,487 of receivables, including deployment expenses of $199, during
the quarter ended April 30, 2000 for this customer.
7
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
We are authorized to issue the following shares of stock:
16,666,667 shares of Common Stock ($.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
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 - - 1,150
Series D 2,853 - 2,853
----- ---- -------
5,353 $ 1 $ 6,503
===== ==== =======
</TABLE>
Preferred stock dividends during the quarters ended April 30, 2000 and
1999 consist of:
<TABLE>
<CAPTION>
Quarter ended April 30,
2000 1999
---- ----
<S> <C> <C>
Accrued, unpaid dividends (Series A) $ 38 $ 38
Deemed dividends (Series C) - 61
Dividends paid (Series C) - 240
Deemed dividends (Sorrento Series A) 360 -
----- -----
$ 398 $ 339
===== =====
</TABLE>
OTHER CAPITAL STOCK TRANSACTIONS
On March 3, 2000, our optical networking subsidiary, Sorrento Networks,
Inc. completed a sale of 8,596,333 shares of its Series A Convertible Preferred
Stock receiving net proceeds of $46,638. These shares were sold to a group of
investors. 1,467,891 shares were purchased by entities in which one of our
outside directors is a partner or member pursuant to a previously contracted
right of participation. In addition, Sorrento paid a finders fee of $1,950
through the issuance by Sorrento of 357,799 shares of its Series A Convertible
Preferred Stock to an entity in which one of our outside directors is a partner.
Subsequent to the purchase of 2,697,248 of these shares an officer and director
of the purchaser joined the Board of Directors of Sorrento. One of our outside
directors purchased 45,872 shares and a director of Sorrento, who subsequently
became an officer of Sorrento, purchased 91,744 in this placement.
Each share of Sorrento's Series A Preferred Stock is convertible into
one share of Sorrento's common stock at the option of the holder, may vote on an
"as converted" basis except for election of directors, and has a liquidation
preference of $5.45 per share. The shares are automatically converted into
Sorrento's common stock upon an underwritten public offering by Sorrento with an
aggregate offering price of at least $50,000. In the event Sorrento
8
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------
does not complete a $50,000 public offering by March 1, 2001, the holders of at
least 50% of the then outstanding Series A shares may request to be redeemed at
the shares then adjusted liquidation preference. The net proceeds from the
issuance of these shares has been classified as a minority interest in the
accompanying financial statements. The difference between the net proceeds
received on the sale of these shares and their liquidation preference of
$48,800 will be recorded as a deemed dividend during the period from issuance
to March 31, 2001. During the quarter ended April 30, 2000 we recorded a deemed
dividend of $360 with respect to the Sorrento Series A shares.
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 April 30, 2000 there were 2,855,416 shares under option at prices
varying from $3.00 to $49.25 per share.
EARNINGS PER SHARE CALCULATION
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 quarters ended April
30, 2000 and 1999 as they would be anti-dilutive.
The following data show the amounts used in computing basic earnings
per share for the quarters ended April 30, 2000 and 1999.
<TABLE>
<CAPTION>
Quarter ended April 30,
2000 1999
---- ----
<S> <C> <C>
Net income (loss) $ (12,837) $ (2,272)
Less: preferred dividends ( 398) ( 339)
---------- ---------
Net loss available to common shareholders used in basic EPS $ (13,235) $ (2,611)
========== =========
Average number of common shares used in basic EPS 11,516,593 8,880,811
========== =========
</TABLE>
We had a net loss for the quarters ended April 30, 2000 and 1999.
Accordingly, the effect of dilutive securities including convertible preferred
stock, vested and nonvested stock options and warrants to acquire common stock
are not included in the calculation of EPS because their effect would be
antidilutive. The following data shows the effect on income and the weighted
average number of shares of dilutive potential common stock.
