10-Q 1 d10q.txt FORM 10-Q 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 March 31, 2001 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 10, 2001 there were 8,916,968 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 3 31, 2001 and June 30, 2000 Consolidated Statements of Operations 4 for the three and nine months ended March 31, 2001 and March 31, 2000 Consolidated Statements of Cash Flows 5 for the nine months ended March 31, 2001 and March 31, 2000 Notes to Consolidated Financial 6 Statements Item 2 - Management's Discussion and Analysis of 11 Financial Condition and Results of Operations PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 15 Signatures 15 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements OSI SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
March 31, June 30, 2001 2000 ------------ ------------- ASSETS Current Assets: Cash and cash equivalents $ 7,604 $ 10,892 Accounts receivable, net of allowance for doubtful accounts of $1,043 and $855 at March 31, 2001 and June 30, 2000, respectively 30,017 29,890 Current portion of note receivable 1,130 Other receivables 1,809 2,184 Inventory 31,756 30,920 Prepaids 1,720 821 Deferred income taxes 1,921 1,807 Income taxes receivable 253 193 -------------- -------------- Total current assets 76,210 76,707 Property and Equipment, Net 13,491 14,248 Intangible and Other Assets, Net 8,800 9,052 Deferred Income Taxes 3,016 3,016 -------------- -------------- Total $101,517 $103,023 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Bank lines of credit $ 3,532 $ 6,079 Current portion of long-term debt 2,663 2,641 Accounts payable 10,138 12,728 Accrued payroll and related expenses 2,879 2,270 Income taxes payable 3,687 1,586 Advances from customers 2,209 558 Accrued warranties 1,716 1,805 Other accrued expenses and current liabilities 3,208 3,141 -------------- -------------- Total current liabilites 30,032 30,808 Long-Term Debt 7,662 7,698 Deferred Income Taxes 162 164 Minority interest 146 -------------- -------------- Total liabilities 37,856 38,816 Shareholders' Equity Preferred stock, no par value; authorized, 10,000,000 shares; none issued and outstanding at March 31, 2001 and June 30, 2000, respectively Common stock, no par value; authorized, 40,000,000 shares; issued and outstanding 8,916,968 and 9,349,750 shares at March 31, 2001 and June 30, 2000, respectively 45,373 47,357 Retained earnings 21,173 18,787 Accumulated other comprehensive loss (2,885) (1,937) -------------- -------------- Total shareholders' equity 63,661 64,207 -------------- -------------- Total $101,517 $103,023 ============== ==============
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)
Three months ended March 31, Nine months ended March 31, ---------------------------- --------------------------- 2001 2000 2001 2000 ---------- ----------- ---------- ----------- Revenues $ 29,379 $ 31,776 $ 82,259 $ 83,238 Cost of goods sold 21,506 23,427 59,493 60,627 ---------- ---------- ---------- ---------- Gross profit 7,873 8,349 22,766 22,611 Operating expenses: Selling, general and administrative 5,258 4,928 16,458 15,166 Research and development 1,765 2,091 4,982 5,600 Goodwill amortization 132 134 389 398 Restrcuturing costs 1,898 ---------- ---------- ---------- ---------- Total operating expenses 7,155 7,153 21,829 23,062 ---------- ---------- ---------- ---------- Income (loss) from operations 718 1,196 937 (451) Interest expense, net 276 201 865 500 Gain on sale of subsidiary (2,967) (2,967) Gain on sale of marketable securities (309) ---------- ---------- ---------- ---------- Income (loss) before provision for income taxes and minority interest 3,409 995 3,039 (642) Provision (benefit) for income taxes 869 284 799 (29) ---------- ---------- ---------- ---------- Income (loss) before minority interest in net loss of subsidiary 2,540 711 2,240 (613) Minority interest in net loss of subsidiary 130 146 228 ---------- ---------- ---------- ----------- Net income (loss) $ 2,540 $ 841 $ 2,386 ($385) ========== ========== ========== =========== Earnings (loss) per common share $ 0.28 $ 0.09 $ 0.26 ($0.04) ========== ========== ========== =========== Earnings (loss) per common share,assuming dilution $ 0.28 $ 0.09 $ 0.26 ($0.04) ========== ========== ========== =========== Weighted average shares outstanding 9,007,468 9,310,074 9,209,289 9,384,155 ========== ========== ========== =========== Weighted average shares outstanding -assuming dilution 9,032,638 9,614,631 9,225,122 9,384,155 ========== ========== ========== ===========
