UNITED STATES
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 December 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 February 10, 1999 there were 9,715,540 shares of common stock outstanding.
OSI SYSTEMS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1998 3
and June 30, 1998 (Unaudited)
Consolidated Statements of Operations for the three and six months 4
ended December 31, 1998 and December 31, 1997
(Unaudited)
Consolidated Statements of Cash Flows for the six months 5
ended December 31, 1998 and December 31, 1997
(Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures about Market Risks 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 4 - Submission of Matter to a Vote of Security Holders 17
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 18
-2-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
December 31, June 30,
1998 1998
----------- --------
ASSETS
Current Assets:
Cash and cash equivalents $11,902 $22,447
Accounts receivable, net of allowance for
doubtful accounts of $906 and $551
at December, 31, 1998 and June 30, 1998,
respectively 27,857 24,254
Other receivables 3,104 1,990
Inventory 26,381 21,705
Prepaid expenses 1,173 841
Deferred income taxes 1,381 1,381
------- -------
Total current assets 71,798 72,618
Property and Equipment, Net 14,073 11,466
Other Assets:
Goodwill and other intangible assets, net 10,884 1,997
Other Assets 2,194 741
------- -------
Total $98,949 $86,822
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank lines of credit $11,811 $ 198
Current portion of long-term debt 739 633
Accounts payable 7,422 8,560
Accrued payroll and related expenses 2,377 2,400
Income taxes payable 2,083 2,517
Advances from customers 1,422 1,808
Accrued warranties 1,988 1,948
Other accrued expenses and current liabilities 3,244 2,137
------- -------
Total current liabilities 31,086 20,201
Long-Term Debt 130 412
Deferred Income Taxes 297 294
------- -------
Total liabilities 31,513 20,907
Shareholders' Equity
Preferred stock, no par value; authorized,
10,000,000 shares; none issued and
outstanding at December 31, 1998 and June 30,
1998, respectively
Common stock, no par value; authorized,
40,000,000 shares; issued and outstanding
9,712,540 and 9,691,915 shares at December 31,
1998 and June 30, 1998, respectively 49,182 49,131
Retained earnings 18,476 17,419
Cummulative foreign currency
translation adjustment (222) (635)
------- -------
Total shareholders' equity 67,436 65,915
------- -------
Total $98,949 $86,822
======= =======
See accompanying notes to consolidated financial statements
-3-
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three months ended December 31, Six months ended December 31,
------------------------------- -----------------------------
1998 1997 1998 1997
------------- -------------- ------------ -------------
Revenues $24,847 $24,285 $46,251 $47,246
Cost of goods sold 17,424 17,183 32,412 33,832
------- ------- ------- -------
Gross profit 7,423 7,102 13,839 13,414
Operating expenses:
Selling, general and administrative 3,548 3,293 6,937 6,392
Research and development 1,559 973 2,583 1,800
In-process research and development 2,579 2,579
------- ------- ------- -------
Total operating expenses 7,686 4,266 12,099 8,192
------- ------- ------- -------
Income / (loss) from operations (263) 2,836 1,740 5,222
Interest (income)/expense (83) (369) (250) 42
------- ------- ------- -------
Income / (loss) before provision for income taxes (180) 3,205 1,990 5,180
Provision for income taxes 423 835 933 1,369
------- ------- ------- -------
Net income / (loss) $ (603) $ 2,370 $ 1,057 $ 3,811
======= ======= ======= =======
Earnings per common share ($0.06) $0.25 $0.11 $0.48
======= ======= ======= =======
Earnings per common share -assuming dilution ($0.06) $0.24 $0.11 $0.46
======= ======= ======= =======
See accompanying notes to consolidated financial statements
-4-
OSI SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share amounts)
(unaudited)
Six months ended December 31,
------------------------------------------
1998 1997
-------- -------
Cash flows from operating activities:
Net income $ 1,057 $ 3,811
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for losses on accounts receivable 13 53
Deferred income taxes 100
Depreciation and amortization 1,568 1,295
Charge for in-process research and development 2,579
Changes in operating assets and liabilities:
Accounts receivable (2,511) (6,379)
Other receivables (993) 241
Inventory (740) (2,667)
Prepaid expenses (323) (314)
Accounts payable (1,604) 940
Accrued payroll and related expenses (761) 210
Income taxes payable (461) 620