9
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter ended April 30,
2000 1999
---- ----
<S> <C> <C>
Net loss available to common shareholders used in basic EPS $ (13,235) $ (2,611)
Preferred stock dividends - -
---------- ----------
Net loss available to common shareholders after assumed
conversions of dilutive securities $ (13,235) $ (2,611)
========== ==========
Average number of common shares used in basic EPS 11,516,593 8,880,811
Effect of dilutive securities:
Convertible preferred stock - 697,965
Stock benefit plans 2,182,710 1,005,437
Warrants 130,591 218,639
---------- ----------
Average number of common shares and dilutive potential
common stock used in diluted EPS 13,829,894 10,802,852
========== ==========
</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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to concentrations of
credit risk consist primarily of temporary cash investments and trade
receivables. As regards the former, we place our temporary cash investments with
high credit financial institutions. At times such amounts may exceed the
F.D.I.C. limits. We limit the amount of credit exposure with any one financial
institution and believe that no significant concentration of credit risk exists
with respect to cash investments. No accounts at a single bank accounted for
more than 10% of our current assets.
Although we are directed affected by the economic well being of
significant customers listed in the following tables, management does not
believe that significant credit risk exists at April 30, 2000. We perform
ongoing evaluations of our customers and require letters of credit or other
collateral arrangements as appropriate. Accordingly, trade credit losses have
not been significant.
Customers accounting for more than 10% of net receivables:
<TABLE>
<CAPTION>
April 30, 2000 January 31, 2000
-------------- ----------------
<S> <C> <C>
Customer A 30.4% 22.2%
Customer B - -
Customer C 11.0 16.2
</TABLE>
Customers accounting for more than 10% of net sales during the quarters
ended April 30, 2000 and 1999:
<TABLE>
<CAPTION>
Quarter ended April 30,
2000 1999
---- ----
<S> <C> <C>
Customer A 17.0% 18.5%
Customer B - 26.8
Customer C 2.5 9.2
</TABLE>
10
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------
SEGMENT INFORMATION
<TABLE>
<CAPTION>
Sorrento Meret Entrada
Networks Optical Networks NETsilicon Other Total
-------- ------- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Quarter ended April 30, 2000:
Revenues from external customers $ 4,684 $ 1,654 $ 3,710 $ - - $ 10,048
Intersegment revenues - - - - - -
------- ------- -------- ------ -------- ---------
Total revenues 4,684 1,654 3,710 - - 10,048
------- ------- -------- ------ -------- ---------
Operating profit (loss) (5,894) 597 (6,971) - (839) (13,107)
Depreciation & amortization expense 399 123 482 - 1 1,005
Valuation allowance additions 62 123 4,731 - - 4,916
Capital asset additions 2,148 22 51 - 11 2,232
Total assets 35,103 8,351 11,179 - $167,580 222,213
Quarter ended April 30, 1999:
Revenues from external customers $ 4,778 $ 2,118 $ 6,418 $ 5,815 $ - $ 19,129
Intersegment revenues - - - - - -
------- ------- -------- ------ -------- ---------
Total revenues 4,778 5,815 6,418 5,815 - 19,129
------- ------- -------- ------ -------- ---------
Operating profit (loss) 127 659 (550) 254 (1,082) (592)
Depreciation & amortization expense 13 207 495 146 - 861
Valuation allowance additions 29 65 95 110 - 309
Capital asset additions 179 7 120 62 - 368
Total assets 11,065 9,778 18,344 11,028 23,123 73,338
</TABLE>
11
<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, 2000.
RESULTS OF OPERATIONS/COMPARISON OF THE QUARTER ENDED APRIL 30, 2000 AND 1999
In connection with the initial public offering by NETsilicon, Inc. ("NSI"), our
remaining 55.4% interest became non-voting shares. Accordingly, our financial
statements for fiscal 2000 include the results of operations of NETsilicon only
through September 14, 1999 at which time our remaining interest is accounted for
as an "available for sale" security which is marked-to-market at the end of each
period. The amounts included in our fiscal 2001 year are not comparable to our
fiscal 2000 year due to the inclusion of NETsilicon for less than a full year.
Readers should refer to NETsilicon's quarterly report on Form 10-Q and annual
report on Form 10-K for information concerning NETsilicon.
Net sales. Our consolidated net sales from continuing operations were $10.0
million for the quarter ended April 30, 2000 as compared to $19.1 million for
quarter ended April 30, 1999. This decline reflects a $2.7 million decline at
Entrada Networks ("Entrada") and a $500,000 decline at Meret Optical
Communications ("Meret"). Sales at Sorrento Networks remained relatively
unchanged. The remaining decline was related to NSI.
