SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 0-23125
___________________________________
OSI SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 33-0238801
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
12525 Chadron Avenue
Hawthorne, California 90250
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 978-0516
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 as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
YES X N0
--- ---
As of May 5, 1998 there were 9,683,965 shares of common stock outstanding.
OSI SYSTEMS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1998 3
and June 30, 1997 (Unaudited)
Consolidated Statements of Operations for the three and nine months 4
ended March 31, 1998 and March 31, 1997
(Unaudited)
Consolidated Statements of Cash Flows for the nine months 5
ended March 31, 1998 and March 31, 1997
(Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 13
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
March 31 June 30
1998 1997
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $23,007 $ 553
Accounts receivable, net of allowance for doubtful accounts of $650 and $586
at March 31, 1998 and June 30, 1997, respectively 25,107 15,556
Other receivables 1,463 2,346
Inventory 23,395 18,517
Prepaid expenses 928 537
Deferred income taxes 748 874
------- -------
Total current assets 74,648 38,383
------- -------
Property and Equipment, Net 6,957 5,841
Intangible and Other Assets, Net 2,696 3,109
------- -------
Total $84,301 $47,333
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank lines of credit $ 0 $ 9,100
Current portion of long-term debt 636 1,240
Accounts payable 8,903 7,712
Accrued payroll and related expenses 2,288 1,607
Income taxes payable 2,204 1,804
Advances from customers 2,075 2,410
Other accrued expenses and current liabilities 3,934 3,710
------- -------
Total current liabilities 20,040 27,583
Long-Term Debt 436 2,840
Deferred Income Taxes 83 101
------- -------
Total liabilities 20,559 30,524
Shareholders' Equity
Preferred stock, no par value; authorized, 10,000,000 shares; none issued and
outstanding at March 31, 1998 and June 30, 1997, respectively
Common stock, no par value; authorized, 40,000,000 shares; issued and outstanding
9,682,465 and 6,156,528 shares at March 31, 1998 and June 30, 1997, respectively 48,800 7,367
Retained earnings 15,044 9,171
Cumulative foreign currency translation adjustment (102) 271
------- -------
Total shareholders' equity 63,742 16,809
------- -------
Total $84,301 $47,333
======= =======
See accompanying notes to consolidated financial statements
-3-
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
Three months ended March 31, Nine months ended March 31,
---------------------------- ---------------------------
1998 1997 1998 1997
-------- --------- --------- -------
Revenues $21,893 $20,880 $69,139 $55,973
Cost of goods sold 15,366 15,210 49,198 40,380
------- ------- ------- -------
Gross profit 6,527 5,670 19,941 15,593
Operating expenses:
Selling, general and administrative 3,106 2,760 9,498 8,183
Research and development 995 584 2,795 1,737
Stock option compensation 856 856
------- ------- ------- -------
Total operating expenses 4,101 4,200 12,293 10,776
------- ------- ------- -------
Income from operations 2,426 1,470 7,648 4,817
Interest expense (income), net (303) 209 (261) 900
------- ------- ------- -------
Income before provision for income taxes 2,729 1,261 7,909 3,917
Provision for income taxes 667 316 2,036 983
------- ------- ------- -------
Net income $ 2,062 $ 945 $ 5,873 $ 2,934
======= ======= ======= =======
Earnings per common share $ 0.21 $ 0.39 $ 0.69 $ 1.22
======= ======= ======= =======
Earnings per common share - assuming dilution $ 0.21 $ 0.15 $ 0.68 $ 0.48
======= ======= ======= =======
See accompanying notes to consolidated financial statements
-4-
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended March 31,
--------------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Net income $ 5,873 $ 2,934
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for losses on accounts receivable 54 97
Deferred income taxes 93 (1,014)
Depreciation and amortization 1,898 1,686
Stock option compensation 0 856
Changes in operating assets and liabilities:
Accounts receivable (9,959) (1,582)
Other receivables 878 (827)
Inventory (5,975) (1,444)
Prepaid expenses (402) (32)
Accounts payable 1,509 980
Accrued payroll and related expenses 720 (80)
Income taxes payable 526 960
