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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 30, 1996
or
[ ] Transition report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________ to
_______________.
COMMISSION FILE NUMBER: 0-26886
OBJECTIVE SYSTEMS INTEGRATORS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 68-0239619
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
100 BLUE RAVINE ROAD, FOLSOM, CALIFORNIA 95630
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (916) 353-2400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------------- ------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on August
31, 1996 as reported on the Nasdaq National Market, was approximately
$170,886,069. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of August 31, 1996, the registrant had outstanding 31,450,170 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form 10-
K portions of its Proxy Statement for the Annual Meeting of Shareholders to be
held November 14, 1996. Portions of the Registrant's Annual Report to
Shareholders for the fiscal year ended June 30, 1996 are incorporated by
reference into Parts II and IV of this Form 10-K.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS REPORT CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE
"REFORM ACT"). FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHER THINGS, THE
FOLLOWING: THE POTENTIAL FLUCTUATIONS IN THE COMPANY'S QUARTERLY RESULTS AND
SEASONALITY; THE NEED TO MANAGE GROWTH; THE NEED TO EXPAND PROFESSIONAL
SERVICES AND CUSTOMER SUPPORT; THE NEED TO MANAGE PRODUCT TRANSITIONS; THE RISKS
ASSOCIATED WITH PRODUCT AND CUSTOMER CONCENTRATIONS; THE COMPANY'S DEPENDENCE
ON RETENTION AND ATTRACTION OF KEY EMPLOYEES; THE RISKS ASSOCIATED WITH
DEPENDENCE ON EMERGING SERVICES, MARKETS AND TECHNOLOGIES; THE RISKS ASSOCIATED
WITH PRODUCT DEFECTS; THE COMPANY'S HIGHLY COMPETITIVE INDUSTRY AND RAPID
TECHNOLOGICAL CHANGE WITHIN THE COMPANY'S INDUSTRY; THE COMPANY'S LIMITED
OPERATING HISTORY AND UNCERTAINTY OF FUTURE OPERATING RESULTS; THE RISKS
ASSOCIATED WITH INTERNATIONAL LICENSING AND OPERATIONS; THE RISKS ASSOCIATED
WITH DEPENDENCE ON THIRD-PARTY RELATIONSHIPS; THE UNCERTAINTY OF PATENT AND
PROPRIETARY TECHNOLOGY PROTECTION AND RELIANCE ON TECHNOLOGY LICENSED FROM THIRD
PARTIES; CHANGES IN, OR FAILURE TO COMPLY WITH, GOVERNMENT REGULATION; GENERAL
ECONOMIC AND BUSINESS CONDITIONS; AND OTHER FACTORS REFERENCED IN THIS REPORT.
OBJECTIVE SYSTEMS INTEGRATORS, NETEXPERT AND THE COMPANY'S LOGO ARE
REGISTERED TRADEMARKS OF OBJECTIVE SYSTEMS INTEGRATORS, INC. THIS REPORT ALSO
INCLUDES TRADEMARKS OF COMPANIES OTHER THAN OBJECTIVE SYSTEMS INTEGRATORS, INC.
ITEM 1. BUSINESS
GENERAL
Objective Systems Integrators, Inc. ("OSI" or the "Company") develops,
markets and supports object-oriented, client/server software solutions for
network operations support and management. OSI's NetExpert(TM) family of
products includes a software framework, off-the-shelf network operations support
and management applications, programmerless development tools and related
professional services. These products and services are optimized for complex,
mission-critical networks, and they enable the rapid deployment of new and
enhanced services over those networks. The object-oriented architecture of
NetExpert provides customers with building blocks that can be used, in
conjunction with NetExpert's intelligent rules-based systems, to customize their
network management systems and to add new products and services without the need
for additional programming.
OSI distributes and sells NetExpert to end users in North America primarily
through a direct sales organization. Outside of North America, the Company
sells its products and services principally through systems integrators and
local distributors, and to a lesser extent through an in-region direct sales
force. To augment its sales efforts, OSI offers comprehensive professional
services to its customers. Professional services engineers work closely with
direct sales personnel, applications specialists and distributors to assist end
users with pre-sales and post-sales support including the implementation and use
of the Company's products. NetExpert has been licensed by many of the world's
leading telecommunications companies, including AT&T Wireless Services Inc.,
Ameritech Corporation, Airtouch Communication Inc., BellSouth Corporation,
British Telecommunications plc, MCI Telecommunications
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Corporation, NTT, Pacific Bell, Southwestern Bell Telephone Company, Sprint
Communications Company, TCI Cable Management Corporation and US One
Communications Corp., as well as other leading operators of voice, data and
video networks, including First Union Bank and Time Warner Cable.
INDUSTRY BACKGROUND
Historically, the telecommunications industry has been characterized by
significant governmental regulation or ownership and limited competition. In
this environment, telecommunications services consisted primarily of local and
long distance telephone service over traditional landlines. More recently,
deregulation and privatization of telecommunications services have led to
increased intra-industry, cross-industry and geographic competition. For
example, long distance and local exchange carriers in the United States
increasingly compete for local and long-distance services. The alignment of
domestic service providers with international telephone companies to deliver
seamless global services has also increased competition in the delivery of
telecommunications services. Telephone companies, both domestically and
internationally, also face increasing competition from cable companies for
telephony and new high-bandwidth voice and video services, and from wireless
companies for voice and data services.
In response to this evolving competitive environment, telecommunications
service providers have sought to differentiate themselves by improving existing
services and rapidly introducing new services. Enhancements of existing
telephone services include the addition of features such as call waiting, call
forwarding, call return, caller identification, voice mail and personal 800
numbers. New telecommunications services include high-speed data services,
video teleconferencing, video-on-demand, home shopping and home banking.
Competition has also increased the importance of bringing these new and enhanced
services to market rapidly. In addition, the availability of new and enhanced
services has fueled a dramatic increase in the use of telecommunications
services by organizations and individuals, which places additional burdens on
existing telecommunications infrastructures.
To deliver new and enhanced services on a timely basis, while responding to
the challenges of increased competition and use, telecommunications service
providers are embracing new, rapidly emerging technologies and expanding the
capacity of their systems. For example, many telecommunications service
providers have embarked on major capital spending programs to augment or replace
traditional copper landline-based networks with new fiberoptic, hybrid fiber
coaxial, radio frequency signal and satellite transmission networks. In
addition, they are implementing a variety of new network and wireless protocols
which, together with new transmission networks, enable the delivery of higher
bandwidth and higher quality services. These network and wireless protocols
include Asynchronous Transfer Mode ("ATM"), Switched Multimegabit Data Service
("SMDS"), Frame Relay, Synchronous Optical Network ("SONET"), Synchronous
Digital Hierarchy ("SDH"), Global System for Mobile Communications ("GSM"),
Cellular Digital Packet Data ("CDPD"), Code Division Multiple Access ("CDMA")
and Time Division Multiple Access ("TDMA"). New technologies, such as Common
Channel Signalling System No. 7 ("SS7") and Advanced Intelligent Network
("AIN"), are also being implemented in existing networks to allow
telecommunications service providers to create, deploy and modify advanced voice
and data communications services quickly and efficiently. In less developed
parts of the world, telecommunications service providers are implementing new
systems both through traditional landline networks and by taking advantage of
recent advances in network technology.
To develop, deploy and manage networks and services, telecommunications
service providers rely on operations support systems ("OSS") and network
management systems ("NMS") that, among other functions, establish communications
connections between service providers and users (provisioning), monitor
equipment performance to detect errors (fault management), report network
performance and traffic loads (traffic reporting) and collect and consolidate
usage information (billing data collection). Historically, OSSs and NMSs were
developed and deployed in an environment characterized by limited competition
and slowly changing technologies and services. These systems were typically
mainframe-based, proprietary and written in early-generation programming
languages.
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As a result, these "legacy" systems are not designed for rapid deployment or
adaptation, do not easily support heterogeneous networks and are not easily
customized to fit specific business needs. In view of the industry trends toward
increased competition, technological complexity and rapid change,
telecommunications service providers must have OSSs and NMSs that can be:
. deployed rapidly and adapted easily to meet changing business and
network requirements;
. integrated with a wide variety of existing network equipment and
systems;
. accommodated to new equipment and systems as they are deployed;
. customized to provide a wide variety of OSS and NMS functions
tailored to specific business needs; and
. scaled to address rapid growth in network size and use.
OSSs and NMSs that provide these benefits will enable rapid, and cost-effective
new and enhanced services to be brought to market.
THE OSI SOLUTION
OSI develops, markets and supports object-oriented, distributed software
solutions for network operations support and management. The Company's flagship
product, NetExpert, includes a software framework, off-the-shelf network
operations support and management applications, programmerless development tools
and related professional services. These products and services are designed for
use in complex, mission-critical networks and enable rapid deployment of new and
enhanced services over those networks. NetExpert provides the following
features:
Reduced Time-to-Market. NetExpert development tools and applications
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enable customers to reduce their time-to-market for new and enhanced services.
NetExpert's graphical use interface ("GUI") based programmerless development
tools are designed to allow network analysts and engineers, rather than software
programmers, to quickly and easily create new network operations support and
management applications or modify existing applications to support new services.
OSI's applications also allow customers to further reduce the time required to
initiate revenue-generating services.
Management of Heterogeneous Systems. NetExpert was designed to manage
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heterogeneous network devices regardless of the transmission technology,
management protocols or media used in the network. Through the open NetExpert
framework and its available gateways, customers can manage network devices, such
as computers, transmission equipment and switches, including those that use
advanced transmission technologies such as ATM, SMDS, Frame Relay and SONET.
These devices are managed using standard management protocols, such as Common
Management Information Protocol ("CMIP") and Simple Network Management Protocol
("SNMP"), and selected industry-specific protocols. The ability to seamlessly
manage networks that include heterogeneous elements not only protects a
customer's investment in its current legacy systems, but also facilitates the
migration to and installation of new, advanced technologies.
Flexibility. The generic nature of the NetExpert framework enables it to
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support a variety of applications. For example, customers have used NetExpert
for such diverse management functions as fault management, provisioning, billing
data collection, work crew dispatch, network traffic reporting and performance
analysis. The ability to obtain these functions from a single framework enables
OSI's customers to leverage their time and resource investments. It also allows
them to quickly and cost-effectively deploy new applications.
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Scalability. NetExpert's modular architecture allows customers to manage a
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wide variety of differently sized networks by distributing NetExpert modules to
any number of computers. These computers may be located in the same area, for
performance scalability, or in multiple locations, for geographic scalability.
In addition, NetExpert's ability to communicate with other NetExpert systems
allows multiple systems to be configured in both peer-to-peer and traditional
hierarchical structures.
OSI'S STRATEGY
OSI's goal is to become a leading provider of software frameworks,
applications and tools to support mission-critical networks. In pursuit of this
objective, the Company has adopted the following strategies:
Extend Technological Leadership. The Company intends to continue
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committing substantial resources to further develop object-oriented, rules-based
software solutions that address market requirements. For example, OSI has
extended NetExpert to provide increased reliability and availability to support
advanced applications, such as SONET provisioning. By optimizing performance
and efficiency, the Company is also increasing NetExpert's capacity to
accommodate increased message flows from larger, more complicated networks. The
Company intends to comply with existing and future industry standards. The
Company also intends to participate in the development of emerging standards.