Gross profit. Cost of sales consists principally of the costs of components,
subcontract assembly from outside manufacturers, and in-house system
integration, quality control, final testing and configuration costs. Gross
profit decreased to $1.9 million for the quarter ended April 30, 2000 from $8.9
million for quarter ended April 30, 1999. This decline reflects a $1.5 million
decline at Entrada exclusive of a $2.7 million valuation allowance recorded
against inventories at Entrada. The remaining decline was primarily related to
NSI.
Selling and marketing. Selling and marketing expenses consist primarily of
employee compensation and related costs, commissions to sales representatives,
tradeshow expenses and travel expenses. We intend to increase expenditures for
sales and marketing including the recruitment of additional sales and marketing
personnel, the expansion of our domestic and international distribution channels
and the establishment of strategic relationships. In addition, we expect sales
commissions to increase as we increase our sales volume. Our consolidated
selling and marketing expenses decreased to $3.7 million, or 37.0% of net sales,
for quarter ended April 30, 2000 from $4.1 million, or 21.5% of net sales for
the quarter ended April 30, 1999.
Engineering, research and development. Engineering, research and development
expenses consist primarily of compensation related costs for engineering
personnel, facilities costs, and materials used in the design, development and
support of our technologies. All research and development costs are expensed as
incurred. We expect research and development costs to continue to increase as we
continue to develop our technologies and future products. Our consolidated
engineering, research and development expenses increased to $5.9 million, or
58.9% of net sales, for the quarter ended April 30, 2000 from $2.2 million, or
11.7% of net sales, for the comparable quarter last year.
General and administrative. General and administrative expenses consist
primarily of employee compensation and related costs, legal and accounting fees,
public company costs, and allocable occupancy costs. Increases in general and
administrative expenses are planned as we strengthen our infrastructure to
provide sufficient administrative support for the growth of our businesses.
Consolidated general and administrative expenses increased to $3.2 million, or
31.5% of net sales, for the quarter ended April 30, 2000 from $3.0 million, or
15.9% of net sales, for the comparable quarter last year.
Other operating expenses. Other operating expenses for the quarters ended April
30, 2000 and 1999 include $93,000 of amortization of purchased technology
related to acquisitions included in Meret. The remaining $2.1
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million of other operating expenses were attributable to the closure of
one of Entrada's facilities and valuation reserves recorded against
distributor receivables.
Other income (charges). Other income (charges) from continuing operations
increased to $270,000 income for the quarter ended April 30, 2000 from
$(451,000) expense for the comparable quarter last year. The change reflects
increased interest income of $471,000 related to short term investments of
surplus cash combined with reduced interest expense incurred on short term debt.
The outstanding borrowings on our various lines of credit, exclusive of NSI,
declined by $8.1 million from April 30, 1999 to April 30, 2000.
Income taxes. There was no provision for income taxes for quarters ended April
30, 2000 and 1999. 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 provided a valuation allowance in full for our deferred tax assets
as it is our opinion that it is more likely than not that some portion or all of
the assets will not be realized.
Discontinued operations. We completed our disposition of our Far East business
unit as of January 31, 2000, accordingly we had no discontinued operations
during the quarter ended April 30, 2000. Net assets to be disposed of, at their
expected realizable values, have been separately classified in the accompanying
balance sheet at April 30, 2000 and January 31, 2000.
SORRENTO NETWORKS
Net sales. Net sales for Sorrento decreased slightly to $4.7 million, or 2.0%,
for the quarter ended April 30, 2000 from $4.8 million for the quarter ended
April 30, 1999. During the quarter ended April 30, 2000 Sorrento shipped product
to 8 customers one of which represented 17.0% of our consolidated net sales.
During the quarter ended April 30, 1999 Sorrento shipped product to four
customers, of which two customers represented a combined 45.3% of our
consolidated net sales. Sorrento expects to continue to experience significant
fluctuations in its quarterly revenues as a result of its long and variable
sales cycle as well as its highly concentrated customer base.
Gross profit. Gross profit decreased to $2.6 million, or 4.1%, for the quarter
ended April 30, 2000 from $2.7 million for the quarter ended April 30, 1999.
Sorrento's gross margin decreased slightly to 55.6% for the quarter ended April
30, 2000 from 56.8% for the comparable quarter last year.
