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MARKET SAVVY

New Controversy Hammers Osicom

Technology: Stock sinks a second day. At least 8 class-action suits are filed against networking firm.

April 23, 1999|WALTER HAMILTON | TIMES STAFF WRITER

Osicom Technologies acknowledged Thursday that a contract it once estimated to be worth $90 million generated only $68,000 in revenue, a development that sent its stock plunging and raised fresh questions about the company's credibility.

The Santa Monica-based computer networker had announced July 1 that an order for a personal data assistant device from an unidentified Japanese firm would bring in about $90 million over two years. The stock jumped more than 20% the next day.

However, Osicom now says it has received only $68,000 for "nonrecurring engineering expenses" and that it expects no additional payment. Further, the Asian division of Osicom that handled the product has been put up for sale, the company said.

Osicom shares have plummeted on enormous volume the last two days since questions about the contract were raised in a Bloomberg News report. The shares tumbled $4.94, or 47%, on Thursday to $5.56, after sinking 44% on Wednesday.

At least eight class-action lawsuits were filed against Osicom on Thursday, alleging it defrauded investors by misleading them about the value of the contract.

The furor over the contract is the latest in a string of episodes that have raised questions about the money-losing company. Various media stories have leveled a barrage of charges at Osicom, its stock, and Par Chadha, its chief executive, in recent years.

Joe Gladue, an analyst at Chapman Co., a Baltimore-based brokerage firm, said that while he believes Osicom didn't intend to mislead investors, the episode nonetheless raises a credibility issue. It may hurt an initial public offering that Osicom is planning for one of its business units, he said.

"You have to question, will this credibility cloud sour that offering," Gladue said. "It's a legitimate question."

Chadha said Thursday that he stood by the accuracy of the July prediction of $90 million in revenue from the contract, saying he was simply conveying to shareholders what was expected at the time.

Chadha said that because he had updated shareholders about the status of the contract in conference calls since then, "this information is old. Everybody knew it."

Chadha also disputed that the company's credibility is in question, saying that Osicom has received industry accolades and favorable coverage in the trade press. "If that doesn't reflect credibility, I don't know what would," he said.

Osicom has recorded net losses totaling more than $46 million over the last four years. An acquisition spree boosted revenue from less than $6 million in 1995 to $119 million in 1998. But sales dropped to $95 million in the 1999 fiscal year ended in January, and the company posted a net loss of $13.4 million.

Osicom has been dogged by controversy over the years.

In August 1997, Barron's magazine alleged that Chadha was the subject of a criminal investigation in the U.S. and Britain for certain financial dealings. Chadha denied the allegations. A December 1996 article in BusinessWeek said Osicom's stock may have been manipulated by firms associated with organized crime without the company's knowledge. Osicom disputed that claim.

Last year, The Times reported that the company had issued a news release saying that Chadha had bought almost 350,000 Osicom shares, but that the release didn't mention that Chadha acquired them from a large shareholder who wanted to sell.

Osicom's stock has fluctuated wildly in value in recent years. It briefly topped $60 in mid-1996 but sank to less than $2 last September. It then rebounded to a recent peak of $28.75 amid excitement over the firm's GigaMux product line--devices that increase the amount of data that can be carried over fiber-optic networks, Gladue said.

Osicom said March 17 it won a $20-million contract to provide GigaMux products to an unidentified phone company. That contract is important because larger rivals such as Lucent Technologies and Northern Telecom are expected to soon roll out products to compete with GigaMux, Gladue said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Osicom's Dive

Shares of Osicom Technologies have plunged in the wake of the company's disclosure that a major contract it announced last summer won't result in any sales. Monthly closes and latest for the stock, on Nasdaq:

May 1996: $53.63

Thursday: $5.56

Sources: Bridge, Bloomberg News

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