Advances from customers (336) 1,771
Other accrued expenses and current liabilities 425 806
------- -------
Net cash (used in) provided by operating activities (4,696) 5,111
------- -------
Cash flows from investing activities:
Additions to property and equipment (2,607) (1,530)
Cash paid for business acquisition, net of
cash acquired 0 (302)
Other assets 164 135
------- -------
Net cash used in investing activities (2,443) (1,697)
------- -------
Cash flows from financing activities:
Net repayment of bank lines of credit (9,409) (1,363)
Payment on senior subordinated debt 0 (350)
Payments on long-term debt (2,573) (3,399)
Proceeds from issuance of long-term debt 2,646
Proceeds from issuance of stock 41,338 79
------- -------
Net cash provided by (used in) financing activities 29,356 (2,387)
------- -------
Effect of exchange rate changes on cash 237 4
------- -------
Net increase in cash and cash equivalents 22,454 1,031
Cash and cash equivalents, beginning of period 553 581
------- -------
Cash and cash equivalents, end of period $23,007 $ 1,612
======= =======
Supplemental disclosures of cash flow information - Cash paid during the period for:
Interest $ 413 $ 902
Income taxes $ 1,540 $ 1,261
During the period ended March 31, 1997, certain related parties converted $225
and $2,500 of senior subordinated debt into 120,536 and 1,250,000 shares of
common and preferred stock, respectively.
See accompanying notes to consolidated financial statements
-5-
OSI SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - OSI Systems, Inc. and its subsidiaries (collectively, the "Company")
is a vertically integrated worldwide provider of devices, subsystems and end-
products based on optoelectronic technology. The Company designs and
manufactures optoelectronic devices and value-added subsystems for original
equipment manufacturers in a broad range of applications, including security,
medical diagnostics, telecommunications, gaming, office automation, aerospace,
computer peripherals and industrial automation. In addition, the Company
utilizes its optoelectronic technology and design capabilities to manufacture
security and inspection products that it markets worldwide to end users under
the "Rapiscan" brand name. These products are used to inspect people, baggage,
cargo and other objects for weapons, explosives, drugs and other contraband.
Consolidation - The consolidated financial statements include the accounts of
OSI Systems, Inc. and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The consolidated balance sheet as of March 31, 1998, the consolidated statements
of operations for the three-month and nine-month periods ended March 31, 1998
and 1997 and the consolidated statements of cash flows for the nine month
periods ended March 31, 1998 and 1997 have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (the "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. However, in the opinion of management all adjustments,
consisting of only normal and recurring adjustments, necessary for a fair
presentation of the financial position and the results of operations for the
periods presented have been included. These consolidated financial statements
and the accompanying notes should be read in conjunction with the audited
consolidated financial statements and accompanying notes for the fiscal year
ended June 30, 1997 included in the Company's Registration Statement on Form S-1
as filed with the Commission on October 1, 1997. The results of operations for
the nine months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the fiscal year ending June 30, 1998.
Inventory - Inventory is stated at the lower of cost or market; cost is
determined on the first-in, first-out method.
-6-
Inventory at March 31, 1998 and June 30, 1997 consisted of the following (in
thousands):
MARCH 31, JUNE 30,
1998 1997
Raw Materials..... $12,697 $11,408
Work-in-process... 6,204 4,224
Finished goods.... 4,494 2,885
------- -------
Total.......... $23,395 $18,517
======= =======
Earnings Per Share - Earnings per common share is computed using the weighted
average number of shares outstanding during the period. Earnings per common
share-assuming dilution, is computed using the weighted average number of shares
outstanding during the period and dilutive common stock equivalents from the
Company's stock option plans, and in the 1997 period common equivalent shares
from convertible debt and preferred stock, calculated using the treasury stock
method.