Advances from customers (386) (298)
Accrued warranties (46) 171
Other accrued expenses and current liabilities 111 521
-------- -------
Net cash used in operating activities (2,497) (1,696)
-------- -------
Cash flows from investing activities:
Additions to property and equipment (2,291) (1,897)
Cash paid for business acquisitions, net of cash acquired (16,619)
Other assets (475) 54
-------- -------
Net cash used in investing activities (19,385) (1,843)
-------- -------
Cash flows from financing activities:
Net proceeds (repayment of) from bank lines of credit 11,783 (8,595)
Payments on long-term debt (399) (2,603)
Proceeds from issuance of stock 51 41,209
-------- -------
Net cash provided by financing activities 11,435 30,011
-------- -------
Effect of exchange rate changes on cash (98) 193
-------- -------
Net increase (decrease) in cash and cash equivalents (10,545) 26,665
Cash and cash equivalents, beginning of period 22,447 553
-------- -------
Cash and cash equivalents, end of period $ 11,902 $27,218
======== =======
Supplemental disclosures of cash flow information -
Cash paid (received) during the period for:
Interest $ (193) $ 393
Income taxes $ 1,315 $ 586
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 and silicon pressure-sensor micro-structure
technology. The Company designs and manufactures optoelectronic and silicon
pressure-sensor 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",
"Secure" and "Metor" brand names. These products are used to inspect people,
baggage, cargo and other objects for weapons, explosives, drugs and other
contraband. The Company has also moved into the field of manufacturing and
selling bone densitomers, which are used to provide bone loss measurements in
the treatment and diagnosis of osteoporosis.
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 December 31, 1998, the consolidated statements
of operations for the three-month and six-month periods ended December 31, 1998
and 1997 and the consolidated statements of cash flows for the six month periods
ended December 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, 1998 included in the Company's Annual Report on Form 10K as filed
with the Commission on September 28, 1998. The results of operations for the six
months ended December 31, 1998 are not necessarily indicative of the results to
be expected for the fiscal year ending June 30, 1999.
-6-
Acquisitions. On December 11, 1998, the Company acquired most of the assets and
assumed certain liabilities of a Canadian security products manufacturer for
approximately $476,000 in cash, including professional fees associated with the
acquisition.
On November 17, 1998, the Company acquired all the outstanding stock of Silicon
Microstructures, Inc. ("SMI"), a silicon pressure sensor manufacturer, from Exar
Corporation of Fremont, California. The Company paid $2.7 million in cash,
including professional fees associated with the acquisition. The Company may pay
up to an additional $3.9 million in cash, at a later date, based on future
sales. The acquisition has been accounted for by the purchase method of
accounting, and accordingly, based on the preliminary valuation, the purchase
price has been allocated to the assets acquired of $806,000, in-process research
and development of $418,000 and identified intangible assets of $1.5 million.
On November 4, 1998, the Company purchased the security products business of
Metorex International Oy ("Metorex Security") of Espoo, Finland. The Company
paid $4.7 million in cash, including professional fees associated with the
acquisition. The Company may pay up to an additional $1.5 million in cash, at a
later date, based on future sales. The acquisition has been accounted for by the
purchase method of accounting, and accordingly, based on the preliminary
valuation, the purchase price has been allocated to the assets acquired of
$914,000, in-process research and development of $204,000, and goodwill and
identified intangible assets of $3.6 million.
On September 2, 1998, the Company acquired all the outstanding capital stock of
Osteometer MediTech A/S ("Osteometer") a Danish manufacturer of bone
densitometers for diagnosing osteoporosis. The Company paid $7.9 million in
cash, including professional fees associated with the acquisition. The
acquisition has been accounted for by the purchase method of accounting, and
accordingly, based on the preliminary valuation, the purchase price has been
allocated to the assets acquired of $3.6 million, and liabilities assumed of
$1.7 million, in-process research and development of $2.0 million and identified
intangible assets of $4.0 million.