See accompanying notes to consolidated financial statements -4- OSI SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Nine months ended March 31, --------------------------- 2001 2000 ---------- --------- Cash flows from operating activities: Net Income (loss) $ 2,386 ($385) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 3,359 3,110 Loss on sale of property and equipment 140 15 Deferred income taxes (244) (17) Gain on sale of subsidiary (2,967) Gain on sale of marketable securities available for sale (309) Minority interest in net loss of subsidiary (146) (228) Changes in operating assets and liabilities: Accounts receivable (2,161) (6,862) Other receivables 350 174 Inventory (4,254) (4,688) Prepaids (972) (467) Accounts payable (1,862) 4,152 Accrued payroll and related expenses 818 327 Income taxes payable 2,142 926 Income taxes receivable (36) 125 Advances from customers 1,670 (166) Accrued warranties (78) (108) Other accrued expenses and current liabilities 109 1,019 ----------- -------- Net cash used in operating activities (1,746) (3,382) ----------- -------- Cash flows from investing activities: Purchases of property and equipment (3,017) (2,350) Proceeds from sale of property and equipment 496 6 Proceeds from sale of marketable securities available for sale 2,505 (Increase) decrease in equity investments (121) 93 Cash received for business disposition, net of disposition costs 5,961 Cash paid for business acquisitions, net of cash acquired (442) (1,325) Cash received on note receivable 250 Other assets (201) (28) ----------- -------- Net cash provided by (used in) investing activities 2,926 (1,099) ----------- -------- Cash flows from financing activities: Net payment to bank lines of credits (2,506) (4,567) Net (payments) proceeds on long-term debt (7) 10,015 Proceeds from exercise of stock options and warrants 58 342 Purchase of treasury stock (2,042) (1,820) ----------- -------- Net cash (used in) provided by financing activities (4,497) 3,970 ----------- -------- Effect of exchange rate changes on cash 29 11 ----------- -------- Net decrease in cash and cash equivalents (3,288) (500) Cash and cash equivalents, beginning of period 10,892 7,241 ----------- -------- Cash and cash equivalents, end of period $ 7,604 $ 6,741 =========== ======== Supplemental disclosures of cash flow information - Cash paid/(received) during the period for: Interest $ 745 $ 467 Income taxes ($1,316) ($943)
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 and devices and value-added subsystems for original equipment manufacturers in a broad range of applications, including security, medical diagnostics, telecommunications, gigabit ethernet and fiber optics, 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 also manufactures and sells bone densitometers, which are used to provide bone loss measurements in the 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 March 31, 2001, the consolidated statements of operations for the three-month and nine-month periods ended March 31, 2001 and 2000 and the consolidated statements of cash flows for the nine month periods ended March 31, 2001 and 2000 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, 2000 included in the Company's Annual Report on Form 10K as filed with the Commission on September 27, 2000. The results of operations for the nine months ended March 31, 2001 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2001. Certain amounts related to the prior periods have been reclassified to confirm to the current year presentation. -6- Recent Developments - In August 2000, the Company acquired substantially all the assets of Square One Technology for total consideration consisting of: $228,000 in cash, a $30,000 advance for future royalties, the return of the Square One stock held by the Company with a carrying value of $259,000, and an agreement to pay royalties equal to ten percent of net sales of the Square One products in the next five years, up to a maximum of $1.0 million. The cash consideration of $228,000 approximates the fair value of the tangible assets acquired. In September 2000, the Company acquired an additional equity interest, representing approximately 10% of the ownership of OSI Medical Inc., for $183,000. This amount was recorded as goodwill based on the estimated fair value of the underlying net assets and is being amortized over a period of twenty years. With this additional equity investment, the Company increased its common stock ownership in OSI Medical Inc. to approximately 64%. The Company sold all of the outstanding stock of its wholly owned subsidiary, Silicon Microstructures, Inc. ("SMI") to Elmos Semiconductor AG of Germany for $6.0 million in cash. In connection with the transaction, the Company's UDT Sensors, Inc. ("UDT") subsidiary sold certain capital equipment to SMI for $462,000 in cash. The transaction was completed on March 31, 2001. The sale agreement also includes a three year commitment from UDT to supply four inch silicon foundry wafers to SMI and to dedicate limited manufacturing facilities to be used by SMI, for its etching operations. The total pre-tax