For the periods ending March 31, 1997, pursuant to Securities and Exchange
Commission Staff Accounting Bulletin Topic 4D, common stock and stock options
issued or granted during the twelve month period prior to the date of the
initial filing of the Company's Form S-1 Registration Statement have been
included in the calculation of the weighted average number of shares
(denominator), using the treasury stock method as if they were outstanding for
each period.
The following table reconciles the numerator and denominator used in calculating
earnings per common share and earnings per common share-assuming dilution.
-7-
For the Quarter ended March 31,
------------------------------------------------
1998 1997
------------ -------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator Amount (Numerator) (Denominator) Amount
Earnings per common share
Income available to
common stockholders $2,062,000 9,661,265 $0.21 $945,000 2,425,564 $0.39
========= ========
Effect of Dilutive Securities
Convertible subordinated debt 25,000 1,689,814
Convertible preferred stock 1,978,125
Options, treasury stock method 247,247 196,388
--------------------------- --------------------------
Earnings per common share assuming dilution
Income available to common
stockholders + assumed conversions $2,062,000 9,908,512 $0.21 $970,000 6,289,891 $0.15
================================== ===================================
For the Nine months ended March 31,
------------------------------------------------
1998 1997
------------ -------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator Amount (Numerator) (Denominator) Amount
Earnings per common share
Income available to
common stockholders $5,873,000 8,471,278 $0.69 $2,934,000 2,409,064 $1.22
======== ==========
Effect of Dilutive Securities
Convertible subordinated debt 92,000 1,692,861
Convertible preferred stock 1,978,125
Options, treasury stock method 184,451 173,593
--------------------------- --------------------------
Earnings per common share assuming dilution
Income available to common
stockholders + assumed conversions $5,873,000 8,655,729 $0.68 $3,026,000 6,253,643 $0.48
================================= ====================================
-8-
Recently Issued Accounting Pronouncements - In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 130, "Reporting for Comprehensive Income" and No. 131, "Disclosure about
Segments of an Enterprise and Related Information." These statements are
effective for financial statements issued for fiscal years beginning after
December 15, 1997. The Company has not yet analyzed the impact of adopting these
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CAUTIONARY STATEMENT
Statements in this report that are forward-looking are based on current
expectations, and actual results may differ materially. Forward-looking
statements involve numerous risks and uncertainties that could cause actual
results to differ materially, including, but not limited to, the possibilities
that the demand for the Company's products may decline as a result of possible
changes in general and industry specific economic conditions and the effects of
competitive pricing and such other risks and uncertainties as are described in
this report on Form 10-Q and other documents previously filed or hereafter filed
by the Company from time to time with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Revenues. Revenues increased by 4.9% to $21.9 million for the three months ended
March 31, 1998 compared to $20.9 million for the comparable prior year period.
For the nine months ended March 31, 1998, revenues increased by 23.5% to $69.1
million from $56.0 million in the comparable prior year period. Revenues for the
three months ended March 31, 1998 from security and inspection products were
$8.6 million, or approximately 39.2% of the Company revenues, and revenues from
optoelectronic devices and subsystems were $13.3 million or approximately 60.8%
of the Company revenues. Revenues for the nine months ended March 31, 1998 from
security and inspection products were $32.8 million or approximately 47.4% of
the Company revenues, and revenues from optoelectronic devices and subsystems
were $36.3 million or approximately 52.6% of the Company revenues. The increase
in revenues from sales of optoelectronic devices and subsystems for the quarter
and nine months ended March 31, 1998, both in absolute dollars and as a
percentage of total company revenues was due to an increase in sales to the
medical diagnostic and gaming industries and introduction of products that are
sold for use in the oil exploration field. The revenues from sales of security
and inspection products decreased in the quarter because of delayed shipments of
certain large cargo scanning machines. The increase for the nine month period
ended March 31, 1998 was due to an increase in sales of the Company's Rapiscan
Series 500 EPX Systems and continuing penetration in the security and inspection
products market.