Expand Off-the-Shelf Applications. The Company offers additional, off-the-
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shelf applications for the NetExpert, including broadband fiber, telephony over
cable and test management systems. By licensing such off-the-shelf
applications, customers can reduce development time and introduce new and
enhanced services more rapidly.
Integrate Third-Party Applications. Rather than build applications that
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are in the market, the Company develops NetExpert interfaces to complementary
third-party applications, including element management from Hewlett-Packard
Company ("Hewlett-Packard"), help desk from Remedy Corporation, performance
management from Metrica Corporation and asset management from Accugraph
Corporation.
Increase Penetration of Markets. To address additional opportunities in
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the communications industry, the Company intends to continue extending NetExpert
and developing new applications. In addition, OSI believes that its core
technology can be adapted to other industries in which flexibility, reliability
and scalability of network management systems are critical. The Company's
initial deployment in industries outside of telecommunications include
management and control of utility power management, as well as automated
operations and fault management of large computer centers. The Company is
expanding its capabilities beyond element and network management by providing
rules and operations which assist in Telecommunications Management Network
("TMN") service level operations such as provisioning.
Expand Worldwide Distribution. The Company plans to continue expanding its
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direct sales force to increase its penetration of domestic and selected
international communications markets. To leverage its direct sales force, the
Company has established, and will continue to establish, strategic alliances
with complementary telecommunications equipment and software suppliers,
distributors and systems integrators. To address the needs of its international
customers, the Company and its distribution partners intend to continue to
localize products for use in the native language of targeted countries. To date,
Japanese, French, Korean, Spanish and German versions of NetExpert are
available.
Enhance Professional Services. The Company believes that providing
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comprehensive professional services and a high level of customer support is
critical to its ability to maintain its competitive position. Therefore, OSI
intends to continue expanding its professional services organization in areas
such as OSS requirements consulting,
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pre-sales and post-sales support, quality assurance, project management,
application customization and training. In 1996, the Company increased the
number of people dedicated to professional services from 62 as of June 30, 1995,
to 79 as of June 30, 1996.
PRODUCTS
The Company develops, markets and supports object-oriented, client/server
software solutions for network operations support and management. The Company's
NetExpert family of products includes a software framework, off-the-shelf
network operations support and management applications, and programmerless
development tools. The Company is committed to supporting open standards.
NetExpert products run on the current versions of UNIX platforms offered by
Hewlett-Packard, Sun Microsystems, Inc. ("Sun Microsystems"), International
Business Machines Corporation ("IBM") and Silicon Graphics, Inc. In addition,
NetExpert operates with relational databases offered by Oracle Corporation
("Oracle"), Sybase, Inc. ("Sybase") and Informix Corporation ("Informix").
Customers can choose the configuration of products needed to meet their
specific requirements. License fees for production NetExpert installations
typically range in price from $250,000 to $1.0 million. In some cases, license
fees have been as high as $5.0 million, depending on the scope of the network
and the functionality required for a given customer application. The Company
and its customers generally enter into support agreements that provide for
ongoing service and product upgrades for a fixed annual fee.
NETEXPERT FRAMEWORK
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The NetExpert framework consists of software modules that execute
predefined rules to manage and control a customer's network. The object-
oriented architecture of the NetExpert framework provides customers with
building blocks that can be used in conjunction with NetExpert's intelligent
rules-based systems to implement their network operations support and management
systems without the need for professional programmers. Because rules are
interpreted by NetExpert products rather than compiled into them, rules can be
developed off-line and then incorporated into runtime systems without
significantly affecting system availability.
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NetExpert framework software modules include the following:
NETEXPERT FRAMEWORK
NetExpert Core Services NetExpert Distributed Management
NetExpert Administrator Access CNM
IPMH Daemon SNMP Proxy Agent
Authorization Agent Peer-to-Peer
NetExpert Gateways NetExpert Visual Agent
Generic Gateway Visual Agent Server
SNMP Gateway and Trap Daemon Visual Agent Client
Multiplexing Gateway NetExpert Client Serives
CMIP Protocol Agent Client Manager
Shell Protocol Agent Alert Display
X.25 Protocol Agent Trouble Ticket
TCP/IP Protocol Agent Managed Object Control
Serial Protocol Agent Inhibit Alert
BCN Protocol Agent Paging
Datakit Protocol Agent Data Browser
NETEXPERT ANALYSIS Report Maker
Intelligent Dynamic Event Analysis System Polling
("IDEAS") Graphics Manager
NETEXPERT DATA COLLECTION Graphics Agent
Data Archiver
NetExpert Core Services. NetExpert Core Services are required for all
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NetExpert installations and are used by all other NetExpert processes.
NetExpert Core Services include a messaging infrastructure to allow modules to
communicate in a distributed computing environment; object management and
repository services; object and action authorization services; standard routines
for error handling, licensing and logging; and many other common services.
These services are accessed by other NetExpert products and can be used to
develop programs to extend the capabilities of NetExpert.
NetExpert Gateways. NetExpert Gateways are the means by which NetExpert
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communicates with computers, transmission equipment, switches and testing
equipment. NetExpert Gateways execute predefined rules to communicate with
hardware elements, customer subscriber databases, billing systems, service order
systems, inventory systems and other management systems. NetExpert's Generic,
SNMP and CMIP gateways, enable bidirectional communication using both standard
and nonstandard communication protocols. In addition, because each network
element is handled by a separate gateway, NetExpert supports phased
implementations of both NetExpert and the network.
NetExpert Analysis. NetExpert Analysis receives and filters large volumes
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of messages sent either by other NetExpert modules or by external systems
through the NetExpert Gateways. It also executes actions based on the
predefined rules created using NetExpert Development Tools. These actions might
include analysis of received error messages, initiation of provisioning
commands, analysis of network performance, generation of alarms to the operator
and other actions based upon changes in network elements or operator requests.
The interpretive, rules-based design of NetExpert Analysis allows the user to
modify the behavior of the management system by changing rules without
reprogramming.
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NetExpert Data Collection. NetExpert Data Collection collects and
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normalizes data from other NetExpert modules and stores it in user-defined
databases or other repositories. This allows the storage of large amounts of
data which can be later analyzed by a customer or forwarded to other management
systems. NetExpert Data Collection is designed to facilitate performance
management, traffic management and billing data collection, all of which require
the manipulation and analysis of large amounts of data.
NetExpert Distributed Management. NetExpert Distributed Management, which
--------------------------------
includes Peer-to-Peer and SNMP Proxy Agent, forwards NetExpert data to other
NetExpert and third-party management systems via standard or nonstandard
interfaces. These specialized gateways allow other management systems to
interface with, access the information stored in and trigger actions in
NetExpert. In particular, Peer-to-Peer allows NetExpert systems to communicate
and share information with each other, which increases scalability, provides
backup and enhances management system performance through distributed
processing.
NetExpert Visual Agent. NetExpert Visual Agent allows users to develop
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custom screens to graphically visualize management information and control the
behavior of managed objects, such as OSS applications, transmission devices,
computer systems and switches. Users implement templates to display classes of
objects, define the actions the operators can perform against those objects and
create a menu of operations from which to initiate the defined actions. Screens
can be created that dynamically display network and element conditions and the
performance of these elements as they change in real-time.
NetExpert Client Services. NetExpert Client Services contain several
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special-purpose management utilities. These include processes that display
alarm information to users, manage trouble tickets, page technicians, display
stored management data, provide reports on historical conditions and initiate
actions on a scheduled basis.
NETEXPERT DEVELOPMENT TOOLS
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NetExpert Development Tools, which consist of editors, configuration
management utilities and application programming interfaces ("APIs"), are used
to develop or modify rules that govern the behavior of the other NetExpert
products. NetExpert Editors are GUI-based, programmerless tools which enable
implementation of specific network operations support and management
applications. They also enable configuration and customization of OSI's off-
the-shelf applications or the addition of enhanced functionality to NetExpert.
Package Administration allows customers to combine user- and OSI-developed
applications and to control the migration of new applications from a test
environment to a production environment.
NetExpert Development Tools include the following:
NETEXPERT DEVELOPMENT TOOLS
Rule Editor NetExpert Object Workspace ("NOW")
Dialog Editor IPMH ToolKit
Administration Editors Protocol Agent ToolKit
Authorization Editor Package Administration
Graphics Editor
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NETEXPERT APPLICATIONS
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NetExpert Applications are off-the-shelf rule sets that perform common
operations and management functions. NetExpert Applications range from element
interfaces that control a particular type of device, such as a switch, to
complete systems capable of managing complex, multivendor network domains. For
example, NetExpert trafficMASTER monitors the volume of data flowing through a
multivendor switch network, identifies and displays areas of congestion to the
operator, automatically initiates plans to correct congestions and
stores/reports on traffic data. All NetExpert Applications are customizable in
varying degrees to meet the specific requirements of customers. For example,
element interfaces usually require a minimal level of customization, while full
management systems generally require a high level of customization.
NetExpert Applications include the following:
NETEXPERT APPLICATIONS
transportMASTER loopMASTER
AT&T DDM2000 Fault ADC OSWorks HDT Domestic Fault/Prov
AT&T FT2000 OC48 Fault ADC OSWorks HDT International
Fault/Prov
Alcatel 1648 Fault/Prov Nortel AccessNode HDT Fault/Prov
Fujitsu Fault ADC NMCS/DV6000 v2 Fault
Nortel OC3 Express
Nortel S/D MS Transport Node Fault
NEC 2400 Fault/Prov
AT&T DACS II Fault
AT&T DACS IV 2000 Fault
Tellabs Titan 5500 Fault/Prov
Tellabs Titan 532 Fault
switchMASTER WIRELINE trafficMASTER
AT&T 5ESS Fault AT&T 5ESS Trunk Side Perf
AT&T 5ESS Line - Analog/ISDN Prov Alcatel S1240 Trunk Side Perf
Nortel DMS Fault Ericsson AXE-10 Trunk Side Perf
PIC/Care NEC NEAX 2400 - Trunk Side Perf
switchMASTER WIRELESS
AT&T Autoplex Fault
Ericsson AXE-10 Fault
AT&T Fault
AT&T Perf
Revenue from the license, service and support of NetExpert has accounted
for substantially all of the Company's revenues since its inception. The
Company believes that this will continue for the foreseeable future. Therefore,
the Company's future operating results significantly depend on continued market
acceptance of
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NetExpert, improvements to the NetExpert Framework, new and enhanced NetExpert
development tools, and related applications.
There can be no assurance that NetExpert will continue to achieve market
acceptance or that the Company will be successful in developing, introducing and
marketing improvements to the NetExpert framework, NetExpert development tools
or applications. A decline in the demand for NetExpert as a result of
competition, technological change or other factors would have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, delays in the introduction of advanced services, failure of those
services to gain widespread market acceptance or the decision of
telecommunications carriers and other service providers not to use the Company's
products in the deployment of these services would have a material adverse
effect on the Company's business, operating results and financial condition.