Selling and marketing. Sales and marketing expenses increased to $2.5 million,
or 53.2% of net sales, for the quarter ended April 30, 2000 from $1.4 million,
or 28.8% of net sales for the comparable quarter last year. The increase in
sales and marketing expenses was the result of increased personnel, travel
expenses, trade show participation, advertising, depreciation on demonstration
equipment, customer education and marketing materials. The number of sales and
marketing personnel at Sorrento increased to 53 at April 30, 2000 from 20 at
April 30, 1999.
Engineering, research and development. Engineering, research and development
expenses increased to $4.2 million, or 90.6% of net sales, for the quarter ended
April 30, 2000 from $485,000 or 10.2% of net sales, for the comparable period
last year. The increase in engineering, research and development expenses was
the result of increased expenditures associated with the continuing development
of our existing products as well as future technologies. The number of
engineering personnel at Sorrento increased to 63 at April 30, 2000 from 18 at
April 30, 1999.
General and administrative. General and administrative expenses increased to
$1.8 million, or 37.7% of net sales, for the quarter ended April 30, 2000 from
$724,000, or 15.2% of net sales, for the comparable period last year. The
increase in general and administrative expenses reflects increased
infrastructure costs including the addition of general and administrative
personnel to support our planned growth.
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Meret Optical Communications
Net sales. Net sales of Meret decreased to $1.7 million, or 21.9%, during the
quarter ended April 30, 2000 from $2.1 million during the quarter ended April
30, 1999. This decrease reflects a decline in sales of older generation
broadband products.
Gross profit. Gross profit decreased slightly to $939,000 for the quarter ended
April 30, 2000 from $942,000 for the comparable quarter last year. Meret's gross
margin increased to 56.1% for the quarter ended April 30, 2000 from 44.4% for
the comparable quarter last year. The gross margin percentage increase reflects
a shift in Meret's sales to higher margin products.
Operating expenses. Meret's total operating expenses increased slightly to
$343,000, or 20.7% of net sales, for the quarter ended April 30, 2000 from
$284,000, or 13.4% of net sales for the comparable quarter last year. Meret
experienced a moderate increase in operating expenses as it establishes separate
operations from that of Sorrento.
ENTRADA NETWORKS
On April 10, 2000 we entered into an agreement to merge Entrada with Sync
Research, Inc. ("Sync"), a Nasdaq listed company. We will retain a 50% interest
in the merged corporation which will be known as Entrada Networks, Inc. The
merger is subject to approval by Sync's shareholders at a meeting to be held
after August, 2000.
Net sales. Net sales for Entrada Networks decreased to $3.7 million for the
quarter ended April 30, 2000 from $6.4 million for the quarter ended April 30,
1999. Sales to OEM's of networking adapter product lines increased, however this
increase was more than offset by the decrease in sales to distributors of remote
access and print server products, reflecting Entrada's focus on sales to OEM's
and its roll-out of its new generation of products.
Gross profit. Gross profit decreased to a negative $1.7 million for the quarter
ended April 30, 2000 from a positive $2.5 million for the comparable quarter
last year. Exclusive of the $2.7 million valuation allowance recorded against
inventory in connection with product transitions, Entrada's gross margin was
26.9 percent for the quarter ended April 30, 2000, as compared to 39.4 percent
for the comparable period last year. The decline in gross margins resulted from
increased sales to OEM customers which have lower margins than sales to
distributors as well as product transitions in anticipation of its merger
with Sync.
Selling and marketing. Sales and marketing expenses decreased slightly to $1.0
million, or 27.9% of net sales, for the quarter ended April 30, 2000 from $1.1
million, or 17.7% of net sales for the comparable quarter last year. During May,
2000 we reduced our sales and marketing personnel by 12 as a result of the
closure of our Massachusetts facility as well as personnel reductions in
anticipation of its merger with Sync.
Engineering, research and development. Engineering, research and development
expenses increased to $1.7 million, or 44.5% of net sales, for the quarter ended
April 30, 2000 from $1.2 million, or 19.5% of net sales, for the comparable
quarter last year. $434,000 of the increase was the result of a reduction to the
net book value of capitalized software development costs caused by changing
market conditions.