During the period ended September 30, 1998, the Company also made investments in
the aggregate amount of approximately $800,000 in cash, in two other businesses.
The results of operations for each of Osteometer, Metorex Security and SMI are
included in the Company's consolidated financial statements from their
respective dates of acquisition. The results of operations for the Canadian
acquisition are not included in the Company's consolidated statement of
operations because the acquisition occurred in December 1998, and did not have a
material effect on the Company's consolidated statements of operations for the
periods presented.
Had the acquisitions occurred as of July 1, 1997, pro forma revenues for the
quarter and six months ended December 31, 1998 and 1997 would have been as
follows (in thousands):
Quarter Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
$25,837 $28,450 $50,495 $55,901
Revenues ======= ======= ======= =======
As of December 31, 1998, reliable pro forma net income and earnings per common
share information is not available.
7
Inventory. Inventory is stated at the lower of cost or market; cost is
determined on the first-in, first-out method. Inventory at December 31, 1998 and
June 30, 1998 consisted of the following (in thousands):
December 31, June 30,
1998 1998
Raw Materials..... $12,585 $12,200
Work-in-process... 7,931 6,030
Finished goods.... 5,865 3,475
------- -------
Total.......... $26,381 $21,705
======= =======
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.
The following table reconciles the numerator and denominator used in calculating
earnings per common share and earnings per common share-assuming dilution.
-8-
For the Quarter ended December 31, 1998
--------------------------------------------------------------------------
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 ($603,000) 9,712,540 ($0.06) $2,370,000 9,571,540 $0.25
====== =====
Effect of Dilutive Securities
Options, treasury stock method 137,213 333,519
--------- ---------
Earnings per common share
assuming dilution
Income available to common
stockholder, assuming dilution ($603,000) 9,849,753 ($0.06) $2,370,000 9,905,059 $0.24
============================================ ===========================================
For the Six months ended December 31, 1998
--------------------------------------------------------------------------
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 $1,057,000 9,702,853 $0.11 $3,811,000 7,876,284 $0.48
====== =====
Effect of Dilutive Securities
Options, treasury stock method 150,178 330,277
--------- ---------
Earnings per common share
assuming dilution
Income available to common
stockholder, assuming dilution $1,057,000 9,853,031 $0.11 $3,811,000 8,206,561 $0.46
============================================ ===========================================
Comprehensive Income - In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 130 "Reporting for
Comprehensive Income" (SFAS No. 130), which the Company adopted in the first
quarter of fiscal 1999. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income is computed as follows (in
thousands):
For the Quarter ended For the Six months ended
December 31, 1998 December 31, 1998
1998 1997 1998 1997
----------------- ------------------
Net income ($603) $2,370 $1,057 $3,811
----------------- ------------------
Other comprehensive income,
net of taxes:
Foreign currency translation
adjustments (119) (138) (222) (331)
----------------- ------------------
Other comprehensive income (119) (138) (222) (331)
Comprehensive income ($722) $2,232 $ 835 $3,480
================= ==================
- 9 -
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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 2.3% to $24.8 million for the three months ended
December 31, 1998, compared to $24.3 million for the comparable prior year
period. For the six months ended December 31, 1998, revenues decreased by 2.1%
to $46.3 million from $47.2 million in the comparable prior year period.