gain on the transaction was $3.0 million. In April 2001, as a result of the acquisition of a company in which the Company had an equity investment of $300,000, the Company received a total consideration of $1.4 million. This resulted a pre-tax gain of $1.1 million and will be recorded in the quarter ending June 30, 2001. This consideration does not include a hold back of approximately $167,000. New Accounting Pronouncements - In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, Revenue Recognition In Financial Statements ("SAB 101"). SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The Company will adopt SAB 101 as required in the fourth quarter of fiscal 2001. The Company is currently evaluating the impact of adopting SAB 101, and does not expect it to have a material impact on the Company's financial position or result of operations. Effective July 1, 2000, the Company adopted FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133 requires that all derivative financial instruments, such as foreign exchange contracts, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized periodically in income or shareholders' equity (as a component of comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. The adoption of FAS 133 did not have a material effect on the Company's financial position or result of operations for the quarter and nine months ended March 31, 2001. Financial Instruments - The Company enters into forward foreign exchange contracts -7- principally to hedge currency fluctuation in transactions denominated in foreign currencies, thereby limiting the Company's risk that would otherwise result from changes in exchange rates. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions. The Company does not use the contracts for trading purposes. As of March 31, 2001, the total notional amount of all outstanding foreign currency contracts was $1.4 million. The estimated fair value of foreign currency contracts was not material. Inventory. Inventory is stated at the lower of cost or market; cost is determined on the first-in, first-out method. Inventory at March 31, 2001 and June 30, 2000 consisted of the following (in thousands): March 31, June 30, 2001 2000 Raw Materials.................... $15,403 $16,877 Work-in-process.................. 6,835 6,619 Finished goods................... 9,518 7,424 ------- ------- Total......................... $31,756 $30,920 ======= ======= 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 March 31, --------------------------------------------------------- 2001 2000 ------------- ------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount Earnings per common share Income available to common stockholders $2,540,000 9,007,468 $0.28 $ 841,000 9,310,074 $0.09 ======== ========== Effect of Dilutive Securities Options, treasury stock method 25,170 304,557 ------------------------- ----------------------------------------- Earnings per common share assuming dilution Income available to common stockholder, assuming dilution $2,540,000 9,032,638 $0.28 $841,000 9,614,631 $0.09 ====================================== =========================================
For the Quarter ended March 31, --------------------------------------------------------- 2001 2000 ------------- ------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount Earnings per common share Income (loss) available to common stockholders $2,386,000 9,209,289 $0.26 ($385,000) 9,384,155 ($0.04) ======== ========== Effect of Dilutive Securities Options, treasury stock method 15,833 ------------------------- ----------------------------------------- Earnings per common share assuming dilution Income (loss) available to common stockholder, assuming dilution $2,386,000 9,225,122 $0.26 ($385,000) 9,384,155 ($0.04) ====================================== =========================================
Comprehensive Income - Comprehensive income is computed as follows (in thousands):
For the quarter For the nine months ended March 31, ended March 31, 2001 2000 2001 2000 ------------------------- ------------------------- Net income (loss) $2,540 $ 841 $2,386 ($385) ------------------------- ------------------------- Other comprehensive income (loss), net of taxes: Foreign currency translation adjustments (850) (827) (948) (764) Unrealized gains on marketable securities available for sale 486 ------------------------- ------------------------- Other comprehensive income (loss) (850) (827) (948) (278) ------------------------- ------------------------- Comprehensive income (loss) $1,690 $ 14 $1,438 ($663) ========================= =========================
-9- Segment Information. The company's operating locations include the North America (United States and Canada), Europe (United Kingdom, Denmark, Finland and Norway) and Asia (Singapore and Malaysia). The company's operations by geographical areas are as follows (in thousands):