General and administrative. General and administrative expenses decreased to
$530,000, or 14.3% of net sales, for the quarter ended April 30, 2000 from
$693,000, or 10.8% of net sales, for comparable period last year. This decrease
is the result of cost savings achieved through the consolidation of our various
facilities as well as eliminating the 37,000 square feet of unused space leased
at our Annapolis Junction, Maryland facility.
Other operating expenses. Other operating expenses for the quarter ended April
30, 2000 include $494,000 of costs associated with the closure of Entrada's
Massachusetts facility and a $1.4 million valuation reserve recorded against
distributor receivables. Entrada has reduced its total personnel by 39 through
the closure of its Massachusetts facility and other personnel reductions
associated with a shift in its business focus to OEM sales as well as in
anticipation of its merger with Sync. It is anticipated that the closure of
the Massachusetts facility will reduce annual operating expenses by at least
$2.0 million.
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NETSILICON
The results of NSI are no longer included in our consolidated results for the
quarter ended April 30, 2000. Additional information regarding the NSI is
available from its various filings with the Securities and Exchange Commission
which are available online at www.freeedgar.com and www.sec.gov or from the
Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations through a combination of debt and equity financing. At
April 30, 2000, our working capital was $181.6 million including $46.1 million
in cash and cash equivalents.
The amounts included in our statement of cash flows for the quarter ended April
30, 2000 are not comparable to our quarter ended April 30, 1999 amounts due to
the inclusion of NETsilicon for only the quarter ended April 30, 1999. Readers
should refer to NETsilicon's quarterly report on Form 10-Q for information
concerning NETsilicon.
Our continuing operations used cash flows of $8.4 million during the quarter
ended April 30, 2000. During the quarter ended April 30, 1999 continuing
activities provided cash flows of $2.0 million and discontinued operations used
cash of $264,000. The increase in cash flows used by operations reflects a
substantial increase in our net loss as well as increases in accounts receivable
and inventories, partially offset by increases in accrued expenses.
To support our anticipated growth, we expect our research and development,
selling and marketing and general and administrative expenses will increase in
future periods. There can be no assurance that our available cash will be
sufficient to fund such additional expenses.
Our standard payment terms ranges from net 30 to net 90 days. Receivables from
international customers have frequently taken longer to collect.
We provide long-term equipment financing to a customer of Sorrento and the
purchase agreement with this customer provides for invoiced installation and
other deployment expenses not to exceed 10% of the equipment cost. The terms of
this financing provide that the customer may convert any balances outstanding
longer than 90 days into a level payment 35-month term note at 11% per annum
interest. We financed $2.5 million of receivables, including deployment
expenses, during the quarter ended April 30, 2000 for this customer. During the
quarters ended April 30, 2000 and 1999 we made sales of $3.2 million and $1.9,
respectively and reimbursed deployment expenses of $199,000 to this customer
during the quarter ended April 30, 2000.
Our investing activities during the quarter ended April 30, 2000 used cash flows
of $4.2 million. We purchased property and equipment of $2.2 million and
invested $2.0 million in a Sorrento customer. During the quarter ended April 30,
1999 the investing activities of our continuing operations used cash flows of
$3.2 million which consisted primarily of advances to affiliates, purchases of
capital equipment and software development costs.
We expect our investments in property and equipment will increase to support the
anticipated growth of our operations and infrastructure.
Our financing activities during the quarter ended April 30, 2000 provided cash
flows of $45.2 million which consisted primarily of $46.6 million in net
proceeds from a private placement by Sorrento of its convertible preferred stock
and $1.0 million in proceeds from option and warrant exercises offset by
repayments of short and long term debt. During the quarter ended April 30, 1999
the financing activities of our continuing operations provided cash flows of
$6.2 million which consisted primarily of $5.1 million in proceeds from short
and long term debt and $1.4 million from option and warrant exercises.
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We have various lines of credit totaling $15.0 million. Outstanding borrowings
against these lines of credit were $3.6 million at April 30, 2000. Our various
credit lines are collateralized by accounts receivable, inventory and equipment.
During March 2000, our subsidiary, Sorrento Networks, Inc., completed a private
placement of 8,596,333 shares of its Series A Convertible Preferred Stock to a
group of investors receiving net proceeds of approximately $46.6 million.
