<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 JULY 31, 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: 11,670,005 shares at
September 8, 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
July 31, 2000 January 31, 2000
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 21,355 $ 13,511
Short-term commercial paper 8,724 -
Accounts receivable, net 9,573 11,639
Inventory, net 12,113 13,004
Prepaid expenses and other current assets 2,930 1,503
Investment in marketable securities 198,156 168,750
----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 252,851 208,407
----------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 12,476 5,520
----------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Purchased technology, net 1,209 1,395
Capitalized software, net 813 1,773
Other assets 9,632 3,337
Net investment in discontinued operations 1,979 2,833
----------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 13,633 9,338
----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 278,960 $ 223,265
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 4,600 $ 5,407
Current maturities of long term debt 552 721
Accounts payable 5,981 6,417
Other current and accrued liabilities 10,830 6,376
----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 21,963 18,921
----------------------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations 1,585 1,806
----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 23,548 20,727
----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST
Preferred stock of subsidiary; 8,954 shares issued and
outstanding; subsidiary liquidation preference $48,800 47,539 -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; cumulative dividends; liquidation
preference $6,541 including accumulated dividends 1 1
Common stock, $.30 par value; 16,667 shares authorized; 11,677 shares
issued and 11,668 shares outstanding at July 31, 2000; 11,483 shares
issued and 11,474 shares outstanding at January 31, 2000 3,503 3,445
Additional paid-in capital 107,471 102,418
Deferred stock compensation (1,926) -
Accumulated deficit (95,031) (67,771)
Accumulated unrealized gain on marketable securities 193,924 164,514
Treasury stock, at cost; 9 shares at July 31, 2000 and January 31, 2000 (69) (69)
----------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 207,873 202,538
----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 278,960 $ 223,265
======================================================================================================================
</TABLE>
2
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In Thousands, except per share amounts)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
July 31 July 31
-------------------------- ---------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------- ---------------------
<S> <C> <C> <C> <C>
NET SALES $ 11,376 $ 17,206 $ 21,424 $ 36,335
COST OF SALES 7,534 9,086 15,727 19,337
--------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 3,842 8,120 5,697 16,998
--------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and marketing 5,512 4,523 9,226 8,630
Engineering, research and development 6,465 2,526 12,386 4,763
General and administrative 5,035 2,892 8,200 5,925
Deferred and other stock compensation 836 - 836 -
Other operating expenses 93 93 2,255 186
--------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 17,941 10,034 32,903 19,504
--------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (14,099) (1,914) (27,206) (2,506)
--------------------------------------------------------------------------------------------------------------------
OTHER INCOME (CHARGES)
Investment income 873 15 1,361 32
Interest expense (289) (594) (512) (1,064)
Other income (charges) (9) - (4) 2
--------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (CHARGES) 575 (579) 845 (1,030)
--------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (13,524) (2,493) (26,361) (3,536)
Provision for Income Taxes - - - -
--------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (13,524) (2,493) (26,361) (3,536)
LOSS FROM DISCONTINUED OPERATIONS
(NET OF INCOME TAX OF $-0- AND $-0-) - (120) - (1,349)
NET INCOME (LOSS) $(13,524) $ (2,613) $ (26,361) $ (4,885)
====================================================================================================================
INCOME (LOSS) PER COMMON SHARE:
PREFERRED STOCK DIVIDENDS 579 147 976 485
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $(14,103) $ (2,760) $ (27,337) $ (5,370)
====================================================================================================================
BASIC
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 11,609 9,041 11,563 8,962
NET INCOME (LOSS) PER COMMON SHARE:
Continuing Operations $ (1.21) $ (0.29) $ (2.36) $ (0.45)
Discontinued Operations n/a (0.01) n/a (0.15)
--------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ (1.21) $ (0.30) $ (2.36) $ (0.60)
====================================================================================================================
DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 11,609 9,041 11,563 8,962
NET INCOME (LOSS) PER COMMON SHARE:
Continuing Operations $ (1.21) $ (0.29) $ (2.36) $ (0.45)
Discontinued Operations n/a (0.01) n/a (0.15)
--------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ (1.21) $ (0.30) $ (2.36) $ (0.60)
====================================================================================================================
</TABLE>
3
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In Thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
July 31 July 31
---------------------------- --------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C>
COMPREHENSIVE INCOME AND ITS COMPONENTS
CONSIST OF THE FOLLOWING:
Net loss $ (13,524) $ (2,613) $ (26,361) $ (4,885)
Change in unrealized gains on marketable securities 65,969 - 29,406 -
-----------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 52,445 $ (2,613) $ 3,045 $ (4,885)
=============================================================================================================================
</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>
------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
July 31
------------------------------
2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $ (26,361) $ (3,536)
------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,361 1,942
Accounts receivable and inventory reserves 5,366 1,346
Valuation allowance on intangible assets 435 -
Deferred and other stock compensation 836 -
Changes in assets and liabilities net of effects of business entity acquisitions:
Increase in accounts receivable (5,720) (1,455)
Increase in inventories (3,742) (2,365)
Increase in short-term commercial paper (8,559) -
Decrease in other current assets 62 61
Increase (decrease) in accounts payable (110) 2,525
Increase in accrued expenses 4,537 2,153