Three months ended March 31, 2001 ----------------------------------------------------------------- North America Europe Asia Eliminations Consolidated ----------------------------------------------------------------- Revenues $21,037 $ 6,786 $ 1,556 $ 29,379 Transfer between geographical areas $ 2,417 $ 1,001 $ 7,822 $(11,240) ----------------------------------------------------------------- Net revenues $23,454 $ 7,787 $ 9,378 $(11,240) $ 29,379 ================================================================= Income (loss) from operations $ (368) $ (79) $ 1,315 $ (150) $ 718 =================================================================
Nine months ended March 31, 2001 ----------------------------------------------------------------- North America Europe Asia Eliminations Consolidated ----------------------------------------------------------------- Revenues $57,643 $19,924 $ 4,692 $ 82,259 Transfer between geographical areas $ 6,952 $ 3,592 $21,366 $(31,910) ----------------------------------------------------------------- Net revenues $64,595 $23,516 $26,058 $(31,910) $ 82,259 ================================================================= Income (loss) from operations $(2,701) $ 803 $ 2,840 $ (5) $ 937 =================================================================
Three months ended March 31, 2000 ----------------------------------------------------------------- North America Europe Asia Eliminations Consolidated ----------------------------------------------------------------- Revenues $16,224 $12,934 $ 2,618 $ 31,776 Transfer between geographical areas $ 1,600 $ 1,511 $ 5,972 $ (9,083) ----------------------------------------------------------------- Net revenues $17,824 $14,445 $ 8,590 $ (9,083) $ 31,776 ================================================================= Income (loss) from operations $ (381) $ (513) $ 2,158 $ (68) $ 1,196 =================================================================
Nine months ended March 31, 2000 ----------------------------------------------------------------- North America Europe Asia Eliminations Consolidated ----------------------------------------------------------------- Revenues $46,506 $30,167 $ 6,565 $ 83,238 Transfer between geographical areas $ 5,803 $ 3,680 $16,618 $(26,101) ----------------------------------------------------------------- Net revenues $52,309 $33,847 $23,183 $(26,101) $ 83,238 ================================================================= Income (loss) from operations $(2,523) $(1,944) $ 4,866 $ (850) $ (451) =================================================================
-10- 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 consist of sales of optoelectronic and pressure sensor devices, medical imaging systems and security and inspection products. Revenues are recorded net of all inter-company transactions. Revenues decreased by 7.5% to $29.4 million for the three months ended March 31, 2001, compared to $31.8 million for the comparable prior year period. For the nine months ended March 31, 2001, revenues decreased by 1.2% to $82.3 million from $83.2 million for the comparable prior year period. Revenues for the three months ended March 31, 2001 from optoelectronic devices, value added subsystems and medical imaging systems, were $16.7 million, compared to $17.9 million for the comparable prior year period and revenues from security and inspection products were $12.7 million compared to $13.9 million for the comparable prior year period. Revenues for the nine months ended March 31, 2001 from optoelectronic devices, value added subsystems and medical imaging systems were $44.2 million, compared to $46.7 million for the comparable prior year period and revenues from security and inspection products were $38.1 million, compared to $36.5 million for the comparable prior year period. The decrease in revenues from sales of optoelectronic devices, value added subsystems and medical imaging systems for the quarter and nine months ended March 31, 2001 was primarily due to decreased sales of the discontinued product line of data/video projector systems and was offset in part by increased sales of fiber optics and sales to the weapon simulation market. Revenues from the sales of data/video projector systems for the three and nine months ended March 31, 2001 were $0 and $1.0 million, compared to $5.5 million and $7.6 million respectively, for the comparable prior year periods. The decrease in revenues from sale of security and inspection products for the quarter was primarily due to the timing of the shipment of large orders. Gross Profit. Cost of goods sold consists of material, labor and manufacturing overhead. Gross profit decreased by 5.7% to $7.9 million for the three months ended March 31, 2001, compared to $8.3 million for the