-9-
For the three month and nine month periods ended March 31, 1998, overall foreign
currency fluctuations relative to the U.S. dollar had an immaterial effect on
the Company's consolidated revenues and results of operations. The Company
continues to perform ongoing credit evaluations of its customers' financial
condition and if deemed necessary requires advance payment for sales. The
Company is monitoring the currency situation in the Far East to evaluate whether
there may be any significant effect on sales to the Far East in the future.
Gross Profit. Cost of goods sold consists of material, labor and manufacturing
overhead. Gross profit increased by 15.1% to $6.5 million for the three months
ended March 31, 1998 compared to $5.7 million for the comparable prior year
period. For the nine months ended March 31, 1998 gross profit increased by 27.9%
to $19.9 million compared to $15.6 million for the comparable prior year period.
As a percentage of revenues, gross profit increased in the quarter and nine
months to 29.8% and 28.8% this year from 27.2% and 27.9% last year,
respectively. The increase in gross profit was due to increased sales and
increased efficiencies in manufacturing.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of compensation paid to sales, marketing, and
administrative personnel, and marketing expenses. For the three months ended
March 31, 1998, such expenses increased 12.5% to $3.1 million compared to $2.8
million for the comparable prior year period. For the nine months ended March
31, 1998, such expenses increased 16.1% to $9.5 million compared to $8.2 million
for the comparable prior year period. This increase was due primarily to an
increase in payroll expenses and marketing expenses to support revenue growth as
well as an increase in legal expenses related primarily to ongoing litigation
matters. As a percentage of revenues, selling, general and administrative
expenses increased in the quarter to 14.2% this year from 13.2% last year and
decreased in the nine month period to 13.7% this year from 14.6% last year.
Research and Development. Research and development expenses include research
related to new product development and product enhancement expenditures. For the
three months ended March 31, 1998, such expenses increased 70.4% to $995,000
compared to $584,000 for the comparable prior year period. For the nine months
ended March 31, 1998, such expenses increased 60.9% to $2.8 million compared to
$1.7 million for the comparable prior year period. As a percentage of revenues,
research and development expenses increased in the quarter and nine months to
4.5% and 4.0% this year from 2.8% and 3.1% last year, respectively. The increase
was due primarily to acceleration of certain research and development projects,
continued enhancement of Rapiscan series 500EPX systems, and increased efforts
to develop products for cargo scanning and optoelectronic devices and subsystems
products. The Company intends to continue increasing its research and
development expenditures in the future.
Income from Operations. Income from operations for the three and nine months
ended March 31, 1998, increased by $956,000 or 65.0% and $2.8 million or 58.8%
from $1.5 million and $4.8 million for the three and nine months ended March 31,
1997. Excluding
-10-
the non-recurring, non-cash incentive compensation expense of $856,000 incurred
in connection with the acceleration of the vesting period of stock options
granted to certain employees and officers during the period ended March 31,
1997, income from operations increased by $100,000 or 4.3% and $1.9 million or
34.8% from $2.3 million and $5.7 million for the three and nine months ended
March 31, 1998. As a percentage of revenues, income from operations increased in
the quarter and nine months to 11.1% and 11.1% this year from 7.0% and 8.6% last
year, respectively. Excluding the non-cash compensation expense discussed above,
income from operations for the three and nine months ended March 31, 1997 would
have been 11.1% and 10.1%, respectively.
Interest Expense. For the three months ended March 31, 1998, the Company earned
net interest income of $303,000 compared to net interest expense of $209,000 for
the three months ended March 31, 1997. Net interest income for the nine months
ended March 31, 1998 was $261,000 compared to a net interest expense of $900,000
for the comparable prior year period. The interest income was due to proceeds
from the initial public offering of the Company's common stock, in October 1997.
A portion of the proceeds was used to repay a majority of the Company's debt and
the remaining proceeds are invested in short-term investments.