Decrease in other current liabilities (82) (355)
------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN CONTINUING OPERATING ACTIVITIES (30,977) 316
NET CASH USED IN DISCONTINUED OPERATING ACTIVITIES - (925)
------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (30,977) (609)
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (7,121) (1,130)
Capitalized software development costs - (809)
Advances to affiliates, net of repayments 528 (678)
Other assets (2,376) (289)
Investing activities of discontinued operations - (330)
------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (8,969) (3,236)
------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt, net of repayments (807) 3,835
Proceeds from long term debt - 907
Repayment of long-term debt (389) (21)
Proceeds from preferred stock subsidiary 46,638 -
Proceeds from stock option exercises 2,348 1,613
Preferred stock dividends - (240)
Other (73)
Financing activities of discontinued operations - (4,298)
------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 47,790 1,723
-------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,844 (2,122)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 13,511 3,480
------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 21,355 $ 1,358
==============================================================================================================================
</TABLE>
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 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. 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 July 31, 2000 and January 31,
2000, for the three and six months ended July 31, 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 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 July 31, 2000 and for the
three and six months ended July 31, 2000, have been made. The results of
operations for the six months ended July 31, 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 ("Uni"), has been accounted for as a discontinued operation pursuant to
our formal adoption on May 15, 1999 to sell this division. As of January 31,
2000, we sold Uni to a group led by its Hong Kong-based management for $2,500 in
cash in repayment of our advances to Uni and a $3,000 non-voting redeemable
preferred security. This security has not been considered in the estimated
proceeds from disposal due to the uncertainty of future collection. Net assets
disposed, at their expected realizable values, have been separately classified
in the accompanying balance sheets. During the quarter and six months ended July
31, 2000 we received payments of $761 and $854, respectively.
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.
Deferred Stock Compensation
We account for employee-based stock compensation utilizing the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, compensation cost for
stock options issued to employees is measured as the excess, if any, of the fair
market price of our common stock at the date of grant over the amount an
employee must pay to acquire the stock. This amount appears as a separate
component of stockholders' equity and is being amortized on an accelerated basis
by charges to operations over the vesting period of the options in accordance
with the method described in Financial Accounting Standards Board Interpretation
No. 28. All such amounts relate to options to acquire common stock of Sorrento
Networks granted by it to its employees; during the three and six months ended
July 31, 2000 Sorrento Networks amortized $678 of the total $2,605 it recorded
for deferred stock compensation.
For non-employees, we compute the fair value of stock-based compensation in
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
for stock-Based Compensation," and Emerging Issues Tax Force (EITF) 96-18,
"Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services." All such amounts
relate to options to acquire common stock of Sorrento Networks granted by it to
its consultants; during the three and six months ended July 31, 2000 Sorrento
Networks recorded $158 for options granted to consultants.
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.
The Financial Accounting Standards Board issued Interpretation ("FIN")
No. 44, "Accounting for Certain Transactions involving Stock Compensation", an
Interpretation of APB Opinion No. 25, FIN 44 clarifies the application of
Opinion No. 25 for (a) the definition of an employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as
a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 2, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of this standard had no material effect, if any, on our financial
position or results of operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin
No. 101, Revenue Recognition ("SAB 101") which broadly addresses how companies
report revenues in their financial statements effective the fourth fiscal
quarter of years beginning after December 31, 1999. We are currently evaluating
the effect, if any, of the adoption of this policy 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
Inventories at July 31, 2000 and January 31, 2000 consist of:
<TABLE>
<CAPTION>
July 31, 2000 January 31, 2000
------------- ----------------
<S> <C> <C>
Raw material $10,870 $ 9,024
Work in process 3,088 3,677
Spare parts 55 141
Finished goods 4,420 4,232
------- -------
18,433 17,074
Less: Valuation reserve 6,320 4,070
------- -------
$12,113 $13,004
====== ======
</TABLE>
STOCKHOLDERS' EQUITY
We are authorized to issue the following shares of stock:
16,666,667 shares of Common Stock ($.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 - - 1,188
Series D 2,853 - 2,853
----- --- -----
5,353 $ 1 $ 6,541
===== === =====
</TABLE>
Preferred stock dividends during the quarters ended July 31, 2000 and
1999 consist of:
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Accrued, unpaid dividends (Series A) $ 38 $ 38 $ 75 $ 75
Accrued, unpaid dividends (Series C) - 67 - 67
Deemed dividends (Series C) - 42 - 103
Dividends paid (Series C) - - - 240
Deemed dividends (Sorrento Series A) 541 - 901 -
---- ---- ---- ----
$ 579 $ 147 $ 976 $ 485
==== ==== ==== ====
</TABLE>
8
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In Thousands, except share and per share amounts)
------------------------------------------------------------------------------
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
officers, who was an outside director at that time, was 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 officers, who was an outside director at that time, was 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 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 three and six months ended July 31, 2000 we recorded a deemed
dividend of $541 and $901, respectively, 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 July 31, 2000 there were 3,831,473 shares under option at prices
varying from $3.00 to $69.13 per share.
EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic earnings
per share for the quarters ended July 31, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (13,524) $ (2,613) $ (26,361) $ (4,885)
Less: preferred dividends (579) (147) (976) (485)
------- ------- --------- -------
Net loss available to common
shareholders used in basic EPS $ (14,103) $ (2,760) $ (27,337) $ (5,370)
======= ====== ======= =======
Average number of common shares
used in basic EPS 11,608,562 9,041,465 11,563,083 8,962,470
========== ========= ========== =========
</TABLE>
9
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In Thousands, except share and per share amounts)
We had a net loss for the quarters and six months ended July 31, 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.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
Three Months Ended July 31, Six Months Ended July 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss available to common
shareholders used in basic EPS $ (14,103) $ (2,760) $ (27,337) $ (5,370)
Preferred stock dividends - - - -
--------- -------- --------- --------
Net loss available to common
shareholders used in basic EPS $ (14,103) $ (2,760) $ (27,337) $ (5,370)
======= ====== ======= =======
Average number of common shares
used in basic EPS 11,608,562 9,041,465 11,563,083 8,962,470
Effect of dilutive securities:
Convertible preferred stock - 635,440 - 666,703
Stock benefit plans 2,105,306 582,006 2,144,008 793,722
Warrant exercises 106,190 118,105 118,391 168,372
---------- --------- ---------- ---------
Average number of common shares
and dilutive potential common
stock used in diluted EPS 13,820,058 10,377,016 13,825,482 10,591,267
========== ========== ========== ==========
</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.
COMMITMENTS
In July, 2000, we entered into a three year consulting agreement with
our then Chief Executive Officer which provides for annual payments of $250,000.
In June, 2000, we entered in a purchase contract for a 41,000 square
foot facility immediately adjacent to our San Diego, California facility. The
purchase price is $4,805 of which $2,378 was paid prior to July 31, 2000 and we
will assume the existing indebtedness of $2,427.
SUBSEQUENT EVENTS
On August 31, 2000, we completed a merger of Entrada with Sync
Research, Inc. ("Sync"), a Nasdaq listed company in which we received 4,244,155
shares of the merged entity which changed its name to Entrada Networks, Inc. and
changed its symbol to ESAN. We purchased 93,900 shares of Sync in the open
market during June and July, 2000 for $388 and on August 30, 2000 purchased an
additional 1,001,818 shares directly from Entrada for $3,306. After these
transactions we own 48.9% of Entrada Networks and will account for our interest
on the equity method after August 30, 2000.