CUSTOMERS
As of June 30, 1996, the Company had directly or indirectly licensed its
products to more than 150 customers worldwide. The Company's target markets are
the telecommunications, cable and cellular/wireless industries. The Company
also sells, primarily through distributors, to commercial enterprises and
government agencies.
A significant portion of the Company's revenues in any given fiscal period
are derived from substantial orders placed by large organizations. As a result,
the Company's revenues often have been concentrated among a relatively small
number of customers. In fiscal 1994, 1995 and 1996, revenues from the license
of NetExpert products and services to the Company's five largest customers
represented approximately 44%, 45% and 30% respectively, of the Company's total
revenues. In fiscal 1994, Time Warner Inc. ("Time Warner") accounted for 17% of
total revenues. In fiscal 1995, customers accounting for more than 10% of total
revenues were AT&T Wireless Services, Inc. (16%) and Sprint Communications
Company L.P. ("Sprint") (11%). There were no customers accounting for more than
10% of total revenues in fiscal 1996. The Company expects that it will continue
to depend on a limited number of customers for a significant portion of its
future revenues. As a result, the Company's business, operating results and
financial condition would be materially adversely affected if anticipated orders
fail to materialize, are deferred or are canceled due to changes in customer
requirements. In addition, there can be no assurance that revenue from key
customers, individually or as a group, will continue at historical levels.
The Company's operating results may be subject to substantial period-to-
period fluctuations as a result of customer concentration and other factors
affecting capital spending in the telecommunications industry. Customary
payment terms are generally between 30 and 45 days for domestic sales and
between 45 and 60 days for international sales. In addition, some major
customers with substantial orders have payment terms between 60 and 120 days.
SALES AND MARKETING
The Company employs a direct sales force consisting of sales and
application specialists. The application specialists possess expertise that
allows them to define customer requirements in specific application areas, such
as broadband infrastructure, advanced intelligent networks and telephony over
cable. The Company believes that having a direct sales force allows it to
obtain better information regarding market requirements and to further enhance
its expertise in its customers' industries. The Company also uses systems
integrators in North America to supplement its sales efforts, particularly for
government and commercial applications. As of June 30, 1996, the Company's
North American sales and marketing organization included 75 individuals. The
Company
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has 11 sales and customer support offices in North American metropolitan areas:
Atlanta, Chicago, Dallas, Denver, Kansas City, New York, Ontario, San Francisco,
Seattle, Washington, D.C. and Westport. The direct sales force is managed from
the Company's headquarters in Folsom, California.
Outside of North America, the Company sells its products and services
principally through systems integrators and local distributors that have
cultural familiarity, specific industry expertise and the ability to respond to
customer needs on a timely basis. European distribution is managed from the
Company's headquarters in Folsom, California. Distribution in the Pacific Rim
channel is managed from the Company's Seattle, Washington sales office. In
addition, the Company currently has technical sales support offices in Beijing,
Seoul and Singapore.
License, service and other revenue outside of the United States accounted
for 26%, 24% and 31% of the Company's total revenues in fiscal revenue 1994,
1995 and 1996, respectively. The Company expects that international license,
service and other revenue will continue to account for a significant portion of
its total revenue. The Company intends to enter additional international
markets and to continue expanding its operations outside of North America by
expanding its direct sales force, opening additional in-region customer support
and sales offices, adding distributors and pursuing additional strategic
relationships. This expansion will require significant management attention and
the expenditure of significant financial resources, and could adversely affect
the Company's operating margins.
To the extent the Company is not able to establish additional foreign
operations in a timely manner, the Company's ability to grow international sales
may be limited. This could, in turn, materially adversely affect the Company's
business, operating results and financial condition. In addition, the Company's
international operations involve a number of inherent risks, including: longer
collection periods; greater difficulty in collections, staffing and managing;
longer sales cycles; unexpected changes in regulatory requirements; including a
slowdown in the rate of privatization of telecommunications service providers;
reduced protection for intellectual property rights in some countries; and other
trade barriers.
To supplement its sales efforts, the Company has also established
relationships with key suppliers to the Company's customers and potential
customers. Whenever possible the Company works closely with these suppliers to
facilitate a complete customer solution. In addition to assisting the Company's
sales efforts, these relationships also provide the Company with insight into
new and emerging customer applications.
There can be no assurance that the Company will be able to attract
additional equipment providers, systems integrators and distributors who can
market the Company's products effectively. The Company believes that its
success in penetrating markets depends in large part on its ability to maintain
these relationships, to cultivate additional relationships and to cultivate
alternative relationships if its distribution needs change. There can also be
no assurance that telecommunications equipment providers, systems integrators
and distributors will not discontinue their relationships with the Company or
form arrangements with the Company's competitors.
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
The Company believes that a high level of professional services and
customer support is critical to its continuing success in developing long-term
relationships with its customers.
To augment its sales efforts, the Company offers comprehensive professional
services. Professional services engineers work closely with direct sales
personnel, applications specialists and distributors to assist end users with
pre-sales and post-sales support, including the implementation and use of the
Company's products.
-11-
<PAGE>
The Company offers a range of services, including requirements analysis, project
management, system design, customization and installation, training, ongoing
consultation and upgrade management.The Company also offers 12-month support
contracts to its customers. These contracts entitle customers to unlimited
technical support, product updates and product maintenance during the support
period. Substantially all of the Company's customer base was covered by such
support contracts in fiscal 1996.
As of June 30, 1996, the Company had 112 individuals performing
professional services. There can be no assurance that the Company's
professional services and customer support resources will be sufficient to
manage future growth of the Company's business. Failure to expand the Company's
professional services and customer support organizations commensurate with the
expansion of its installed base would have a material adverse effect on the
Company's business, operating results and financial condition.
RESEARCH AND DEVELOPMENT
Because of the underlying complexity of its products and the close customer
interaction required to support mission-critical applications, the Company's
product development process differs from other providers of network operations
support and management applications. The Company's research and development
efforts are focused on addressing the requirements of specific customers under
development contracts, while simultaneously improving the general capabilities
of NetExpert products. The Company often designs, develops and delivers a
prototype version of a product to selected customers for initial deployment.
Thereafter, the Company and its customers work closely to modify and enhance the
product to meet customer specifications and the market requirements. After the
Company has completed this process, the product will become commercially
available to all customers. As a result, the Company believes that the final
product will most closely meet the requirements of its markets.
The Company's research and development organization is composed of seven
teams. These teams are: Current Product Development, Next Generation Product
Development, Advanced Development, Rule Set Applications Development, Human
Interface Design Center, Product Maintenance, and Configuration Management.
The Current Product Development team continuously enhances the existing
products to meet customer requirements. The Next Generation Product Development
team implements fundamental changes to the NetExpert framework address emerging
requirements in the telecommunications industry. The Advanced Development team,
investigates and reduces the risk of new technologies that the Company would
like to incorporate into the product. The Rule Set Applications Development
team produces reusable element, network, and service management solutions for
telecommunications and internet market segments. The Human Interface Design
Center investigates and implements improvements in usability and complexity
management. The Product Maintenance team provides support on customer issues or
problems that requires product changes. The Configuration Management team works
to build software for all supported platforms.
The Company develops the majority of its technology and products
internally. However, it also continually reviews opportunities to license
technologies or products from others, where appropriate. The Company believes
that this approach facilitates the accelerated development and introduction of
new and enhanced applications and products.
-12-
<PAGE>
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and rapid changes in customer requirements. The introduction of products
embodying new technologies and the emergence of new industry standards and
practices can render existing products obsolete and unmarketable. As a result,
life cycles for the Company's products are difficult to estimate. The Company's
future success depends on its ability to enhance existing products and to
develop and introduce, on a timely and cost-effective basis, new products and
product features. There can be no assurance that the Company can develop and
market new products or product features; that the Company will not have
difficulties that delay or prevent these new products and features from being
introduced; or that its new products and/or features will meet the needs of the
marketplace. If the Company is unable to introduce enhancements of existing
products or new products in a timely manner, or if the Company's products fail
to operate across evolving versions of hardware, and software platforms and
databases, the Company's business, operating results and financial condition
would be materially adversely affected.
Furthermore, software products as complex as those offered by the Company
are highly likely to contain defects. There can be no assurance that, despite
testing by the Company and its customers, errors will not be found in existing
or new products or releases after commencement of commercial licensing. This
could result in delay or loss of revenue, loss of market share or failure to
achieve market acceptance. Any of these occurrences would have a material
adverse effect upon the Company's business, operating results and financial
condition.
As of June 30, 1996, the Company's research and development organization
consisted of 82 employees. In fiscal 1994, 1995 and 1996, research and
development expenses were $1.8 million, $4.0 million and $7.1 million,
respectively. The Company has also capitalized certain additional software
development costs totaling approximately $484,000 and $210,000 in fiscal 1994
and 1995, respectively. No software development costs were capitalized in
fiscal 1996. These costs are amortized over the estimated economic life of the
underlying product, generally not exceeding three years. The Company
anticipates that it will commit increasing resources to research and development
in future periods to enhance and extend its product lines.
COMPETITION
Competition in the evolving network operations support and management
market is intense and is characterized by rapidly changing technologies,
evolving industry standards, frequent new product introductions and rapid
changes in customer requirements. To maintain and improve its competitive
position, the Company must continue to develop and introduce, on a timely and
cost-effective basis, new products and features that keep pace with the
increasingly sophisticated needs of its customers. The principal competitive
factors affecting the market for the Company's products are product reputation,
quality, performance, price, professional services, customer support and product
features, such as adaptability, scalability, ability to integrate with other
products, functionality and ease of use. The Company believes that it currently
competes favorably overall with respect to these factors. In the future, the
Company will be required to respond promptly and effectively to the challenges
of technological changes and its competitors' innovations.
The Company's competitors offer a variety of solutions to address the
network operations support and management applications market. They generally
fall within six categories: (i) internal design and development organizations
that produce applications, (ii) major telecommunications carriers who resell
their internal management systems, including NYNEX Corporation ("NYNEX") and GTE
Corporation ("GTE"), (iii) telecommunications equipment vendors, including AT&T
Corporation ("AT&T") and LM Ericsson Telephone Company ("Ericsson"), (iv)
hardware and software vendors, including IBM, Sun Microsystems, Hewlett-Packard,
Microsoft Corporation ("Microsoft") and Computer Associates International, Inc.,
(v) providers of specific market applications, including Bellcore, Boole and
Babbage, Inc., Lucent Technologies and MAXM
-13-
<PAGE>
Systems Corporation, and (vi) systems integrators, such as TCSI (formerly
Teknekron Communications Systems, Inc.) and Applied Computing Devices, Inc.
("ACD"), who primarily provide programming services to develop customer-specific
applications.
Most of the Company's existing and potential customers continuously
evaluate whether to design and develop their own network operations support and
management systems or purchase them from outside vendors. These customers
typically have large internal staffs that are changed with designing and
developing software solutions to meet their particular needs. As a result, the
Company must engage in a continuous education program concerning the advantages
of its products over internally developed network operations support and
management applications.
Most of the Company's current and potential competitors have longer
operating histories and significantly greater financial, technical, sales,
customer support, marketing and other resources. They also have greater name
recognition and a larger installed base.