Revenues for the three months ended December 31, 1998 from optoelectronic
devices, subsystems and medical imaging systems were $13.6 million or
approximately 54.8% of the Company's revenues and revenues from security and
inspection products were $11.2 million, or approximately 45.2% of the Company's
revenues. Revenues for the six months ended December 31, 1998 from
optoelectronic devices, subsystems and medical imaging systems were $27.3
million, or approximately 59.0% of the Company's revenues, and revenues from
security and inspection products were $19.0 million, or approximately 41.0% of
the Company's revenues. The increase in revenues from sales of optoelectronic
devices, subsystems and medical imaging systems for the quarter ended December
31, 1998 was primarily due to sales of medical imaging systems and silicon
pressure sensors through the recent acquisitions of Osteometer and SMI,
respectively. The increase in revenues from sales of optoelectronic devices,
subsystems and medical imaging systems for the six months ended December 31,
1998, was primarily due to an increase in sales to the medical diagnostic and
oil exploration industries. The decrease in revenues from the sale of security
and inspection products was due to the timing of shipment of certain large
orders and was offset in part by an increase in sales of walk-through metal
detection systems through the recent acquisition of Metorex Security.
Gross Profit. Cost of goods sold consists of material, labor and manufacturing
overhead. Gross profit increased by 4.5% to $7.4 million for the three months
ended December 31, 1998, compared to $7.1 million for the comparable prior year
period. For the six months ended December 31, 1998, gross profit increased by
3.2% to $13.8 million, compared to $13.4 million for the comparable prior year
period. As a percentage of revenues, gross profit increased in the quarter and
six months to 29.9% and 29.9% this year, from 29.2% and 28.4% last year,
respectively. The increase in gross profit was due to product mix and increased
efficiencies in manufacturing.
-10-
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of compensation paid to sales, marketing, and
administrative personnel, and professional service fees and marketing expenses.
For the three months ended December 31, 1998, such expenses increased 7.7% to
$3.5 million, compared to $3.3 million for the comparable prior year period. For
the six months ended December 31, 1998, such expenses increased 8.5% to $6.9
million, compared to $6.4 million for the comparable prior year period. The
increase in expenses was due primarily to the inclusion of Osteometer, Metorex
Security and SMI's selling, general and administrative expenses in the Company's
consolidated financial statements, of $839,000, from their respective dates of
acquisition, which was offset in part by a reduction in legal expenses due to
the settlement of certain material litigation (See Part II, Item I, Legal
Proceedings).
Research and Development. Research and development expenses include research
related to new product development and product enhancement expenditures. For the
three months ended December 31, 1998, such expenses increased 60.2% to $1.6
million, compared to $973,000 for the comparable prior year period. For the six
months ended December 31, 1998, such expenses increased 43.5% to $2.6 million,
compared to $1.8 million for the comparable prior year period. As a percentage
of revenues, research and development expenses increased in the three month and
six month periods to 6.3% and 5.6% this year, from 4.0% and 3.8% last year,
respectively. The increase was primarily due to the increase in personnel cost
resulting from the acquisitions of Osteometer, Metorex Security and SMI
amounting to $585,000, acceleration of certain research and development projects
and increased efforts to develop products for cargo scanning.
In-Process Research and Development. The Company used a total of $15.3 million
for the acquisitions of Osteometer, Metorex Security and SMI, including
professional fees associated with these acquisitions. Out of the total of $15.3
million, the Company incurred a total $2.6 million in in-process research and
development charges in the three months ended December 31, 1998, related to
these acquisitions. In September 1998, the Company acquired the assets,
including the developmental technology, and assumed liabilities, of Osteometer.
The Company paid $7.9 million in cash, including professional fees associated
with the acquisition. In November 1998, the Company acquired the assets,
including developmental technology, of Metorex Security. The Company paid $4.7
million in cash, including professional fees associated with the acquisition and
may pay up to $1.5 million in additional contingent purchase payments based on
future sales. Also in November 1998, the Company acquired the assets, including
the developmental technology, of SMI. The Company paid $2.7 million in cash,
including professional fees associated with the acquisition and may pay up to
$3.9 million in additional contingent purchase payments based on future sales.