Each share of Sorrento's Series A Preferred Stock is convertible into one share
of Sorrento's common stock at the option of the holder, may vote on an "as
converted" basis except for election of directors, and has a liquidation
preference of $5.45 per share. The shares are automatically converted into
Sorrento's common stock upon an underwritten public offering by Sorrento with an
aggregate offering price of at least $50,000. In the event Sorrento does not
complete a $50,000 public offering by March 1, 2001, the holders of at least 50%
of the then outstanding Series A shares may request a redemption of the shares
at the then adjusted liquidation preference. The net proceeds from the issuance
of these shares has been classified as a minority interest in the accompanying
financial statements. The difference between the net proceeds received on the
sale of these shares and their liquidation preference of $48,800 will be
recorded as a deemed dividend during the period from issuance to March 31, 2001.
During the quarter ended April 30, 2000 we recorded a deemed dividend of $360
with respect to the Sorrento Series A shares.
During April 2000 we entered into an agreement to merge Entrada with Sync
Research, Inc. ("Sync"), a Nasdaq listed company, and after closing we will own
50% of the merged corporation. The closing is subject to approval by Sync's
shareholders at a meeting to be held after August, 2000.
We have previously announced our plans, through an 8-K filing, to divest all or
several of our operating subsidiaries. During fiscal 2000, NETsilicon completed
its initial public offering and we agreed to sell our Far East business unit. We
have recently entered into an agreement to merge Entrada Networks with Sync
Research, Inc., a public company. While we have no definitive plans at this time
with respect to our other business units, we will continue to explore
opportunities. We continue to operate and invest in all of our businesses
pending any transactions.
We anticipate that our available cash resources, together with the proceeds of
Sorrento's private placement, will be sufficient to meet our presently
anticipated capital requirements for the next year. Nonetheless, our future
capital requirements may vary materially from those now planned including the
need for additional working capital to accommodate planned growth, hiring and
infrastructure needs. There can be no assurances that our working capital
requirements will not exceed our ability to generate sufficient cash internally
to support our requirements and that external financing will be available or
that, if available, such financing can be obtained on terms favorable to us and
our shareholders.
Year 2000 Compliance
We have not experienced any year 2000 compliance problems to date and we believe
our products are year 2000 compliant. We are not aware that any of our
customers, vendors or contract manufacturers have experienced any such problems
to date. It is possible that yet undiscovered problems could severely disrupt
our operations and would adversely affect our business if not properly
addressed.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is effective for financial
statements with fiscal quarters of all fiscal years beginning after June 15,
2000. The Accounting Standards Executive Committee issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of 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 or future
adoption of these standards has had or will have no material effects, if any, on
our financial position or results of operations.
EFFECTS OF INFLATION AND CURRENCY EXCHANGE RATES
We believe that the relatively moderate rate of inflation in the United States
over the past few years has not had a significant impact on our sales or
operating results or on the prices of raw materials. There can be no assurance,
however, that inflation will not have a material adverse effect on our operating
results in the future.
We periodically need additional financing for our large operating losses and
capital expenditures associated with establishing and expanding our operations.
The interest rate that we will be able to obtain on debt financing will depend
on market conditions at that time, and may differ from the rates we have secured
on our current debt. Additionally, the interest rates charged by our present
lenders adjust on the basis of the lenders' prime rate
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Almost of our sales and expenses have been denominated in U.S. dollars and to
date our business has not been significantly affected by currency fluctuations.
However, we conduct business in several different countries and thus
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. In addition, inflation in such countries could increase
our expenses. In the future, we may engage in foreign currency denominated sales
or pay material amounts of expenses in foreign currencies and, in such event,
may experience gains and losses due to currency fluctuations. Our operating
results could be adversely affected by such fluctuations. We attempt to minimize
our currency exposure risks through working capital management and do not hedge
our exposure to translation gains and losses related to foreign currency
exposures.