The Company's open systems architecture could lead to increased competition
as third parties develop competitive network operations support and management
systems. Competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements. They could also devote
greater resources to the development, promotion and sale of their products.
OSI believes that its products offer higher functionality than those of its
competitors. Therefore, they are frequently priced at a premium. Increased
competition could result in price reductions, reduced margins or loss of market
share, any of which could materially and adversely affect the Company's
business, operating results and financial condition. There can be no assurance
the Company can continue to enjoy its current competitive position. If the
Company is unable to do so, the Company's business, operating results and
financial condition would be materially and adversely affected.
PROPRIETARY TECHNOLOGY
The Company relies on a combination of trade secret, copyright and
trademark laws; nondisclosure and other contractual agreements; and a variety of
technical measures to protect its proprietary rights. The Company currently has
no patents or patent applications pending. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. As part of its
confidentiality procedures, the Company generally enters into invention
assignment and proprietary information agreements with its employees and
consultants and nondisclosure agreements with its customers, system integrators
and distributors. The Company also limits access to and distribution of its
software, documentation and other proprietary information.
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Moreover,
effective copyright and trade secret protection may be unavailable or limited in
certain countries outside the United States, making the possibility of
misappropriation more likely. There can be no assurance that the steps taken by
the Company to protect its proprietary technology will prevent its
misappropriation. Moreover, these protections may not preclude competitors from
developing products with functionality or features similar to the Company's
products. The Company believes that, because of the rapid pace of technological
change in the market for its products, legal protections of its proprietary
technology are less significant factors in the Company's success than the
knowledge, technical expertise, ability and experience of its
-14-
<PAGE>
employees, the frequency of product enhancements and the quality of professional
services and customer support it provides.
The Company believes that its products and trademarks do not infringe upon
the proprietary rights of third parties and there are currently no pending
claims to that effect. There can be no assurance, however, that the Company
will not receive future claims that the Company's products infringe, or may
infringe, upon the proprietary rights of others. The Company expects that
software product developers will be increasingly subject to infringement claims
as the number of products and competitors grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time consuming, result in costly litigation and
diversion of technical and management personnel, cause product shipment delays,
require the Company to develop non-infringing technology or cause the Company to
enter into royalty or licensing agreements. Moreover, such royalty or licensing
agreements, if required, may not be available or may be available only on terms
that are unacceptable to the Company. A successful claim of product
infringement against the Company coupled with the failure or inability to
develop non-infringing technology or license the infringed or similar
technology, the Company's business, operating results or financial condition
would be materially adversely affected.
The Company relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used to perform key functions. For instance, the Company has licensed SL/GMS
from SL Corporation, Open Interface from Neuron Data Inc. and FLEXlm from
Globetrotter Software, Inc. There can be no assurance that these third-party
software licenses will continue to be available to the Company on commercially
reasonable terms. In addition, the Company is, to a certain extent, dependent
on the ability of third parties to enhance their current products and to develop
new products on a timely and cost-effective basis. There can be no assurance
that the Company would be able to replace the functionality provided by the
third-party software currently used in the Company's products if it becomes
obsolete or incompatible with future versions or enhancements of the Company's
products. The loss of or inability to maintain any of these software licenses,
or the inability of the third parties to timely and cost-effectively enhance
their products, could result in delays or reductions in product shipments by the
Company until equivalent software could be developed internally or identified,
licensed and integrated. This could have a material adverse effect on the
Company's business, operating results and financial condition.
EMPLOYEES
As of June 30, 1996, the Company had 328 employees, including 82 engaged in
research and development activities, 75 in sales and marketing, 112 in
professional services and 59 in administration and finance. None of the
Company's employees is represented by a collective bargaining agreement, nor has
the Company experienced work stoppages. The Company believes that its relations
with its employees are good.
The Company's success depends to a significant degree on the continuing
contributions of its key management, sales, professional services, customer
support and product development personnel. The loss of key personnel could have
a material adverse effect on the Company. The Company believes that its future
success will depend in large part upon its ability to attract and retain highly
skilled managerial, sales, professional services, customer support and product
development personnel. Competition for qualified personnel in the software
industry is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. Failure to attract and
retain key personnel could have a material adverse effect on the Company's
business, operating results and financial condition.
-15-
<PAGE>
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, customer
support and product development facilities are located in Folsom, California in
two buildings of approximately 35,000 square feet and 11,460 square feet,
respectively. These facilities are leased, with the leases expiring in 1999 and
1997, respectively. The Company has an option to renew the lease with respect to
the 35,000-square-foot facility for up to an additional five years. In addition,
the Company leases offices in the following metropolitan areas: Atlanta,
Beijing, Chicago, Dallas, Denver, Incline Village, Kansas City, New York,
Ontario, San Francisco, Seattle, Seoul, Singapore, Washington, D.C., and
Westport. The Company believes that its existing facilities are adequate to meet
its current needs and that suitable additional or alternative space will be
available in the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and key employees of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Joseph T. Ambrozy... 57 President, Chief Executive Officer and Director
David M. Allen...... 38 Vice President, Finance and Administration, and
Chief Financial Officer
Philip N. Cardman... 48 Vice President, General Counsel and Secretary
A.J. Germek......... 53 Vice President, Planning and Development
Kevin McCoy......... 44 Vice President, Research and Development
Tim J. Sebring...... 32 Vice President, Sales and Marketing
Dan Line............ 45 Vice President, Global Accounts and Managing
Director, European Operations
Jim K.R. Souders.... 37 Vice President and Managing Director, Asia Pacific
Operations
</TABLE>
Joseph T. Ambrozy became President of the Company in November 1995, Chief
-----------------
Executive Officer in January 1996, and has served as a director of the Company
since August 1995. From January 1993 to November 1995, Mr. Ambrozy served as
Vice President, Strategic Planning of Bell Atlantic, a telecommunications
company. From May 1988 to January 1993, he served as Vice President,
Information Systems of Bell Atlantic Network Services, Inc. Prior to that time,
Mr. Ambrozy served in a variety of managerial positions for Bell Atlantic and
AT&T. He currently serves on the Board of Directors of Bell Atlantic Washington
D.C., Grupo Iusacell S.A. de C.V., Sodalia S.p.A., Chesapeake Directory Sales
Company and Bell Atlantic Directory
-16-
<PAGE>
Graphics. Mr. Ambrozy received a BE degree in Mechanical Engineering and an MS
degree in Industrial Management from Stevens Institute of Technology.
David M. Allen has served as Vice President and Chief Financial Officer of
--------------
the Company since July 1996. David M. Allen joined the Company as Vice
President, Finance and Administration, and Chief Financial Officer in July 1996.
From 1991 to July 1996, he was Vice President and Chief Financial Officer at
Telecommunications Techniques Corporation (TTC), which is a subsidiary of
Maryland-based communications test equipment manufacturer, Dynatech Corporation.
Mr. Allen joined TTC in 1985 as Controller and Accounting Manager, and was
Director of Finance and Administration from 1988 to 1991. Previously, Mr. Allen
was with Automata, Inc., and Stoy, Malone & Co. Mr. Allen holds a BA degree in
Accounting from the University of Maryland and is a Certified Public Accountant.
Philip N. Cardman became Vice President, General Counsel and Secretary of
-----------------
the Company in May 1996. From 1989 to May 1996, he was Vice President and
General Counsel as well as Vice President, Business Development at Convex
Computer Corporation, a manufacturer of supercomputer systems. From 1981 to
1989, he served in various management positions at Tandem Computers Inc. Mr.
Cardman holds a BA degree from Washington University and a JD degree from Duke
University. He is a member of the California and Texas Bars.
A.J. Germek became Vice President, Planning and Development at the Company
-----------
in February 1996. From 1992 to 1996 and from 1986 to 1990, he had been a
Principal at Princeton Associates, a management consulting firm specializing in
business planning, financial management and information systems planning. From
1990 to 1992, Mr. Germek was Vice President, Business Development, at Fidelity
Investments. From 1981 to 1986, he held senior management positions at Bell
Atlantic Corporation and AT&T, most recently as Vice President, Personal
Communications Group. He holds a BA degree in Liberal Arts from Cornell
University and a MBA degree from Case Western University, and is a CPA.
Kevin McCoy joined the Company as Vice President, Research and Development,
-----------
in April 1996. He was previously a senior manager at Apple Computer Inc., a
manufacturer of personal computes, where from June 1995 to January 1996, he was
Director of Component Software Engineering and from February 1992 to June 1995,
was Director of Macintosh Desktop Systems Software. Prior to joining Apple, Mr.
McCoy spent 13 years with NCR Corporation, where he held a number of management
positions. Mr. McCoy is a graduate of the University of Oregon, where he
received BS degrees in both Mathematics and Computer Science.
Tim J. Sebring has served as Vice President, Sales and Marketing, of the
--------------
Company since January 1996. From July 1995 to January 1996, he served as Vice
President, Telecommunications Industry and Americas. From July 1993 to July
1995, Mr. Sebring served as Director of Sales and Marketing, Telecommunications
Industry and Americas, and from July 1991 to July 1993, he served as Director of
Sales and Marketing. From September 1986 to July 1991, Mr. Sebring served in a
variety of engineering and sales positions at GTE, a telecommunications company.
Mr. Sebring received a BS degree in Industrial and Management Systems
Engineering from Pennsylvania State University.
Dan Line has served as Managing Director, European Operations since
--------
September 1993 and was also named Vice President, Global Accounts in July 1996.
From 1986 to August 1993, Mr. Line served in a variety of executive sales and
marketing positions for GTE, most recently as Regional Sales Manager, Major
Accounts. From 1982 to 1986, Mr. Line served as Director of International Sales
of TMC Limited, a division of Philips NV, a voice and data communications
company. Mr. Line studied Business at San Jose State University and
International Business at London University, United Kingdom.
-17-
<PAGE>
Jim K.R. Sounders has served as Managing Director, Asia Pacific Operations
-----------------
of the Company since October 1994. He was also named a Vice President in July
1996. From February 1993 to October 1994, Mr. Souders was Managing Director, New
Business Development, Asia-Pacific Region of the Company. Prior to joining the
Company, Mr. Souders served in several sales and marketing positions, most
recently as International Market Manager, Telco Industry for GTE Information
Services from 1988 to January 1993. He received a B.S. degree in Accounting from
Lewis & Clark College.
-18-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the
section captioned "Common Stock Prices and Dividends" contained in the Company's
1996 Annual Report to Shareholders for the fiscal year ended June 30, 1996,
portions of which are filed as Exhibit 13.1 hereto (the "Annual Report to
Shareholders").
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference from the
Company's Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference from the
Company's Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference from the
Company's Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the Annual Meeting of
Shareholders to be held November 14, 1996, to be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy
Statement"). The information required by this item concerning executive
officers is set forth in Part I of this Report. The information required by
this item concerning compliance with Section 16(a) of the Exchange Act is
incorporated by reference from the section captioned "Compliance with Section
16(a) of the Exchange Act" contained in the Proxy Statement.