10
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In Thousands, except share and per share amounts)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
SEGMENT INFORMATION
Sorrento Meret Entrada
Networks Optical Networks NETsilicon Other Total
-------- ------- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Three months ended July 31, 2000:
--------------------------------
Net sales to external customers $ 3,550 $ 1,785 $ 6,041 $ - $ - $11,376
Intersegment sales - - - - - -
-------- -------- -------- --------- ------ -------
Total net sales 3,550 1,785 6,041 - - 11,376
Cost of goods sold 2,782 1,057 3,695 - - 7,534
-------- -------- -------- --------- ------ -------
Gross profit 768 728 2,346 - - 3,842
-------- -------- -------- --------- ------ -------
Operating income (loss) from
continuing operations (12,533) 375 (622) - (1,319) (14,099)
Depreciation & amortization expense 833 123 399 - 1 1,356
Valuation allowance additions 686 177 22 - - 885
Capital asset additions 2,396 29 133 - 7 2,565
Total assets 25,624 8,853 11,893 - 232,590 278,960
Three months ended July 31, 1999:
--------------------------------
Net sales to external customers $ 1,468 $ 1,637 $ 6,586 $ 7,515 $ - $17,206
Intersegment sales - - - - - -
-------- -------- -------- --------- ------ -------
Total net sales 1,468 1,637 6,586 7,515 - 17,206
Cost of goods sold 475 1,238 3,658 3,715 - 9,086
-------- -------- -------- --------- ------ -------
Gross profit 993 399 2,928 3,800 - 8,120
-------- -------- -------- --------- ------ -------
Operating income (loss) from
continuing operations (1,796) 209 16 483 (826) (1,914)
Depreciation & amortization expense 76 162 493 350 - 1,081
Valuation allowance additions 53 250 125 609 - 1,037
Capital asset additions 432 (201) 123 408 - 762
Total assets 8,927 12,723 19,473 9,591 20,860 71,574
</TABLE>
11
<PAGE>
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
(In Thousands, except share and per share amounts)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
SEGMENT INFORMATION (continued)
Sorrento Meret Entrada
Networks Optical Networks NETsilicon Other Total
-------- ------- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Six months ended July 31, 2000:
-------------------------------
Net sales to external customers $ 8,234 $ 3,469 $ 9,751 $ - $ - $21,424
Intersegment sales - - - - - -
--------- -------- -------- -------- -------- -------
Total net sales 8,234 3,439 9,751 - - 21,424
Cost of goods sold 4,862 1,772 9,093 - - 15,727
--------- -------- -------- -------- -------- -------
Gross profit 3,372 1,667 658 - - 5,697
--------- -------- -------- -------- -------- -------
Operating income (loss) from
continuing operations (18,426) 972 ( 7,593) - (2,159) ( 27,206)
Depreciation & amortization expense 1,232 246 881 - 2 2,361
Valuation allowance additions 748 300 4,753 - - 5,801
Capital asset additions 4,544 51 184 - 2,342 7,121
Total assets 25,624 8,853 11,893 - 232,590 278,960
Six months ended July 31, 1999:
-------------------------------
Net sales to external customers $ 6,246 $ 3,755 $10,001 $ 13,004 $ - $36,335
Intersegment sales - - - - - -
--------- -------- -------- -------- -------- -------
Total net sales 6,246 3,755 10,001 13,004 - 36,335
Cost of goods sold 2,538 2,415 3,658 3,715 - 19,337
--------- -------- -------- -------- -------- -------
Gross profit 3,708 1,340 2,928 3,800 - 16,998
--------- -------- -------- -------- -------- -------
Operating income (loss) from
continuing operations (1,668) 868 (534) 737 (1,909) (2,506)
Depreciation & amortization expense 89 369 988 496 - 1,942
Valuation allowance additions 82 315 230 719 - 1,346
Capital asset additions 611 (194) 243 470 - 1,130
Total assets 8,927 12,723 19,473 9,591 20,860 71,574
</TABLE>
12
<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 AND
SIX MONTHS ENDED JULY 31, 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 quarter and six months are not
comparable to our fiscal 2000 quarter as and six months as NETsilicon is no
longer included in our consolidated results. Readers should refer to
NETsilicon's quarterly report on Form 10-Q for information concerning
NETsilicon.
Net sales. Our consolidated net sales from continuing operations were $11.4
million for the quarter ended July 31, 2000 compared to $17.2 million for the
comparable three months ended July 31, 1999, a decrease of 33.9%. This decline
in net sales reflects an increase of $2.1 million at Sorrento Networks
("Sorrento"), an increase of $148,000 at Meret Optical Communications ("Meret"),
and a $545,000 decline at Entrada Networks ("Entrada"). The remaining decline
was related to NSI. During the six months ended July 31, 2000 our net sales from
continuing operations decreased to $21.4 million from $36.3 million a decrease
of 41%. This decline in net sales reflects an increase of $2.0 million at
Sorrento, a $316,000 decline at Meret and a $3.3 million decline at Entrada.
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.
Consolidated gross profit decreased to $3.9 million, or by 52.7%, for the
quarter ended July 31, 2000 from $8.1 million for quarter ended July 31, 1999.
This decline reflects a $582,000 decline at Entrada, a $329 increase at Meret
and a $225,000 decline at Sorrento. The remaining decline was related to NSI.
Consolidated gross profit decreased to $5.7 million, or by 66.5%, for the six
months ended July 31, 2000 from $17.0 million for the six months ended July 31,
1999. This decline reflects a $2.1 million decline at Entrada exclusive of a
$2.7 million valuation allowance recorded against inventories at Entrada, a
$327,000 increase at Meret, and a $336,000 decline at Sorrento. The remaining
decline was related to NSI.
Selling and marketing. Selling and marketing expenses consist primarily of
employee compensation and related costs, commissions to sales representatives,
tradeshow expenses, facilities costs, 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
sales 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 increased to $5.5 million, or 48.5%
of net sales, for quarter ended July 31, 2000 from $4.5 million, or 26.3% of net
sales for the same three months ended July 31, 1999. Our selling and marketing
expenses increased to $9.2 million or 43.1% of net sales during the six months
ended July 31, 2000 from $8.6 million or 23.8% for the comparable six months
ended last year.