comparable prior year period. For the nine months ended March 31, 2001, gross profit increased by 0.7% to $22.8 million, compared to $22.6 million for the comparable prior year period. As a percentage of revenues, gross -11- profit increased in the quarter and nine months to 26.8% and 27.7% this year, from 26.3% and 27.2% last year, respectively. The decrease in gross margin in the quarter was due to lower sales and an increase in gross margin as a percentage of revenues was due to discontinuation of the data/video projector systems product line, which had a lower gross margin. Selling, General and Administrative. Selling, general and administrative expenses consisted primarily of compensation paid to sales, marketing and administrative personnel, and professional service fees and marketing expenses. For the three months ended March 31, 2001, such expenses increased 6.7% to $5.3 million, compared to $4.9 million for the comparable prior year period. For the nine months ended March 31, 2001, such expenses increased by 8.5% to $16.5 million, compared to $15.2 million for the comparable prior year period. As a percentage of revenues, selling, general and administrative expenses increased in the quarter and nine months to 17.9% and 20.0% this year, from 15.5% and 18.2% last year, respectively. The increase in expenses for the quarter and nine months was primarily due to increased administrative expenses, legal and professional fees and an increase in provision for doubtful receivables, offset in part by proceeds of $409,000 from the settlement of certain litigation. 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, 2001, such expenses decreased 15.6% to $1.8 million, compared to $2.1 million for the comparable prior year period. For the nine months ended March 31, 2001, such expenses decreased 11.0% to $5.0 million, compared to $5.6 million for the comparable prior year period. As a percentage of revenues, research and development expenses decreased in the quarter and nine month periods to 6.0% and 6.1% this year from 6.6% and 6.7% last year, respectively. The decrease in expenses for the quarter and nine months ended March 31, 2001 was primarily due to deploying certain research and development personnel to the manufacturing of products, offset in part by increased research spending for medical and fiber optic products. Restructuring Costs. In August 1999, the Company decided to close the operations of Osteometer in Denmark, and relocate certain of these operations to the Company's U.S. facilities. For the nine months ended March 31, 2000, the Company recorded restructuring costs of $1.9 million related to the closure of the Osteometer facility in Denmark. These costs were associated primarily with the termination of certain employees, commitments and other facility closure costs. The Company has completed the closure of the Osteometer facility in Denmark and does not anticipate any future expenses. Income (Loss) from Operations. For the three months ended March 31, 2001, the Company had income from operations of $718,000 compared to $1.2 million for the three months ended March 31, 2000. For the nine months ended March 31, 2001, the Company had income from operations of $937,000 compared to a loss from operations of $451,000 for the comparable prior year period. Excluding the non- recurring restructuring costs of -12- $1.9 million in the nine months ended March 31, 2000, income from operations for the nine months ended March 31, 2000 was $1.4 million. Income from operations for the three months ended March 31, 2001 decreased due to a lower gross margin, increased selling, general and administration expenses and was offset in part by reduced research and development expenses. Excluding the restructuring charge of $1.9 million in the period ended March 31, 2000, income from operations for the nine months ended March 31, 2001 decreased due to increased selling, general and administrative expenses and was offset in part by reduced research and development expenses. Interest Expense. For the three months ended March 31, 2001, the Company incurred net interest expense of $276,000, compared to net interest expense of $201,000 for the three months ended March 31, 2000. For the nine months ended March 31, 2001, the Company incurred net interest expense of $865,000, compared to net interest expense of $500,000 for the nine months ended March 31, 2000. The increase in net interest expense for the three and nine months ended March 31, 2001 was due to higher average amount outstanding on the Company's lines of credit and a reduction in short term investments which were used for working capital and acquisitions. Gain on Sale of Subsidiary. On March 31, 2001, the Company sold all of the outstanding stock of its wholly owned subsidiary SMI to Elmos Semiconductor AG of Germany for $6.0 million