-19-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "Record Date and Principal Share Ownership" contained in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
sections captioned "Compensation Committee Interlocks and Insider Participation"
and "Certain Transactions With Management" contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
--------------------
The following financial statements are incorporated by
reference in Item 8 of this Report:
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1996 and 1995
Consolidated Statements of Income for the years ended
June 30, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the
years ended June 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years
ended June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
-----------------------------
II - Valuation and Qualifying Accounts
Additional schedules are not required under the related
schedule instructions or are inapplicable, and therefore have been omitted.
(a)(3) Exhibits
--------
3.1 Restated Articles of Incorporation of the
3.2/1/ Bylaws of the Registrant, as amended to date
10.1/1/ Stock Option Plan and form of agreements thereto
10.2/1/ 1994 Stock Option Plan and form of agreement
thereto
-20-
<PAGE>
10.3/1/ 1995 Employee Stock Purchase Plan and form of
agreements thereto
10.4/1/ 1995 Director Stock Option Plan and form of
agreement thereto
10.5/1/ Form of Indemnification Agreement between the
Registrant and its officers and directors
10.6/1/ Letter Agreement between the Registrant and Wells
Fargo Bank dated December 9, 1994
10.6.2/1/ Revolving Line of Credit executed by Registrant
on behalf of Wells Fargo Bank
10.7/1*/ Sprint Network Management Systems Agreement
between Registrant and Sprint/United Management
Company dated October 18, 1994
10.8/1/ Standard Office Lease-Gross between Registrant
and PIWI Investments dated February 14, 1994
10.9.1/1*/ Letter of Intent between Registrant and McCaw
Cellular Communications, Inc. dated September
1, 1994
10.9.2/1*/ Letter Agreement between Registrant and AT&T
Wireless Services, Inc. dated as September 15,
1994
10.10/1*/ Stockholder Rights Agreement among Registrant,
Tom L. Johnson and Dick G. Vento and the
purchasers of Preferred Stock named therein
dated September 27, 1995
10.11/1/ Voting Agreement by and among Registrant, Tom L.
Johnson, Dick G. Vento and the purchasers of
Preferred Stock named therein dated September
27, 1995
10.12/1/ Letter Agreement between Registrant and Joseph T.
Ambrozy dated as of November 24, 1995
10.13/2/ Master License Agreement dated December 31, 1995
between the Registrant and AT&T Wireless Services,
Inc.
11.1 Statement regarding computation of per share
earnings
13.1 Portions of Registrant's Annual Report to
Shareholders for the fiscal year ended June 30,
1996
23.1 Independent Auditors' Consent and Report on
Schedule
24.1 Power of Attorney (See Page 22)
27.1 Financial Data Schedule
_______________________
* Confidential treatment has been granted with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
/1/ Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (Reg. No. 33-97506) as declared effective by the
Commission on November 30, 1995.
/2/ Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1995.
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
-------------------
during the quarter ended June 30, 1996.
(c) Exhibits. See Item 14(a)(3) above.
--------
(d) Financial Statement Schedules. See Item 14(a)(2) above.
----------------------------
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
OBJECTIVE SYSTEMS INTEGRATORS, INC.
By: /s/ Joseph T. Ambrozy
-------------------------------------
Joseph T. Ambrozy
President, Chief Executive Officer and
Director
Date: September 27, 1996
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Joseph T. Ambrozy and David M. Allen, and each of
them, his true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, to sign any and all amendments (including post-
effective amendments) to this Annual Report on Form 10-K and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitute or substitutes, or any of them, shall do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
Signature Title Date
- ------------------------ -------------------------------- ------------------
/s/ Joseph T. Ambrozy President, Chief Executive Officer September 27, 1996
- ------------------------ Director (Principal Executive
(Joseph T. Ambrozy) Officer)
/s/ David M. Allen Vice President, Finance and September 27, 1996
- ------------------------ Administration and Chief Financial
(David M. Allen) Officer (Principal Financial and
Accounting Officer)
-22-
<PAGE>
Signature Title Date
- ------------------------ --------------------------------- ------------------
/s/ Richard G. Vento Co-Chairman of the Board September 27, 1996
- ------------------------
(Richard G. Vento)
/s/ Tom L. Johnson Co-Chairman of the Board September 27, 1996
- ------------------------
(Tom L. Johnson)
/s/ Jonathan B. Shantz Director September 27, 1996
- ------------------------
(Jonathan B. Shantz)
Director September , 1996
- ------------------------
(Dr. Kornel Terplan)
/s/ George F. Schmitt Director September 27, 1996
- ------------------------
(George F. Schmitt)
-23-
<PAGE>
SCHEDULE II
OBJECTIVE SYSTEMS INTEGRATORS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged Balance
Beginning to at End
Classification of Period Operations Deductions of Period
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year Ended:
June 30, 1994 $ -- $245,000 $ -- $245,000
=====================================================
June 30, 1995 $245,000 $360,000 $(245,000) $360,000
=====================================================
June 30, 1996 $360,000 $963,000 $(336,000) $987,000
=====================================================
Allowance for Sales Returns
Year Ended:
June 30, 1994 $ -- $ -- $ -- $ --
=====================================================
June 30, 1995 $ -- $250,000 $ -- $250,000
=====================================================
June 30, 1996 $250,000 $ -- $(150,000) $100,000
=====================================================
</TABLE>
<PAGE>
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
OBJECTIVE SYSTEMS INTEGRATORS, INC.
Tom L. Johnson and Gayety W. Hirahara hereby certify that:
1. They are the duly elected Co-Chief Executive Officer and Secretary,
respectively, of Objective Systems Integrators, Inc., a California corporation.
2. The Restated Articles of Incorporation of this corporation, as
amended to the date of the filing of these Third Restated Articles of
Incorporation, and with the omissions required by Section 910 of the
Corporations Code, are hereby amended and restated to read as follows:
I
The name of this corporation is: Objective Systems Integrators, Inc.
II
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
III
(A) This corporation is authorized to issue 55,000,000 shares of its
capital stock, which shall be divided into two classes known as "Common Stock"
and "Preferred Stock."
(B) The total number of Common Stock which this corporation is
authorized to issue is 50,000,000 and the total number of Preferred Stock which
this corporation is authorized to issue is 5,000,000.
(C) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors of this corporation is authorized to determine or
alter the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock, and within the
<PAGE>
limitations or restrictions in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series, to
increase or decrease (but not below the number of shares of any such series then
outstanding) the number of shares of any such series subsequent to the issue of
shares of that series, to determine the designation and par value of any series
and to fix the number of shares of any series.
IV
(A) Limitation of Directors' Liability. The liability of the directors
----------------------------------
of this corporation for monetary damages shall be eliminated to the fullest
extent permissible under California law.
(B) Indemnification of Corporate Agents. This corporation is
-----------------------------------
authorized to provide indemnification of agents (as defined in Section 317 of
the California Corporations Code) through bylaw provisions, agreements with
agents, vote of shareholders or disinterested directors or otherwise, in excess
of the indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject only to the applicable limits set forth in Section
204 of the California Corporations Code with respect to actions for breach of
duty to the corporation and its shareholders.
(C) Repeal or Modification. Any repeal or modification of the
----------------------
foregoing provisions of this Article Fourth by the shareholders of this
corporation shall not adversely affect any right of indemnification or
limitation of liability of a director or officer of this corporation relating to
acts or omissions occurring prior to such repeal or modification.
3. The foregoing Restated Articles of Incorporation have been duly
approved by the Board of Directors of said corporation.
4. The foregoing Restated Articles of Incorporation were approved by
the required vote of the shareholders of said corporation in accordance with
Sections 902 and 903 of the California General Corporations Code at a Special
Meeting of Shareholders, the record date for which was July 17, 1995. The total
number of outstanding shares of the corporation entitled to vote as of the
record date for said meeting was 200 shares of Common Stock, and 9,831,800
shares of Series A Preferred Stock. The number of shares of stock voting in
favor of the foregoing Restated Articles of Incorporation equalled or exceeded
the vote required. The vote required was more than 50% of the outstanding shares
of Common Stock and more than 50% of the outstanding shares of the Series A
Preferred Stock. The
-2-
<PAGE>
Restated Articles are necessary as a result of the automatic conversion of all
outstanding Preferred Stock upon the effectiveness of the corporation's initial
public offering.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in the foregoing Restated Articles of
Incorporation are true and correct of our own knowledge.
Executed at Folsom, California, on December 5, 1995.
/s/ Tom L. Johnson
------------------------------------------
Tom L. Johnson, Co-Chief Executive Officer
/s/ Gayety W. Hirahara
------------------------------------------
Gayety W. Hirahara, Secretary
-3-
<PAGE>
EXHIBIT 11.1
OBJECTIVE SYSTEMS INTEGRATORS, INC.
COMPUTATION OF EARNINGS PER SHARE
JUNE 30, 1996
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1996 1995 1994
---------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Weighted average common shares
outstanding 31,014 11,266 27,028
Equivalent shares from options granted
during the twelve month period prior to the
Company's initial public offering 322 773 773
Weighted average common equivalent shares
from convertible preferred stock (if-
converted method) -- 15,772 --
Equivalent shares attributable to options
(treasury stock method) 2,111 3,599 1,212
---------------------------------------
Total 33,447 31,410 29,013
=======================================
Net income $9,675 $7,178 $3,729
=======================================
Per share amount $0.29 $0.23 $0.13
=======================================
</TABLE>
<PAGE>
EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Total revenues........................ $ 55,918 $36,011 $19,069 $ 8,659 $ 3,721
Gross profit.......................... 42,733 26,421 13,583 5,663 2,622
Income from operations................ 13,847 11,822 6,375 2,806 521
Net income............................ 9,675 7,178 3,729 1,936 446
Net income per share.................. $ 0.29 $ 0.23 $ 0.13 $ 0.07 $ 0.02
Shares used in per share computation.. 33,447 31,410 29,013 27,617 26,612
- -------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------
JUNE 30, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $ 53,988 $ 763 $ 405 $ 742 $ 685
Working capital....................... 84,805 3,925 3,872 1,641 320
Total assets.......................... 106,513 21,011 10,511 4,138 2,004
Long-term obligations................. -- -- 1 29 42
Total shareholders' equity............ 95,058 14,062 6,502 2,303 346
- -------------------------------------------------------------------------------------------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward looking statements as a result of certain factors
discussed herein.
OVERVIEW
The Company develops, markets and supports object-oriented, client/server
software systems for network operations support and management. The Company was
founded in June 1989 and began shipments of NetExpert in August 1990. As of June
30, 1996, the Company had directly or indirectly licensed its products to more
than 150 customers worldwide. The Company has experienced substantial revenue
growth in each of the last three fiscal years and has been profitable in each of
the last twelve quarters.
Revenue from licenses, service and support of the Company's NetExpert product
line has accounted for substantially all of the Company's revenues since
inception. A typical NetExpert sale generally includes a combination of license
fees, fees for professional services and fees for customer support and training.