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 increase substantially as
we continue to develop our technologies and future products. Our consolidated
engineering, research and development expenses increased to $6.5 million, or
56.8% of net sales, for the quarter ended July 31, 2000 from $2.5 million, or
14.7% of net sales, for the same three months ended a year ago. Our consolidated
engineering, research and development expenses increased to $12.4 million, or
57.8% of net sales, from $4.8 million, or 13.1% of net sales, for the comparable
six months ended last year.
13
<PAGE>
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. Our
consolidated general and administrative expenses increased to $5.0 million, or
44.3% of net sales, for the quarter ended July 31, 2000 from $2.9 million, or
16.8 % of net sales, for the quarter ended July 31, 1999. Our consolidated
general and administrative expenses increased to $8.2 million, or 38.3% of net
sales, for the six months ended July 31, 2000 from $5.9 million, or 16.3% of net
sales, for the comparable period last year.
Other operating expenses. Other operating expenses for the quarters ended July
31, 2000 and 1999 include $93,000 of amortization of purchased technology
related to acquisitions included in Meret. During the six months ended July 31,
2000, approximately $2.1 million of these costs were attributable to the closure
of one of Entrada's facilities and valuation reserves recorded against
distributor receivables and capitalized software costs.
Other income (charges). Other net income (charges) from continuing operations
increased to $575,000 income for the quarter ended July 31, 2000 from $(579,000)
expense for the comparable three months last year. The increase reflects an
increased in interest income of $858,000 related to short term investments of
surplus cash combined with lower interest expenses resulting from the decrease
in our short term debt during the six months ended July 31, 2000. During the six
months ended July 31, 2000 other net income (charges) increased to $845,000
income from $(1.0) million expense for the comparable six months ended last
year. The increase reflects an increased in investment income of $1.4 million
related to short term investments of surplus cash combined with lower interest
expenses resulting from the decrease in our short term debt during the six
months ended July 31, 2000.
Income taxes. There was no provision for income taxes for quarters and six
months ended July 31, 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 three and six months ended July 31, 2000. Net assets to be disposed
of, at their expected realizable values, have been separately classified in the
accompanying balance sheets at July 31,2000 and January 31, 2000.
SORRENTO NETWORKS
Net sales. Net sales for Sorrento increased to $3.6 million, or 141.8%, for the
quarter ended July 31, 2000 from $1.5 million for the three months ended July
31, 1999. During the quarter ended July 31, 2000, Sorrento shipped product to 4
customers of which two customers represented a combined 79.4% of Sorrento's net
sales for the quarter. These two customers represented 12.8% and 12.0%
individually of our consolidated net sales for the quarter ended July 31, 2000.
During the quarter ended July 31, 1999, Sorrento shipped product to one customer
which represented 87.9% of Sorrento's net sales for the quarter ended July 31,
1999. This customer did not contribute to the sales during the quarter ended
July 31, 2000. During the six months ended July 31, 2000, net sales increased to
$8.2 million, or 31.8%, from $6.2 million for the comparable six months last
year. During the six months ended July 31, 2000, Sorrento shipped product to 7
customers of which 4 customers represented a combined 88.9% of Sorrento's net
sales for the six month period. During the six months ended July 31, 2000 one
customer represented 15.2% of our consolidated net sales. During the six months
ended July 31, 1999, Sorrento shipped product to 4 customers of which 2
customers represented a combined 96.3% of Sorrento's net sales for the six month
period. 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 $768,000, or 22.7%, for the quarter
ended July 31, 2000 from $993,000 for the quarter ended July 31, 1999.
Sorrento's margins decreased to 21.6% for the quarter ended July 31, 2000 from
14
<PAGE>
67.6% for the comparable quarter last year. During the six months ended July 31,
2000 Sorrento's gross profit decreased to $3.4 million, or 9.1%, from $3.7
million for the six month period ended July 31, 1999. Sorrento's margins
decreased to 41.0% for the six months ended July 31, 2000 from 59.4% for the
comparable six month period last year. Both the three and six month declines in
gross margins primarily resulted from increased fixed manufacturing overhead
costs and higher gross margins on sales to a single customer last year.
Selling and marketing. Selling and marketing expenses increased to $4.1 million,
or 115.2% of net sales, for the quarter ended July 31, 2000 from $1.3 million,
or 88.9% of net sales for the comparable three months last year. For the six
months ended July 31, 2000, selling and marketing expenses increased to $6.6
million, or 79.9% of net sales, from $2.7 million or 43.0% of net sales for the
six months ended July 31, 1999. 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. Sorrento increased its sales and marketing personnel to 57
at July 31, 2000 from 26 at July 31, 1999.