Based on the preliminary valuation, the Company allocated the excess of the non-
contingent purchase price over the fair value of net tangible assets acquired to
goodwill and identified intangible assets. In performing this allocation, the
Company considered, among other factors, the attrition rate of the active users
of the technology at the date of acquisition and the research and development
projects in-process at the date of acquisition. With regard to the in-process
research and development projects, the Company considered, among other factors,
the stage of development of each project at
-11-
the time of acquisition, the importance of each project to the overall
development plan, and the projected incremental cash flows from the projects
when completed and any associated risks. Associated risks include the inherent
difficulties and uncertainties in completing each project and thereby achieving
technological feasibility and risks related to the impact of potential changes
in future target markets.
Income from Operations. For the three months ended December 31, 1998, the
Company incurred a loss from operations of $263,000 compared to income from
operations of $2.8 million for the three months ended December 31, 1997. Income
from operations for the six months ended December 31, 1998 was $1.7 million,
compared to $5.2 million for the comparable prior year period. Excluding the
non-recurring, in-process research and development charge of $2.6 million,
income from operations for the three months ended December 31, 1998 decreased
18.3% to $2.3 million, compared to $2.8 million for the comparable prior year
period. For the six months ended December 31, 1998, income from operations
decreased 17.3% to $4.3 million, compared to $5.2 million for the comparable
prior year period. Excluding the non-recurring, in-process research and
development charge, as a percentage of revenues, income from operations
decreased in the three month and six month periods to 9.3% and 9.3% this year,
from 11.7% and 11.1% in the three month and six month periods last year,
respectively. Income from operations decreased due to increased selling,
general and administration expenses and increased research and development
expenses.
Interest (Income) Expense. For the three months ended December 31, 1998, the
Company earned net interest income of $83,000, compared to $369,000 for the
three months ended December 31, 1997. For the six months ended December 31,
1998, the Company earned net interest income of $250,000, compared to net
interest expense of $42,000 for the six months ended December 31, 1997. For the
three months ended December 31, 1998, the reduction in net interest income was
due to a reduction in short term investments as $16.6 million was used to pay
for business acquisitions and professional fees associated with the
acquisitions. For the six months ended December 31, 1998, net interest income
was primarily a result of short term investments of the remaining proceeds of
the initial public offering of the Company's common stock in October 1997.
Provision for Income Taxes. Provision for income taxes decreased to $423,000
and $933,000 for the three months and six months ended December 31, 1998,
respectively, from $835,000 and $1.4 million for the comparable prior year
periods. Excluding the non-recurring, in-process research and development charge
of $2.6 million, as a percentage of income before provision for income taxes,
provision for income taxes was 17.6% and 20.4% for the three months and six
months ended December 31, 1998, respectively; and the provision for income taxes
was 26.1% and 26.4% for the same periods ending December 31, 1997,
respectively. The reduction in the Company's tax rate is primarily due to a one
year tax holiday in Malaysia for all applicable earnings for the fiscal year
ending June 30, 1999.
-12-
Net Income. For the reasons outlined above, including the non-recurring, in-
process research and development charge of $2.6 million, the Company incurred a
net loss of $603,000 for the three months ended December 31, 1998, compared to
net income of $2.4 million for the three months ended December 31, 1997. Net
income for the six months ended December 31, 1998 was $1.1 million, compared to
$3.8 million for the comparable prior year period. Excluding the non-recurring,
in-process research and development charge of $2.6 million, net income for the
three months ended December 31, 1998 decreased 16.6% to $2.0 million, compared
to $2.4 million for the comparable prior year period. Net income for the six
months ended December 31, 1998 decreased 4.6% to $3.6 million, compared to $3.8
million for the comparable prior year period.
Liquidity and Capital Resources
The Company's operations used net cash of $2.5 million during the six months
ended December 31, 1998. The amount of net cash used by operations reflects
increases in accounts receivable, other receivables inventory, prepaid expenses
and reductions in accounts payable, accrued payroll and related expenses, income
taxes payable and advances from customers. Net cash used in operations was
offset in part by an increase in other accrued expenses and current liabilities.
The increase in accounts receivable is mainly due to the timing of shipment of
certain large contracts.