The Company believes that revenue from the licenses, service and support of the
NetExpert product line will continue to account for substantially all of the
Company's total revenue for the foreseeable future. A significant portion of the
Company's revenues has been, and will continue to be, derived from substantial
orders placed by large organizations. The timing of these orders and their
fulfillment has caused and will continue to cause material fluctuations in the
Company's operating results, particularly on a quarterly basis. The Company
believes that its quarterly revenues and operating results are likely to vary
significantly in
<PAGE>
the future, that period-to-period comparisons of its revenue and results of
operations are not necessarily meaningful and that quarterly revenues should not
be relied upon as indications of future performance.
The Company distributes and sells NetExpert to end users in North America
primarily through a direct sales organization. Outside of North America, the
Company sells its products and services through systems integrators, local
distributors and, to a lesser extent, through an in-region direct sales force.
The Company intends to enter into additional international markets and to
continue to expand its operations outside of North America by expanding its
direct sales force, opening additional in-region customer support and sales
offices, adding distributors and pursuing additional strategic relationships.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, statement of
income data for the periods indicated.
<TABLE>
<CAPTION>
-------------------------------------------------------
YEAR ENDED JUNE 30, 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C>
Revenues:
License 69% 64% 61%
Service and other 31 36 39
-----------------------
Total revenues 100 100 100
-----------------------
Cost of revenues:
License 2 5 6
Service and other 22 22 23
-----------------------
Total cost of revenues 24 27 29
-----------------------
Gross profit 76 73 71
-----------------------
Operating expenses:
Sales and marketing 26 21 19
Research and development 13 11 9
General and administrative 12 8 10
-----------------------
Total operating expenses 51 40 38
-----------------------
Income from operations 25 33 33
Other income (expense), net 3 1 --
-----------------------
Income before income taxes 28 34 33
Provision for income taxes 11 14 13
-----------------------
Net income 17% 20% 20%
=======================
------------------------------------------------------
</TABLE>
<PAGE>
REVENUES
The Company's revenues are derived from license fees and fees for a full range
of services complementing its products, including professional services,
software maintenance, customer support and training. Software licenses are
generally granted and priced on a per seat basis, although the Company may grant
site, network-wide or enterprise-wide licenses for larger installations. The
Company's software licenses generally provide for an initial license fee and are
non-royalty bearing. Revenue from software licenses for which collectibility is
probable and customer acceptance is not dependent on the fulfillment of other
significant vendor obligations is generally recognized upon shipment and
customer acceptance. Costs associated with insignificant vendor obligations are
accrued. Revenue from software licenses with other significant vendor
obligations is generally recognized using contract accounting on a percentage of
completion basis, using input or output measuring as appropriate.
Although the Company's license agreements generally do not provide for a right
of return, reserves are maintained for returns and potential credit losses,
neither of which has had a material effect on the Company's results of
operations or financial condition through June 30, 1996. The Company offers 12-
month support contracts to its customers which entitle the customer to unlimited
telephone support, product updates and product maintenance during the support
period. Maintenance revenues from ongoing customer support and product upgrades
are deferred and recognized ratably over the term of the maintenance agreement,
typically 12 months. Payments for maintenance fees are generally made in advance
and are non-refundable. Revenues for training, consulting and professional
services are recognized as the services are performed and acceptance criteria
have been met.
Total revenues increased by 55% from $36.0 million in fiscal 1995 to $55.9
million in fiscal 1996 and by 89% from $19.1 million in fiscal 1994 to $36.0
million in fiscal 1995. Total revenues increased in each period primarily due
to increased licenses of NetExpert, and, to a lesser extent, an increase in
professional services and support fees. The Company's product and service list
prices did not change significantly during the comparison periods.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------
REVENUES PERCENTAGE CHANGE
(IN MILLIONS) (FROM PRIOR YEAR)
--------------------------------- -------------------------
REVENUES BY TYPE 1996 1995 1994 1996 1995
- -------------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
License revenues $38.5 $23.1 $11.6 67% 99%
Service and other revenues 17.4 12.9 7.5 35% 72%
---------------------------
Total revenues $55.9 $36.0 $19.1 55% 89%
===========================
- -----------------------------------------------------------------------------------------
</TABLE>
LICENSE REVENUES License revenues as a percentage of total revenues were
69%, 64% and 61% in fiscal 1996, 1995 and 1994, respectively. Substantially all
of the period-to-period growth in license revenues was derived from new customer
installations of NetExpert, as NetExpert continued to gain market acceptance, as
well as from licenses of additional applications and development tools to
existing customers.
The Company anticipates that license revenues will continue to represent a
majority of its total revenues for the foreseeable future. The Company believes
that historic growth rates of the Company's license revenues should not be
relied upon as an indication of growth rates for any future period. The Company
also believes that competition in its markets is likely to increase, which could
result in price reductions, reduced gross margins or loss of market share, any
of which could have a material adverse effect on the Company's business,
operating results and financial condition.
<PAGE>
SERVICE AND OTHER REVENUES Service and other revenues as a percentage of
total revenues were 31%, 36% and 39% in fiscal 1996, 1995 and 1994,
respectively. The growth in service and other revenues in absolute dollars for
each period was primarily attributable to higher demand for the Company's
professional services, including requirements analysis, project management,
system design, customization and installation in connection with the increased
number of licenses of NetExpert and, to a lesser extent, an incremental increase
in maintenance, customer support and training revenues resulting from the larger
installed base of NetExpert.
The Company anticipates that service and other revenues will continue to
represent a significant portion of its total revenues in future periods,
primarily as a result of continued demand for professional services in
connection with increased licenses of NetExpert, renewal of existing support
contracts and incremental support revenues attributable to the increasing
installed base of NetExpert. The Company believes that prior growth rates of the
Company's service and other revenues may not be sustainable and should not be
relied upon as an indication of growth rates for any future period.
Revenues from outside of the United States represented 31%, 24% and 26% of total
revenues for fiscal 1996, 1995 and 1994, respectively. Revenues from customers
in Asia and the Pacific Rim accounted for 23% of total revenues in fiscal 1996
compared to 12% in 1995 and 13% in 1994. Sales to European customers accounted
for 5% of total revenues in fiscal 1996 compared to 6% in 1995 and 4% in 1994.
The Company expects that international revenues will continue to account for a
significant portion of its total revenues in future periods. The Company intends
to enter additional international markets and continue to expand its existing
international operations. The Company's international business involves a number
of inherent risks, including longer receivable collection periods, greater
difficulty in collections, difficulty in staffing and managing operations, a
longer sales cycle, potentially unstable political and economic conditions,
language barriers, cultural differences, seasonality, unexpected changes in
regulatory requirements, including a slowdown in the rate of privatization of
telecommunications services providers, reduced protection for intellectual
property rights, potentially adverse tax consequences, tariffs, and other trade
barriers. In addition, access to foreign markets is often difficult due to the
established relationships between government owned or controlled communications
companies and local suppliers of communications products. There can be no
assurance the Company will be able to successfully penetrate international
markets. In addition, there can be no assurance that the Company will be able to
sustain or increase revenue derived from international licensing and services or
that the above factors will not have a material adverse effect on the Company's
future international business and, consequently, on the Company's overall
business, operating results and financial condition.
COST OF REVENUES
COST OF LICENSE REVENUES Cost of license revenues consists primarily of
license fees paid to third-party software vendors and the costs of product media
and duplication, manuals, packaging materials, shipping expenses, amortization
of capitalized software costs and related labor costs. Cost of license revenues
were $1.2 million, $1.7 million and $1.1 million in fiscal 1996, 1995 and 1994,
respectively, resulting in gross profit from license revenues of 97%, 93% and
91%, respectively. The improvements in gross profit from license revenue in each
period resulted primarily from reduced license fees paid to third-party software
vendors.
COST OF SERVICE AND OTHER REVENUES Cost of service and other revenues
consists primarily of personnel costs for providing professional services,
consulting fees paid to third-party providers of professional services, and
costs for telephone support, maintenance, shipment of product upgrades and
customer training. Cost of service and other revenues were $11.9 million, $7.9
million and $4.4 million in fiscal 1996, 1995 and 1994, respectively, resulting
in gross profit from service and other revenues of 31%, 39% and 41%,
respectively. Gross profit from service and other revenues decreased as a result
of increased personnel-related costs, as the Company continued to build its
customer support and training organizations. The Company believes that cost of
service and other revenue will increase in absolute
<PAGE>
dollars and may increase as a percentage of service and other revenue in the
future as a result of continued investment in its service organization.
OPERATING EXPENSES
SALES AND MARKETING Sales and marketing expenses consist primarily of
salaries, commissions and bonuses for sales and marketing personnel, facilities
costs associated with the Company's sales and customer support offices,
promotional expenses and contract administration. Sales and marketing expenses
were $15.1 million, $7.8 million and $3.6 million, or 26%, 21% and 19% of total
revenues, in fiscal 1996, 1995 and 1994, respectively. The increase in sales and
marketing expenses resulted primarily from the expansion of the Company's sales
and marketing organization, expansion of the Company's indirect sales channels,
particularly outside of North America, increased spending on contract
administration and increased expenses for trade shows, advertising and other
marketing programs. The Company expects that sales and marketing expenses in
future periods will continue to increase in absolute dollars, and may increase
as a percentage of total revenues.
RESEARCH AND DEVELOPMENT Research and development expenses were $7.1
million, $4.0 million and $1.8 million, or 13%, 11% and 9% of total revenues, in
fiscal 1996, 1995 and 1994, respectively. The increase in research and
development expenses was primarily attributable to increased staffing and
associated equipment, facilities and support for software engineers. The Company
anticipates that it will continue to commit significant resources to research
and development in future periods to enhance and extend its core technology and
product line. The Company expects that research and development expenses in
future periods will continue to increase in absolute dollars, and may increase
as a percentage of total revenues.
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, costs for the research and development of new software products and
substantial enhancements to existing software products are expensed as incurred
until technological feasibility of the product has been established, at which
time additional costs are capitalized. The Company did not capitalize any
software development costs during fiscal 1996. The Company capitalized certain
software development costs, including the costs of purchased software, totaling
approximately $210,000 and $484,000 in fiscal 1995 and 1994, respectively. These
costs are amortized over the estimated economic life of the underlying product,
generally not exceeding three years. See Note 2 of Notes to Consolidated
Financial Statements.
GENERAL AND ADMINISTRATIVE General and administrative expenses consist
primarily of personnel costs for finance, human resources, network and
information systems and general management, as well as insurance and
professional services expenses. General and administrative expenses were $6.7
million, $2.8 million and $1.8 million, or 12%, 8% and 10% of total revenues, in
fiscal 1996, 1995 and 1994, respectively. The increase in general and
administrative expenses resulted primarily from increased staffing, facilities
costs and associated expenses necessary to manage and support the Company's
growth. The Company is in the process of supplementing its executive management
team. As a result, the Company expects that general and administrative expenses
will increase in future periods as such individuals are hired.
The Company has recorded deferred compensation expense with respect to certain
stock options granted since February 1994. The amortization of deferred
compensation expense is recorded in each of sales and marketing, research and
development and general and administrative expenses. The amortization of
deferred compensation expense resulted in a charge to operations of $424,000,
$382,000 and $470,000 for fiscal 1996, 1995 and 1994, respectively, and will
result in charges in future periods aggregating approximately $1.0 million to be
amortized through June 1999 over the vesting periods of the related stock
options.