in cash resulting in a gain of $3.0 million. In addition, as a part of the agreement, $2.2 million of the accounts payable by SMI to the Company as a result of intercompany transactions was converted to a note receivable payable by the buyer over a period of four and a half years. Provision (Benefit) for Income Taxes. Provision for income taxes increased to $869,000 for the three months ended March 31, 2001, compared to $284,000 for the three months ended March 31, 2000. For the nine months ended March 31, 2001, the Company had an income tax provision of $799,000 compared to a income tax benefit of $29,000 for the nine months ended March 31, 2000. The change in provision (benefit) for income taxes was due to a mix in income from U.S. and foreign operations. Net Income (Loss). For the reasons outlined above, the Company had net income of $2.5 million and $2.4 million for the three and nine months ended March 31, 2001, compared to net income of $841,000 and a net loss of $385,000 for the three and nine months ended March 31, 2000, respectively. Liquidity and Capital Resources The Company's operations used net cash of $1.7 million during the nine months ended March 31, 2001. The amount of net cash used by operations reflects increases in accounts receivable, inventory, prepaids, and reduction in accounts payables. Net cash used in operations was offset in part by an increase in accrued payroll and related expenses, income taxes payable, advances from customers, and reduction in other receivables. The increase in accounts receivable is mainly due to the timing of shipments of certain large -13- contracts. The increase in inventory is due to a change in product mix and a longer intercompany in transit time due to certain manufacturing being moved to Malaysia from the United States and the United Kingdom. Net cash provided by investing activities was $2.9 million for the nine months ended March 31, 2001, compared to net cash used in investing activities of $1.1 million for the nine months ended March 31, 2000. In the nine months period ended March 31, 2001, net cash provided by investing activities reflects cash received from the sale of SMI and the sale of property and equipment and was offset in part by cash used in business acquisitions and the purchase of property and equipment. In the nine months ended March 31, 2000, the net cash used in investing activities reflects primarily cash used in business acquisitions and the purchase of property and equipment and was offset in part by proceeds received from the sale of marketable securities. Net cash used in financing activities was $4.5 million for the nine months ended March 31, 2001, compared to net cash provided by financing activities of $4.0 million in the nine months ended March 31, 2000. During the nine months ended March 31, 2001, net cash used in financing activities resulted primarily due to the purchase of the Company's common shares pursuant to its stock repurchase program and repayment of borrowings under the Company's lines of credit. In March 1999, the Company announced a stock repurchase program of up to 2,000,000 shares of its common stock. Through May 10, 2001, the Company repurchased 935,500 shares at an average price $4.60 per share. The stock repurchase program did not have a material effect on the Company's liquidity and is not expected to have a material effect on liquidity in subsequent quarters. The Company retired the repurchased shares. The shares are included as a deduction from issued and outstanding common shares in the accompanying financial statements. In February 2001, the Company entered into a credit agreement with Sanwa Bank California. The agreement provides for a $12.0 million line of credit, which includes revolving line, letter of credit, acceptance and foreign exchange facilities. In addition, the Company has a $10.5 million term loan. 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, Finland and Canada are maintained in Singapore dollars, Malaysian ringgits, U.K. pounds sterling, Norwegian kroner, Danish kroner, Finnish markka and Canadian dollars, 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 -14- accumulated as a component of accumulated other comprehensive income. Net foreign currency transaction losses of approximately $258,000 and $131,000 were included in the Company's results for the nine months ended March 31, 2001 and 2000, respectively. Inflation. The Company does not believe that inflation has had a material impact on its results of operations for the nine months ended March 31, 2001. Item 6. Exhibits and Reports of Form 8-K a. Exhibits 10.1 Credit agreement, dated February 27, 2001 between the Company and Sanwa Bank California. 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 10th day of May 2001. 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 -15-