Engineering, research and development. Engineering, research and development
expenses increased to $5.1 million, or 144.0% of net sales, for the quarter
ended July 31, 2000 from $672,000, or 45.8% of net sales, for the same three
months ended last year. For the six months ended July 31, 2000, engineering,
research and development expenses increased to $9.4 million, or 113.6% of net
sales, from $1.2 million, or 18.5% of net sales, for the six months ended July
31, 1999. The increases were primarily the result of additional engineering,
research and development personnel to support the continuing development of our
existing products as well as new products and technologies. Sorrento increased
its engineering personnel to 88 at July 31, 2000 from 11 at July 31, 1999.
Engineering, research and development costs will continue to increase as
Sorrento intends to remain on the leading-edge of developing end to end optical
networking solutions for the metropolitan market.
General and administrative. General and administrative expenses increased to
$3.4 million, or 96.4% of net sales, for the quarter ended July 31, 2000 from
$811,000, or 55.2% of net sales, for the same three months ended last year. For
the six months ended July 31, 2000, general and administrative expenses
increased to $5.2 million, or 63.0% of net sales, from $1.5 million, or 24.5% of
net sales, for the six months ended July 31, 1999. The increase is primarily
attributable to professional fees and costs associated with our initial public
offering which was cancelled, increased personnel, increased infrastructure
costs necessary to support our planned growth and increased allowances for bad
debts. Sorrento increased its general and administrative personnel to 24 at July
31, 2000 from 12 at July 31, 1999.
Deferred and other stock compensation. Deferred and other stock compensation for
the quarter and six months ended July 31, 2000 includes $678,000 of amortization
of deferred stock compensation and $158,000 of expense resulting from the
amortization, over the vesting period, of the value of stock options granted to
consultants. In connection with the grants of stock options with exercise prices
determined to be below the fair value of our common stock on the date of grant,
Sorrento recorded deferred stock compensation of $2.6 million which is being
amortized on an accelerated basis over the vesting period of the options.
MERET OPTICAL COMMUNICATIONS
During the periods prior to January 31, 2000 Meret was an integral portion of
the "Optical Networking" business unit which also included Sorrento. As of
January 31, 2000, we separated Meret from the Optical Networking business
segment. For periods prior to January 31, 2000 amounts reported for the Meret
segment of our business may not be indicative of the results of operations that
would have resulted had Meret been operated as a stand-alone entity.
As part of this separation Meret relocated its Fremont, California facility to a
5,000 square foot facility under a three year lease which provides for monthly
rent of $7,000. The prior location was leased for $22,000 per month and was
18,000 square feet.
Net sales. Net sales for Meret increased slightly to $1.8 million, or 9.0%, for
the quarter ended July 31, 2000 from $1.6 million for the quarter ending July
31, 1999. During the six months ended July 31, 2000 net sales declIned slightly
to $3.4 million, or 8.4%, from $3.7 million for the comparable six months.
15
<PAGE>
Gross Profit. Gross profit increased to $728,000, or 82.5%, for the quarter
ended July 31, 2000 from $399,000 for the quarter ended July 31, 1999. Meret's
margins increased to 40.8% for the quarter ended July 31, 2000 from 24.4% for
the comparable quarter last year. During the six months ended July 31, 2000
Meret's gross profit increased to $1.7 million, or 24.4%, from $1.3 million for
the six months ended July 31, 1999. Meret's margins increased to 48.5% for the
six months ended July 31, 2000 from 35.7% for the six months ended July 31,
1999. These increases in gross margin reflect a shift in Meret's product mix
towards higher margin items.
Selling and Marketing. Selling and marketing expenses decreased to $105,000, or
5.9% of net sales, for the quarter ended July 31, 2000 from $167,000, or 10.2%
of net sales, for the comparable period last year. For the six months ended July
31, 2000, selling and marketing expenses decreased to $285,000, or 8.3% of net
sales, from $425,000, or 11.3% of net sales, for the six months ended July 31,
1999. Travel and advertising expenses decreased as Meret focused its selling and
marketing efforts to support only the Meret product group. We anticipate
increased expenditures during the remainder of the fiscal year to support
expected growth of Meret's business.
Engineering, Research and Development. Meret incurred engineering expenses
during the quarter and six months ended July 31, 2000 of $59,000 and $87,000,
respectively. No engineering expenses were incurred during the three and six
months ended July 31, 1999. After Meret's separation from the Optical Networking
segment, we increased engineering expenditures to update older products and we
will continue to increase engineering spending through the fiscal year to
support existing as well as new products.