Net cash used in investing activities was $19.4 million and $1.8 million for the
six months ended December 31, 1998 and 1997, respectively. In the six month
period ended December 31, 1998, net cash used in investing activities reflects
primarily cash used in business acquisitions and professional fees associated
with these acquisitions of $16.6 million, and the purchase of property and
equipment. In the six months ended December 31, 1997, the net cash used in
investing activities reflects primarily the purchase of property and equipment.
Net cash provided by financing activities was $11.4 million and $30.0 million
for the six months ended December 31, 1998 and 1997, repectively. During the six
months ended December 31, 1998, net cash provided by financing activities
resulted primarily from borrowings under the Company's acquisition and working
capital lines of credit. For the six months ended December 31, 1997, net cash
provided by financing activities resulted primarily from the Company's initial
public offering in October 1997 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, Norway, Denmark and Finland are maintained in
Singapore dollars, Malaysian ringgits, U.K. pounds sterling, Norwegian kroner,
Danish kroner and Finnish marks, respectively. Foreign currency financial
statements are translated into U.S. dollars
-13-
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
(losses)/gains of approximately ($284,000) and $67,000 were included in income
for the six months ended December 31, 1998 and 1997, respectively.
Inflation. The Company does not believe that inflation has had a material impact
on its results of operations for the six months ended December 31, 1998.
Market Risk. The Company is exposed to certain market risks, which are inherent
in the Company's financial instruments and arise from transactions entered into
in the normal course of business. The Company may enter into derivative
financial instrument transactions in order to manage or reduce market risk in
connection with specific foreign currency denominated transactions. The Company
does not enter into derivative financial instrument transactions for speculative
purposes. A discussion of the Company's primary market risk disclosure in
financial instruments is presented below and should be read in conjunction with
the forward-looking statement included herein.
The Company is subject to interest rate risk on its short-term borrowings under
its bank lines of credit. Borrowings under these lines of credit do not give
rise to significant interest rate risk because these borrowings have short
maturities and are borrowed at variable interest rates. Historically, the
Company has not experienced material gains or losses due to interest rate
changes.
The Company from time to time enters into foreign currency forward contracts to
hedge certain foreign currency transactions and commitments. These contracts
were not significant at December 31, 1998 and had a notional value of
approximately $203,000 with a net unrealized gain of approximately $9,000.
Year 2000 Compliance
The Company has a comprehensive Year 2000 project designed to identify and
assess the risks associated with its information systems, products, operations
and infrastructure, suppliers, and customers that are not Year 2000 compliant,
and to develop, implement, and test remediation and contingency plans to
mitigate these risks. The project comprises of four phases: (1) identification
of risks, (2) assessment of risks, (3) development of remediation and
contingency plans, and (4) implementation and testing.
The Company's Year 2000 project is currently in the assessment phase and, with
respect to certain information systems and products, is in the remediation
phase. The Company's Year 2000 project is being spearheaded by a special task
force comprised of a senior management team as well as other key personnel. The
task force meets on a regular basis to determine and implement the steps
necessary to insure that the Company becomes fully Year 2000 compliant.
The Company has upgraded its critical database and believes that it is Year 2000
compliant. The financial records of the Company's principal U.S. subsidiaries,
Rapiscan Security Products (U.S.A.), Inc. ("Rapiscan") and UDT Sensors, Inc.
("UDT") have also been upgraded and are Year 2000 compliant. Following an
assessment of the Company's financial records system, it was determined that
each subsidiary will have its own Year 2000 compliant system. The estimated
completion date for this implementation is on or before September 30, 1999. The
Company has completed an upgrade of the telephone systems, including voice-mail
software, for Rapiscan and UDT. The cost of these upgrades to date has not been
material. The Enterprise Resource Planning software used by several of the
Company's operating subsidiaries has been certified as Year 2000 compliant.