<PAGE>
OTHER INCOME (EXPENSE), NET Other income (expense), net was $2.0
million, $260,000 and ($107,000), or 3%, 1% and 0% of total revenues, in fiscal
1996, 1995 and 1994, respectively. The increase in 1996 was primarily due to
interest income earned on the Company's cash and cash equivalents primarily
resulting from the net proceeds of the Company's initial public offering of
Common Stock in December 1995.
PROVISION FOR INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. The provision for
income taxes includes federal, state and foreign income taxes. The effective tax
rate in fiscal 1996 was 39% and in 1995 and 1994 was 41%. The effective tax
rates for such periods differ from the federal statutory rate primarily due to
state income taxes, partially offset by certain research and development tax
credits. See Note 5 of Notes to Consolidated Financial Statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's quarterly operating results have in the past and will in the
future vary significantly depending on the timing of large orders and shipments.
The fluctuation in quarterly license revenues is due to the timing of large
orders by customers such as AT&T Wireless and Sprint. Large orders are typically
preceded by long sales cycles and, accordingly, it has been and will continue to
be difficult to predict the timing of these orders. The Company expects that
quarterly license revenues will continue to vary significantly based upon the
timing of large orders. The failure to obtain large orders during any given
reporting period, for whatever reason, would have a material adverse effect on
the Company's business, operating results and financial condition.
The Company's quarterly operating results have also varied significantly
depending on factors such as capital spending patterns of the Company's
customers, changes in pricing policies by the Company or its competitors, the
lengthy sales cycles of the Company's products, increased competition, the
cancellation of licenses or support agreements, changes in operating expenses,
personnel changes, fluctuation in the demand for NetExpert, the number, timing
and significance of new product and product enhancement announcements by the
Company and its competitors, the ability of the Company to develop, introduce
and market new and enhanced versions of NetExpert on a timely basis, the mix of
direct and indirect sales and general economic factors, among others.
Due to the foregoing factors, the implementation by the Company of a new
forecasting and budgeting system that has not been tested against historical
results, and the addition of new senior management who initially will have
limited historical perspective regarding the Company's operations, quarterly
revenue and operating results have been and will continue to be difficult to
forecast.
Revenues are also difficult to forecast because the Company's sales cycle, from
initial evaluation to product shipment, varies substantially from customer to
customer. The purchase of a network operations support and management
application generally involves a significant commitment of capital, with the
attendant time requirements often associated with customers' internal procedures
to approve large capital expenditures and test and accept new technologies that
affect mission critical operations. For these and other reasons, the sales cycle
associated with the purchase of the Company's products is typically lengthy and
subject to a number of significant risks, including customers' budgetary
constraints and internal acceptance reviews, over which the Company has little
or no control.
In addition, the Company typically realizes a significant portion of license
revenues in the last month of a quarter, frequently in the last weeks or even
days of a quarter. The Company's expense levels are based, in part, on its
expectations as to future revenues. If revenues are below expectations,
operating results are likely to be materially adversely affected. In particular,
because only a small portion of the Company's expenses varies with revenue, net
income may be disproportionately affected by a decrease from anticipated
<PAGE>
revenue. The Company's business has experienced and is expected to continue to
experience significant seasonality, in part due to an increase in capital
expenditures by customers in certain quarters. The Company has historically had
higher sales for its software products during the quarter ending in December and
weaker sales during the quarter ending in March. The Company believes this
pattern will continue.
Based upon all of the foregoing, the Company believes that quarterly revenues
and operating results are likely to vary significantly in the future. The
Company also believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Further, it is likely that in some future
quarter the Company's revenue or operating results will be below the
expectations of public market analysts and investors. In that event, the price
of the Company's Common Stock will be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations primarily through
cash generated from operations, sales of its common stock, and to a lesser
extent, capital equipment leases. For the year ended June 30, 1996, cash used in
operating activities of $3.1 million was primarily attributable to increases in
receivables, partially offset by growth in payables and deferred revenue. Cash
used in investing activities of $3.4 million in the year ended June 30, 1996
related primarily to $7.6 million in capital expenditures partially offset by
repayment of loans to shareholders of $4.2 million. Cash flows from financing
activities of $59.8 million in the year ended June 30, 1996 were primarily
attributable to the net proceeds of $59.5 million from the Company's initial
public offering in November 1995 and, to a lesser extent, $672,000 from the
exercise of stock options to purchase common stock, partially offset by
repayment of the Company's line of credit.
As of June 30, 1996, the Company had working capital of approximately $84.8
million, including $54.0 million in cash and cash equivalents. In addition, the
Company has an unsecured revolving line of credit with a bank, pursuant to which
the Company may borrow up to $5.0 million. Under the line of credit, which
expires in November 1996, borrowings bear interest at either (i) a fluctuating
rate per annum equal to the prime lending rate in effect or (ii) a fixed rate
per annum equal to 2% above the London Interbank Offered Rate. As of June 30,
1996, there were no borrowings outstanding under the line of credit. The
agreement, among other conditions and restrictions, contains certain financial
covenants and as of June 30, 1996, the Company was in compliance with these
provisions.
From time to time, certain accounts receivable of the Company remain outstanding
beyond their payment terms. The Company maintains an allowance for doubtful
accounts that it believes is adequate to cover any potential credit losses. As
of June 30, 1996, accounts receivable of approximately $8.6 million had been
outstanding for more than 120 days, of which approximately $5.9 million were
beyond payment terms. The reason such accounts are beyond payment terms varies
from customer to customer but generally relates primarily to delays in the
launch of the customer's system in which the Company's product is included and
international customers, which typically are granted longer payment terms.
Approximately $5.2 million of the accounts receivable outstanding greater than
120 days as of June 30, 1996 were due from eight customers of the Company.
Management of each of these customers has acknowledged to the Company the
customer's obligation to pay the amounts due. There is no dispute regarding
acceptance of the product or the amount of the receivable. Each of these
organizations continues to license products and purchase services from the
Company. In addition, the Company believes that each of these customers is
financially capable of paying the receivable.
The Company currently has no material commitments for capital expenditures,
although management intends to continue to support the growth of its operations.
In fiscal 1996, the Company incurred approximately $7.6 million in capital
expenditures, which primarily related to investment in computer hardware and
software and networking and communications equipment. Management expects to
continue to support the growth of the
<PAGE>
Company's operations in fiscal 1997 and estimates that the Company will incur
capital expenditures equal to or in excess of fiscal 1996 spending.
The Company believes that existing cash balances and cash flow from operations
will be sufficient to support the Company's working capital requirements for at
least the next twelve months. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's working capital requirements, the Company
may be required to raise additional funds. No assurance can be given that
additional financing will be available or that, if available, such financing
will be obtainable on terms favorable to the Company or its shareholders. To the
extent the Company raises additional capital by issuing equity or convertible
debt securities, ownership dilution to the Company's shareholders will result.
In the event that adequate funds are not available, the Company's business may
be adversely affected.
<PAGE>
OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
JUNE 30,
- ---------------------------------------------------------------------------------------------
(in thousands) 1996 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 53,988 $ 763
Accounts receivable (net of allowances of $987 in 1996
and $360 in 1995)............................................... 32,198 8,918
Income tax refund receivable...................................... 7,710 --
Deferred income taxes............................................. 1,446 462
Prepaid expenses and other current assets......................... 918 731
-------- -------
Total current assets........................................... 96,260 10,874
Property and equipment - net........................................ 9,822 5,116
Notes receivable from shareholders.................................. -- 4,412
Other assets (net of accumulated amortization of $748 in 1996
and $527 in 1995).................................................. 431 609
-------- -------
Total assets................................................... $106,513 $21,011
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 3,462 $ 1,861
Accrued compensation.............................................. 2,353 1,017
Accrued liabilities............................................... 291 431
Income taxes payable.............................................. -- 233
Deferred revenue.................................................. 5,349 3,007
Line of credit.................................................... -- 400
-------- -------
Total current liabilities...................................... 11,455 6,949
-------- -------
Commitments
Shareholders' equity:
Preferred stock, no par value: 5,000 shares in 1996 and 36,251
shares in 1995 authorized; none in 1996 and 27,037 shares in
1995 issued and outstanding..................................... -- 1,084
Common stock, no par value: 50,000 shares in 1996 and 25,000
shares in 1995 authorized; 31,301 shares in 1996 and 1
share in 1995 issued and outstanding............................ 73,207 1,226
Deferred stock compensation....................................... (996) (1,420)
Retained earnings................................................. 22,847 13,172
-------- -------
Total shareholders' equity..................................... 95,058 14,062
-------- -------
Total liabilities and shareholders' equity..................... $106,513 $21,011
====================
- ---------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
- -------------------------------------------------------------------------
(in thousands, except per share data) 1996 1995 1994
<S> <C> <C> <C>
Revenues:
License............................... $38,525 $23,119 $11,558
Service and other..................... 17,393 12,892 7,511
-----------------------------
Total revenues..................... 55,918 36,011 19,069
-----------------------------
Cost of revenues:
License............................... 1,242 1,690 1,085
Service and other..................... 11,943 7,900 4,401
-----------------------------
Total cost of revenues............. 13,185 9,590 5,486
-----------------------------
Gross profit............................ 42,733 26,421 13,583
-----------------------------
Operating expenses:
Sales and marketing................... 15,070 7,815 3,612
Research and development.............. 7,117 3,994 1,760
General and administrative............ 6,699 2,790 1,836
-----------------------------
Total operating expenses........... 28,886 14,599 7,208
-----------------------------
Income from operations.................. 13,847 11,822 6,375
Other income (expense), net............. 2,003 260 (107)
-----------------------------
Income before income taxes.............. 15,850 12,082 6,268
Provision for income taxes.............. 6,175 4,904 2,539
-----------------------------
Net income.............................. $ 9,675 $ 7,178 $ 3,729
=============================
Net income per share.................... $ 0.29 $ 0.23 $ 0.13
=============================
Shares used in per share computation.... 33,447 31,410 29,013
=============================
- -------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
SERIES A DEFERRED
CONVERTIBLE STOCK RETAINED
PREFERRED STOCK COMMON STOCK COMPENSATION EARNINGS TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
(in thousands) SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1993............ -- $ -- 27,032 $ 35 $ -- $ 2,265 $ 2,300
Common stock issued................ -- -- 28 2 -- -- 2
Repurchase of common stock......... -- -- (22) 1 -- -- 1
Deferred stock compensation........ -- -- -- 1,225 (1,225) -- --
Amortization of deferred stock
compensation..................... -- -- -- -- 470 -- 470
Net income......................... -- -- -- -- -- 3,729 3,729
-----------------------------------------------------------------------------------------
Balance at June 30, 1994........... -- -- 27,038 1,263 (755) 5,994 6,502
Conversion of common stock
to Series A preferred
stock............................ 27,037 37 (27,037) (37) -- -- --
Deferred stock compensation........ -- 1,047 -- -- (1,047) -- --
Amortization of deferred stock
compensation..................... -- -- -- -- 382 -- 382
Net income......................... -- -- -- -- -- 7,178 7,178
------------------------------------------------------------------------------------------
Balance at June 30, 1995........... 27,037 1,084 1 1,226 (1,420) 13,172 14,062
Conversion of preferred stock