General and Administrative. Our general and administrative expenses increased to
$96,000 for the quarter ended July 31, 2000 and to $138,000 for the six months
ended July 31, 1999. General and administrative expenses increased due to our
separation from the Optical Networking business unit and to build an
infrastructure to support our expected future growth.
Other operating expenses. Other operating expenses of $93,000 and $186,000 for
the quarter and six months ended July 31, 2000 remained unchanged compared to
the same periods ended July 31, 1999. These costs represent the amortization of
purchased technology related to prior acquisitions.
ENTRADA NETWORKS
On August 31, 2000, we completed a merger of Entrada with Sync Research, Inc.
("Sync"), a Nasdaq listed company in which we received 4,244,155 shares of the
merged entity which changed its name to Entrada Networks, Inc. and changed its
symbol to ESAN. We purchased 93,900 shares of Sync in the open market during
June and July, 2000 for $388 and on August 30, 2000 purchased an additional
1,001,818 shares directly from Entrada for $3,306. After these transactions we
own 48.9% of Entrada Networks and will account for our interest on the equity
method after August 31, 2000.
During July, 2000, in anticipation of this merger Entrada established its
headquarters at a 19,000 square foot facility in San Diego, California under a
66 month lease which provides for monthly rent of $18,000.
Net sales. Net sales for Entrada Networks declined to $6.0 million , or 8.3%,
for the quarter ended July 31, 2000 from $6.6 million for the quarter ended July
31, 1999. Net sales were $9.8 million for the six months ended July 31, 2000
compared to $13.0 million for the six months ended July 31, 1999. Sales to OEM's
of networking adapter products increased, however this increase was more than
offset by a decrease in sales to distributors of remote access and print server
products, reflecting Entrada's focus on OEM business and roll-out of its new
generation products
Gross profit. Gross profit decreased to $2.3 million for the quarter ended July
31, 2000 from $2.9 million for the comparable quarter last year. Gross profit
decreased to $658,000, inclusive of a $2.7 million inventory valuation
adjustment, for the six months ended July 31, 2000 from $5.5 million for the
comparable period last year. Gross Entrada's gross margin, excluding the
valuation adjustment, decreased to 38.8% and 35.8%, respectively, for the three
and six months ended July 31, 2000 as compared to 44.5% and 41.9% for the
comparable periods 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.
16
<PAGE>
Selling and marketing. Sales and marketing expenses remained constant at $1.3
million, or 21.8% of net sales for the quarter ended July 31, 2000 and 20.0% of
net sales for the quarter ended July 31, 1999. Sales and marketing expenses were
$2.4 million, or 24.1% of net sales, for the six months ended July 31, 2000 as
compared to $2.5 million, or 18.9% of net sales, for the comparable period last
year. During May, 2000 Entrada reduced its selling and marketing personnel by 12
as a result of the closure of its Massachusetts facility as well as personnel
reductions in anticipation of its merger with Sync.
Engineering, research and development, Engineering, research and development
expenses increased slightly to $1.1 million, or 18.3% of net sales, for the
quarter ended July 31, 2000 as compared to $1.1 million, or 16.0% of net sales,
for the quarter ended July 31, 1999. Cost savings achieved through the
consolidation of our facilities were offset by increased new product development
costs. Engineering, research and development expenses increased to $2.8 million,
or 28.3% of net sales, for the six months ended July 31, 2000 as compared to
$2.3 million, or 17.7% of net sales, for the six months ended July 31, 1999.
This increase was primarily the result of a $434,000 reduction of capitalized
software development costs caused by changing market conditions.
General and administrative. General and administrative expenses decreased
slightly to $541,000, or 9.0% of net sales, for the quarter ended July 31, 2000
from $542,000 or 8.2% of net sales, for the quarter ended July 31, 1999. General
and administrative expenses decreased to $1.1 million, or 11.0% of net sales,
for the six months July 31, 2000 from $1.2 million, or 9.5% of net sales, for
the six months ended July 31, 1999. Entrada consolidated its facilities as
well as eliminated 37,000 square feet of unused space leased at its Annapolis
Junction, Maryland facility.
Other operating expenses. Other operating expenses for the six months 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.
NETSILICON
The results of NSI are no longer included in our consolidated results for the
quarter and six months ended July 31, 2000. Additional information regarding the
Company 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
July 31, 2000, our working capital was $230.8 million including $21.4 million in
cash and cash equivalents.
The amounts included in our statement of cash flows for the six months ended
July 31, 2000 are not comparable to our months ended July 31, 1999 amounts due
to the inclusion of NETsilicon for only six months ended July 31, 1999. Readers
should refer to NETsilicon's quarterly reports on Form 10-Q for information
concerning NETsilicon.