The Company is in the assessment and remediation phase of determining Year 2000
compliance of its own products, which are dependent on third party suppliers and
vendors for critical parts. The Company expects to complete this assessment by
June 30, 1999 and expects to be able to complete remediation as required by
September 30, 1999. Based on
-14-
what the Company knows at this time, DOS and Windows 95 are not Year 2000
compliant; therefore, the Company's products which rely on these products are
themselves not Year 2000 compliant. The Company is in the process of acquiring
and installing software which is Year 2000 compliant. The Company's products
which are not presently Year 2000 compliant are not affected in terms of
performance in any material respect; however archiving of information may be
affected by Year 2000 noncompliance. The Company's exposure is with respect to
its products under warranty, which were manufactured prior to the software
upgrade. In such cases, the Company would offer its customers a software upgrade
to a Year 2000 compliant version. Until the assessment phase is completed, the
Company is not in a position to know if the costs of upgrading the software used
in the manufacture of it products or offering its customers such upgrading will
be material.
Based on current estimates, the Company expects to have completed by June 30,
1999 a full assessment of all hardware, operating systems and software
applications in use on a worldwide basis. Some upgrading is expected to be
required. The costs of such assessment and upgrading are not expected to be
material. Required upgrading is expected to be completed on or before September
30, 1999. In addition, the Company is in the process of obtaining Year 2000
compliance statements from the manufacturers of the Company's hardware and
software products.
The Company believes that its greatest potential risks are associated with (i)
its information systems and systems embedded in its operations and
infrastructure; and (ii) its reliance on Year 2000 compliance by the Company's
vendors and suppliers. The Company is at the beginning stage of assessments for
its operations and infrastructure, and cannot predict whether significant
problems will be identified. The Company is asking its critical vendors,
suppliers and customers to complete a Year 2000 survey to assess the status of
their compliance in order to assess the effect it could have on the Company. The
Company has completed distribution of such surveys to most of its critical
vendors and suppliers and expects to complete distribution of surveys to such
vendors and suppliers by March 31, 1999. The Company expects that surveys to all
of its critical customers will be distributed by April 30, 1999. The Company has
not yet determined the full extent of contingency planning that may be required.
Based on the status of the assessments made and remediation plans developed to
date, the Company is not in a position to state the total cost of remediation of
all Year 2000 issues. Costs identified to date have not been material. The
Company does not currently expect the costs to be material, and it expects to be
able to fund the total costs through operating cash flows. However, the Company
has not yet completed its assessments, developed remediation for all problems,
developed any contingency plans, or completely implemented or tested any of its
remediation plans.
Based on the Company's current analysis and assessment of the state of its Year
2000 compliance, the Company's most reasonably likely worst case scenario
involves delays in shipping of parts, including critical parts, by certain of
the Company's vendors and suppliers. Such delays could cause the Company to
experience delays in shipping its products. Specific contingency plans will be
formulated after the Company has received
-15-
compliance surveys back from its vendors and suppliers but could include, among
other things, increasing inventory of critical parts in late 1999 to insure an
adequate supply is on hand to minimize shipping delays by the Company of its
products.
As the Year 2000 project continues, the Company may discover additional Year
2000 problems, may not be able to develop, implement, or test remediation or
contingency plans, or may find that the costs of these activities exceed current
expectations and become material. In many cases, the Company is relying on
assurances from suppliers that new and upgraded information systems and other
products will be Year 2000 compliant. The Company plans to test such third-party
products, but cannot be sure that its tests will be adequate or that, if
problems are identified, they will be addressed in a timely and satisfactory
way. Because the Company uses a variety of information systems and has
additional systems embedded in its operations and infrastructure, the Company
cannot be sure that all of its systems will work together in a Year 2000
compliant fashion. Furthermore, the Company cannot be sure that it will not
suffer business interruptions, either because of its own Year 2000 problems or
those of its customers or suppliers whose Year 2000 problems may make it
difficult or impossible for them to fulfill their commitments to the Company. If
the Company fails to satisfactorily resolve Year 2000 issues related to its
products in a timely manner, it could be exposed to liability to third parties.
The Company is continuing to evaluate Year 2000-related risks and will take such
further corrective actions as may be required.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
The information required by this item is incorporated herein by reference to the
section entitled "Market Risk" in Management's Discussion and Analysis of
Results of Operations and Financial Condition (Part I, Item 2).