Provision for Income Taxes. Provision for income taxes increased to $667,000 and
$2.0 million for the three months and nine months ended March 31, 1998,
respectively, from $316,000 and $983,000 for the comparable prior year periods
due to higher income before income taxes. As a percentage of income before
provision for income taxes, provision for income taxes decreased in the quarter
to 24.4% this year from 25.1% last year, and in the nine months increased to
25.7% this year from 25.1% last year.
Net Income. For the reasons outlined above, net income for the three months
ended March 31, 1998 increased 118.2% to $2.1 million compared to $945,000 for
the comparable prior year period, and net income for the nine months ended March
31, 1998 increased 100.2% to $5.9 million compared to $2.9 million for the
comparable prior year period. The non-cash compensation charge described above,
decreased net income by $514,000 in the three months and nine months ended March
31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations used net cash of $4.7 million during the nine months
ended March 31, 1998. The amount of net cash used by operations reflects
increases in accounts receivable, inventory, prepaid expenses and reductions in
advances from customers. Net cash used in operations was offset in part by a
reduction of other receivables and increases in accounts payable, income taxes
payables, accrued payroll and related expenses and other accrued expenses and
current liabilities. The increase in accounts receivable is due to an increase
in sales as well as the timing of shipments made upon completion of certain
contracts during the nine months ended March 31, 1998.
Net cash used in investing activities was $2.4 million and $1.7 million for the
nine
-11-
months ended March 31, 1998 and 1997, respectively, in each case due primarily
to purchases of property and equipment. In the period ended March 31, 1998, of
the total property and equipment purchases, approximately $708,000 was for the
purchase of equipment to manufacture products used in the oil exploration field
and in the period ended March 31, 1997, of the total purchases of property and
equipment, approximately $302,000 was for partial payment for the business
acquisition of the Company's Norwegian subsidiary.
Net cash provided by financing activities was $29.4 million for the nine months
ended March 31, 1998 compared to net cash used in financing activities of $2.4
million for the nine months ended March 31, 1997. During the nine months ended
March 31, 1998, net cash provided by financing activities resulted primarily
from the Company's initial public offering and was offset in part by repayment
of the majority of the Company's debt.
The Company anticipates that current cash balances, anticipated cash flows from
operations and current borrowing arrangements will be sufficient to meet its
working capital and capital expenditure needs for the foreseeable future.
Foreign Currency Translation. The accounts of the Company's operations in
Singapore, Malaysia, England and Norway are maintained in Singapore dollars,
Malaysian ringgits, U.K. pounds sterling and Norwegian krone, respectively.
Foreign currency financial statements are translated into U.S. dollars at
current rates, with the exception of revenues, costs and expenses, which are
translated at average rates during the reporting period. Gains and losses
resulting from foreign currency transactions are included in income, while those
resulting from translation of financial statements are excluded from income and
accumulated as a component of shareholder's equity. Net transaction (loss)/gains
of approximately ($40,000) and $9,000 were included in income for the nine
months ended March 31, 1998 and 1997, respectively.
Inflation. The Company does not believe that inflation has had a material impact
on its March 31, 1998 results of operations.
Year 2000. The Company is in the process of assessing Year 2000 issues as they
relate to its systems, business and operations, and at this time the Company
cannot make a determination of the impact, if any, of year 2000. At this time,
however, the Company has not made an assessment of the impact if any, of Year
2000 issues as they may relate to relationships with significant customers or
suppliers.
-12-
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27. Financial Data Schedule
b. Reports on Form 8-K
None
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, in the City of Hawthorne, State of
California on the 8th date of May 1998.
OSI Systems, Inc.
-----------------
By:___________________________
Deepak Chopra
President and
Chief Executive Officer
By:____________________________
Ajay Mehra
Vice President and
Chief Financial Officer
-13-
5
1,000
9-MOS
JUN-30-1998
JUL-01-1997
MAR-31-1998
23,007
0
25,107
0
23,395
74,648
6,957
0
84,301
24,040
436
0
0
48,800
14,942
84,301
69,139
69,139
49,198
49,198
12,293
0
(261)
7,909
2,036
5,873
0
0
0
5,873
0.69
0.68