Our continuing operations used cash flows of $31.0 million during the six months
ended July 31, 2000. During the six months ended July 31, 1999 continuing
activities provided cash flows of $316,000 and discontinued operations used cash
of $925,000. The increase in cash flows used by operations reflects a
substantial increase in our net loss as well as increases in accounts
receivable, inventories and short-term commercial paper, partially offset by
increases in accrued expenses. The increased loss from continuing operations
reflects our continued commitment to grow Sorrento Networks.
17
<PAGE>
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 $4.9 million of receivables, including deployment
expenses, during the six months ended July 31, 2000 for this customer. During
the six months ended April 30, 2000 and 1999 we made sales of $3.2 million and
$1.9, respectively, and reimbursed deployment expenses of $409,000 to this
customer during the six months ended July 31, 2000.
Our investing activities during the six months ended July 31, 2000 used cash
flows of $9.0 million. We purchased property and equipment of $7.1 million and
invested $2.0 million in a Sorrento customer. During the six months ended
July 31, 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. In June, 2000, we
entered in a purchase contract for a 41,000 square facility immediately adjacent
to our San Diego, California facility. The purchase price is $4,805 of which
$2,378 was paid prior to July 31, 2000 and we will assume the existing
indebtedness of $2,427.
Our financing activities during the six months ended July 31, 2000 provided cash
flows of $47.8 million which consisted primarily of $46.6 million in net
proceeds from a private placement by Sorrento of its convertible preferred stock
and $2.3 million in proceeds from option and warrant exercises offset by
repayments of short and long term debt. During the six months ended July 31,
1999 the financing activities of our continuing operations provided cash flows
of $6.0 million which consisted primarily of $4.7 million in proceeds from short
and long term debt and $1.6 million from option and warrant exercises.
We have various lines of credit totaling $15.0 million. Outstanding borrowings
against these lines of credit were $4.6 million at July 31, 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.
18
<PAGE>
On August 30, 2000, we completed a merger of Entrada with Sync Research, Inc.
("Sync"), a Nasdaq listed company in which we received 4,244,155 shares of the
merged entity which changed its name to Entrada Networks, Inc. and changed its
symbol to ESAN. We purchased 93,900 shares of Sync in the open market during
June and July, 2000 for $388 and on August 30, 2000 purchased an additional
1,001,818 shares directly from Entrada for $3,306. After these transactions we
own 48.9% of Entrada Networks and will account for our interest on the equity
method after August 30, 2000.
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.
The Financial Accounting Standards Board issued Interpretation ("FIN")
No. 44, "Accounting for Certain Transactions involving Stock Compensation", an
Interpretation of APB Opinion No. 25, FIN 44 clarifies the application of
Opinion No. 25 for (a) the definition of an employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as
a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 2, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of this standard had no material effect, if any, on our financial
position or results of operations.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 101,
Revenue Recognition ("SAB 101") which broadly addresses how companies report
revenues in their financial statements effective the fourth fiscal quarter of
years beginning after December 31, 1999. We are currently evaluating the effect,
if any, of the adoption of this policy on our financial position or results of
operations.
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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.
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
We settled the pending consolidated class action case filed against us. 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 and second fiscal quarter 2000; 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 Networks;
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.
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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 4, 2000, the we entered into a settlement of the consolidated
shareholder class actions pending in Federal district court in Los Angeles
against us and certain present and former officers. The settlement, which was
entered into without any admission of liability by any of the defendants,
provides that, among other things, all claims against the all defendants shall
be dismissed. The settlement also provides for an aggregate cash payment to
class members of $3.75 million, plus accrued interest from September 1, 2000, if
any, less approved attorneys' fees and related expenses. The settlement will be
funded by our insurance carrier, and did not have a material adverse effect on
our financial position or results of operations. The court granted preliminary
approval to the settlement on August 8, 2000, notice to the class members has
been made and a hearing for final approval of the settlement is scheduled for
October 23, 2000.
The lawsuit, entitled In re Osicom Technologies, Inc. Securities Litigation,
Master File No. CV-99-4321-R, was filed on August 20, 1999 against, our Chief
Executive Officer, our President and our former Chief Financial Officer in the
United States District Court for the Central District of California. The
consolidated complaint generally alleged that, during the period July 1, 1998 to
April 20, 1999, 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 asserted that the defendants' conduct
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and
SEC Rule 10b-6 promulgated thereunder, as well as state common law. The
consolidated complaint did not specify an amount of damages.
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
-------------------
June 12, 2000 Resignation of Chairman and Chief Executive Officer
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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: September 15, 2000
--------------------------------
Christopher E. Sue,
Vice President Finance
Principal Accounting Officer
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