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On January 21, 1997, Rapiscan filed a complaint in the U.S. District Court for
the Central District of California against Lunar Corporation ("Lunar") in
response to claims by Lunar that certain security inspection products produced
by Rapiscan infringe U.S. Patent No. 4,626,688 (the `688 patent"), which patent
is owned by the University of Alabama Research Foundation (`UAB") and licensed
exclusively to Lunar. The complaint sought a declaratory judgment that the
products produced by Rapiscan do not infringe the `688 patent, that the `688
patent is invalid, and that the patent may not be enforced against Rapiscan for
a number of equitable and legal reasons. The complaint also asserted related
non-patent claims including fraud and the breach of an oral agreement whereby
Lunar would compensate Rapiscan for assisting Lunar in its enforcement of the
`688 patent and sought compensatory and punitive damages for these claims.
-16-
On January 23, 1997, Lunar and UAB filed suit against OSI Systems, Inc. ("OSI"),
Rapiscan and UDT in the U.S. District Court for the Western District of
Wisconsin. Lunar and UAB asserted patent infringement, contributory infringement
and inducement thereof. Lunar and UAB sought damages in an unspecified amount
and an injunction preventing OSI, Rapiscan and UDT from further making, using,
selling and offering for sale products including the dual energy detector
allegedly covered by the `688 patent. The Wisconsin lawsuit was transferred to
the U.S. District Court for the Central District of California and was
consolidated with the lawsuit brought by Rapiscan.
On August 31, 1998, the parties participated in a mandatory settlement
conference. In December 1998, the parties entered into a settlement agreement,
pursuant to the terms of which, among other things, payments were made by the
parties to each other, resulting in a net payment to the Company of $400,000.
As a part of the settlement, the parties entered into a license agreement
pursuant to which OSI, Rapiscan and UDT were granted a fully paid up worldwide,
nonexclusive license under the `688 patent and U.S. Patent No. 5,138,167 (the
"'167 patent") in the non-medical field.
Prior to the Company's acquisition of Osteometer in September 1998, Osteometer
had also been involved in litigation with Lunar and UAB regarding the `688 and
`167 patents. In December 1998, the parties to this litigation entered into a
settlement agreement. Osteometer received a covenant not to sue under the `688
and `167 patents and U.S. Patent No. 4,686,695. As a part of the settlement, the
parties entered into a license agreement pursuant to which Osteometer was
granted a worldwide, nonexclusive license under the `688 and `167 patents for
certain bone densitometers. Osteometer made an initial royalty payment of
$250,000 with respect to products manufactured prior to the entering into of
this license agreement and will make royalty payments on future sales of the
licensed products.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders on November 18, 1998, the following
actions were taken:
1. Election of Directors
Name For Withheld
---- --- --------
Deepak Chopra 8,037,338 6,550
Ajay Mehra 8,037,688 6,200
Steven C. Good 8,035,788 8,100
Meyer Luskin 8,038,188 5,700
Madan G. Syal 8,038,188 5,700
-17-
2. Approval and adoption of the Company's Employee Stock Purchase Plan
For 7,854,588
Against 174,700
Abstain 14,600
3. Ratification of Deloitte & Touche L.L.P. as independent auditors for the
year ending June 30, 1999.
For 8,006,675
Against 36,463
Abstain 750
Item 6. Exhibits and Reports of 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 16th day of February 1999.
OSI Systems, Inc.
-----------------
By:/s/ Deepak Chopra
___________________________
Deepak Chopra
President and
Chief Executive Officer
By:/s/ Ajay Mehra
____________________________
Ajay Mehra
Vice President and
Chief Financial Officer
-18-
5
1,000
6-MOS
JUN-30-1999
JUL-01-1998
DEC-31-1998
11,902
0
27,857
0
26,381
71,798
14,073
0
98,949
31,086
130
0
0
49,182
18,254
98,949
46,251
46,251
32,412
32,412
12,099
0
(250)
1,990
933
1,057
0
0
0
1,057
0.11
0.11