OTHER MATTERS
A consolidated class action lawsuit has 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
All statements other than statements of historical fact contained in this Form
10-Q, in our future filings with the Securities and Exchange Commission, in our
press releases and in our oral statements made with the approval of an
authorized executive officer are forward-looking statements. Words such as
"propose," "anticipate," "believe," "estimate," "expect," "intend," "may,"
"should", "could," "will" and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although we believe that our expectations reflected in these
forward-looking statements are based on reasonable assumptions, such statements
involve risk and uncertainties and no assurance can be given that actual results
will be consistent with these forward-looking statements. Important factors that
could cause actual results to differ materially from those forward-looking
statements include without limitation: unanticipated technical problems related
to our products; our ability, or lack thereof, to make, market and sell optical
networking products, high-speed connectivity products, and products for Storage
Area Networks that meet with market approval and acceptance; the greater
financial, technical and other resources of our many, larger competitors in the
marketplace for optical networking products, high-speed connectivity products
and products for Storage Area Networking; changed market conditions, new
business opportunities or other factors that might affect our decisions as to
the best interest of its shareholders, including but not limited to Entrada's
decision to focus its sales efforts on Original Equipment Manufacturers or to
develop products for the Storage Area Networking marketplace; the failure of
the Company to achieve sales of its products to customers pursuant to the
strategic alliance and equipment purchase agreements entered into during the
Company's first fiscal quarter 2000; the failure of Sync's shareholders to
approve the proposed merger of Sync and Entrada Networks; the inability of
Sync Research or the Company to obtain, or meet the conditions imposed upon
them for governmental approval of the merger; other uncertainties relating to
the effectiveness of the consolidation activities related to the proposed merger
of Sync and Entrada; the effect of the merger upon the customers of Sync and
Entrada and those customers' decisions to purchase products and services prior
to the merger from either company, or after the merger from Entrada
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Networks; our ability, or failure, to complete a transaction with respect to the
Far East Division, for reasons either within or outside our control or the
control of the management of the Far East Division; our potential inability to
enforce any agreement in China or Hong Kong under the laws and legal system in
effect in the applicable jurisdiction; and other risks detailed from time to
time in the Company's reports filed with the U.S. Securities and Exchange
Commission.
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 in the
following section. 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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates
and foreign currency rates. Our exposure to interest rate risk is the result of
our need for periodic additional financing for our large operating losses and
capital expenditures associated with establishing and expanding our operations.
Almost all of our sales have been denominated in U.S. dollars. A portion of our
expenses are denominated in currencies other than the U.S. dollar and in the
future a larger portion of our sales could also be denominated in non-U.S.
currencies. As a result, currency fluctuations between the U.S. dollar and the
currencies in which we do business could cause foreign currency translation
gains or losses that we would recognize in the period incurred. We cannot
predict the effect of exchange rate fluctuations on our future operating results
because of the number of currencies involved, the variability of currency
exposure and the potential volatility of currency exchange rates. We attempt to
minimize our currency exposure risk through working capital management and do
not hedge our exposure to translation gains and losses related to foreign
currency net asset exposures.
We do not hold or issue derivative, derivative commodity instruments or other
financial instruments for trading purposes. Investments held for other than
trading purposes do not impose a material market risk.
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 should we require
debt financing in the future.
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PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On August 20, 1999, a consolidated class action lawsuit entitled In re Osicom
Technologies, Inc. Securities Litigation, Master File No. CV-99-4321-R, was
filed in the United States District Court for the Central District of California
against us, our Chief Executive Officer, our President and our former Chief
Financial Officer. The consolidated complaint generally alleges that, during the
purported class action period, the defendants made false and misleading public
statements related to a contract entered into by our Far East business unit with
a Japanese customer. 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. During January
2000 the court issued an order denying our motion to dismiss the case. In
February, 2000, answers were filed on behalf of all defendants denying liability
for all claims. We are defending the class action 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 other legal proceedings and claims
incidental to the conduct of our business. Although it is impossible to predict
the outcome of any outstanding legal proceedings, we believe that such legal
proceedings and claims, individually and in the aggregate, are not likely to
have a material effect on our financial position or results of operations or
cash flows.
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
--------
20 Consolidated Financial Statements for the Quarter Ended
April 30, 2000 (included in Part I, Item 1)
27 Financial Data Schedule
B. Reports on Form 8-K
-------------------
February 23, 2000 Private Placement by Sorrento Networks, Inc.
(a subsidiary of the Registrant) of its
Series A Convertible Preferred Stock
March 9, 2000 Strategic Alliance Agreement between Sorrento
Networks, Inc. and INRANGE Technologies
Corporation
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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: June 14, 2000
--------------------------------------
Christopher E. Sue,
Vice President Finance
Principal Accounting Officer
20