to common stock at initial
public offering.................. (27,037) (1,084) 27,037 1,084 -- -- --
Common stock issued at
initial public offering, net of
offering costs of $6,059........ -- -- 3,450 59,491 -- -- 59,491
Common stock issued under
stock plans...................... -- -- 813 672 -- -- 672
Amortization of deferred stock
compensation..................... -- -- -- -- 424 -- 424
Tax benefit from exercise of
stock options.................... -- -- -- 10,734 -- -- 10,734
Net income......................... -- -- -- -- -- 9,675 9,675
-----------------------------------------------------------------------------------------
Balance at June 30, 1996........... -- $ -- 31,301 $73,207 $ (996) $22,847 $95,058
=========================================================================================
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
- --------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 9,675 $ 7,178 $ 3,729
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization.................................... 3,092 1,516 566
Loss on disposal of property and equipment....................... -- 7 46
Deferred income taxes............................................ (345) (368) (213)
Amortization of deferred stock compensation...................... 424 382 470
Interest (earned) received on loans to shareholders.............. 212 (212) --
Effect of changes in:
Accounts receivable........................................... (23,280) (1,806) (4,499)
Income tax refund receivable.................................. (7,710) -- --
Prepaid expenses and other current assets..................... (187) (368) (270)
Accounts payable.............................................. 1,601 986 566
Accrued liabilities........................................... 1,196 682 210
Income taxes payable.......................................... 9,862 (315) 384
Deferred revenue.............................................. 2,342 1,228 1,107
------------------------------
Net cash provided by (used for) operating activities....... (3,118) 8,910 2,096
------------------------------
Cash flows from investing activities:
Loans to shareholders collected (issued)............................ 4,200 (4,200) --
Purchases of property and equipment................................. (7,577) (4,555) (1,738)
Purchase of other assets............................................ (43) (210) (692)
Proceeds from disposal of property and equipment.................... -- 17 8
------------------------------
Net cash used for investing activities..................... (3,420) (8,948) (2,422)
------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net......................... 60,163 -- 1
Principal payments on capital leases................................ -- (4) (12)
Proceeds (repayments) of line of credit, net........................ (400) 400 --
------------------------------
Net cash provided by financing activities.................. 59,763 396 (11)
------------------------------
Net increase (decrease) in cash and cash equivalents.................. 53,225 358 (337)
Cash and cash equivalents:
Beginning of the year............................................... 763 405 742
------------------------------
End of the year..................................................... $ 53,988 $ 763 $ 405
==============================
Other cash flow information
Cash paid during the period for:
Interest......................................................... $ 49 $ 78 $ 10
==============================
Income taxes..................................................... $ 3,790 $ 5,586 $ 2,368
==============================
- -------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Objective Systems Integrators, Inc. ("OSI" or the "Company") develops, markets
and supports object-oriented, client/server software solutions for network
operations support and management. The Company was founded in June 1989 and
began shipments of NetExpert in August 1990. The Company's NetExpert family of
products includes a software framework, off-the-shelf network operations support
and management applications, programmerless development tools and related
professional services. These products and services are designed for use in
complex, mission-critical networks and enable the rapid deployment of new and
enhanced services over these networks. The Company distributes and sells
NetExpert to end users in North America primarily through a direct sales
organization. Outside North America, the Company sells its products and services
principally through systems integrators and local distributors and, to a lesser
extent, through an in-region direct sales force.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary after elimination of
significant intercompany transactions and balances.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of cash on
deposit with banks and high-quality money market instruments with original
maturities of 90 days or less. Due to the short period of time to maturity, fair
values of cash and cash equivalents approximate cost.
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Depreciation is computed using the straight-line and accelerated methods over
the estimated useful lives of the assets, which range from three to seven years.
OTHER ASSETS: Other assets consist primarily of software development costs. In
accordance with Statement of Financial Accounting Standards NO. 86, Accounting
for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed,
costs for the research and development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility of the product has been established, at which time
additional costs are capitalized (ending when the product is available for
general release to customers). The Company did not capitalize any software
development costs in 1996. The Company capitalized $210,000 and $484,000 of
software development costs in 1995 and 1994, respectively. Amortization is
computed using the straight-line method over the estimated economic life of the
products (not to exceed three years). Amortization of software development costs
charged to expense was $221,000, $163,000 and $150,000 for 1996, 1995 and 1994,
respectively.
13
<PAGE>
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Company will adopt SFAS 121 in the
first quarter of fiscal year 1997 and, based on current circumstances, does not
believe the effect of adoption will be material.
REVENUE RECOGNITION: Revenues consist primarily of fees for licenses of the
Company's software products, maintenance and customer support and consulting
contracts.
License revenue: Revenue from software licenses for which collectibility is
probable and customer acceptance is not dependent on the fulfillment of other
significant vendor obligations is generally recognized after shipment and
customer acceptance. Costs associated with insignificant vendor obligations
are accrued. Revenue from software licenses with other significant vendor
obligations is generally recognized using contract accounting on a percentage
of completion basis using input or output measuring as appropriate.
Service and other revenue: Revenue from support contracts is recognized
ratably over the term of the agreement, which is typically one year. Other
revenue is derived primarily from professional services. Such revenue is
generally recognized using the percentage of completion method on a time and
materials basis.
Deferred revenue: Deferred revenue includes unearned amounts received under
support contracts and amounts billed to customers but not recognized as
revenue.
CONCENTRATION OF CREDIT RISKS: The Company sells its products throughout the
world to customers primarily in the telecommunications industry. The Company
performs periodic credit evaluations of customers and generally does not require
collateral or other security to support accounts receivable. The Company
maintains reserves for credit losses, and such losses have been within
management's expectations.
NET INCOME PER SHARE: Net income per share is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletins and Staff Policy, such computations include all common and
common equivalent shares issued within 12 months of the initial public offering
date as if they were outstanding for all periods presented prior to the
offering, using the treasury stock method. Common equivalent shares consist of
the incremental common shares issuable upon the conversion of the convertible
preferred stock (using the if-converted method) and shares issuable upon the
exercise of stock options (using the treasury stock method).
STOCK BASED COMPENSATION: The Company accounts for its stock option and
employee stock purchase plans in accordance with the provisions of the
Accounting Principles Board's Opinion No. 25 ("APB 25"), Accounting for Stock
Issued to Employees. In October 1995, the Financial Accounting Standards Board
released Statement of Financial Accounting Standard No. 123 ("SFAS 123"),
Accounting for Stock Based Compensation. SFAS 123 provides an alternative to
APB 25 and is effective for the Company beginning in fiscal 1997. The Company
expects to continue to account for its employee stock plans in accordance with
the provisions of APB 25. Accordingly, SFAS 123 is not expected to have a
material impact on the Company's financial position or results of operations.
INCOME TAXES: Income taxes are recorded under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, for all
periods presented. This statement requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of temporary
differences between amounts carried on the financial statements and the tax
bases of assets and liabilities.
14
<PAGE>
RECLASSIFICATION: Certain prior year balances have been reclassified to comply
with current year presentation and did not have an effect on the Company's net
income or shareholders' equity.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
JUNE 30,
- ------------------------------------------------------------------
1996 1995
<S> <C> <C>
Computer equipment...................... $11,609 $ 5,346
Furniture and fixtures.................. 1,298 814
Machinery and equipment................. 1,001 347
Trade show equipment.................... 399 264
Leasehold improvements.................. 312 271
------------------
Total................................. 14,619 7,042
Accumulated depreciation and
amortization........................... (4,797) (1,926)
------------------
Property and equipment -- net........... $ 9,822 $ 5,116
==================
- --------------------------------------------------------------
</TABLE>
4. LINE OF CREDIT
The Company has an unsecured revolving line of credit with a bank, pursuant to
which the Company may borrow up to $5 million. Under the line of credit
agreement, which expires in November 1996, borrowings bear interest at either
(i) a fluctuating rate per annum equal to the prime rate in effect or (ii) a
fixed rate per annum equal to 2% above the London Interbank Offered Rate. As of
June 30, 1996, there were no borrowings outstanding under the line of credit.
The agreement, among other conditions and restrictions, contains certain
financial covenants and as of June 30, 1996, the Company was in compliance with
these provisions.
5. INCOME TAXES
The provision for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
YEAR ENDED JUNE 30,
- -------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal.......................... $5,144 $3,841 $2,057
State............................ 1,172 1,195 619
Foreign.......................... 204 236 76
----------------------------
Total current................. 6,520 5,272 2,752
----------------------------
Deferred
Federal.......................... (206) (220) (170)
State............................ (139) (148) (43)
----------------------------
Total deferred................ (345) (368) (213)
----------------------------
Total provision for income taxes... $6,175 $4,904 $2,539
============================
- -------------------------------------------------------------------
</TABLE>
The income tax benefit related to the exercise of stock options reduces taxes
currently payable and is credited to common stock. Such amount was approximately
$10.7 million in 1996.
15
<PAGE>
Total income tax expense differs from the amounts computed by applying the
statutory federal income tax rate to income before taxes as a result of the
following (in thousands):
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Statutory federal tax................... $5,548 $4,229 $2,194
State taxes............................. 951 725 376
Benefit from Foreign Sales
Corporation........................... (184) -- --
Research and other credits.............. (254) (132) (72)
Other................................... 114 82 41
----------------------------
Total provision for income taxes........ $6,175 $4,904 $2,539
============================
-----------------------------------------------------------------------
The components of deferred tax assets and liabilities are (in thousands):
-----------------------------------------------------------------------
JUNE 30,
-----------------------------------------------------------------------
1996 1995
<S> <C> <C>
Deferred tax assets:
Allowances for doubtful accounts and
sales returns....................... $ 461 $ 264
Deferred compensation................. 293 487
Accrued expense....................... 618 73
Tax credit carryforwards.............. 639 --
-----------------
Total deferred tax assets.......... 2,011 824
-----------------
Deferred tax liabilities:
Depreciation and amortization......... (201) (110)
Capitalized software.................. (138) (149)
Other................................. (226) (103)
-----------------
Total deferred tax liabilities..... (565) (362)
-----------------
Deferred income tax assets--net......... $1,446 $ 462
=================
-----------------------------------------------------------------------
</TABLE>
As of June 30, 1996, the Company had federal and state credit carryforwards of
$639,000 which will expire at various dates between 2001 and 2011.
16
<PAGE>
6. LEASE OBLIGATIONS
The Company leases its office facilities under operating lease agreements. Rent
expense was approximately $1.2 million, $713,000 and $363,000 for 1996, 1995 and
1994, respectively.
Future minimum lease payments under noncancellable operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
----------------------------------
YEAR ENDING JUNE 30,
----------------------------------
<S> <C>
1997.................... $1,256
1998.................... 1,038
1999.................... 838
2000.................... 80
2001.................... 23
------
Total................... $3,235
======
</TABLE>
7. EMPLOYEE BENEFIT PLAN
The Company has adopted a qualified 401(k) profit sharing plan (the "Plan") for
all eligible employees who have attained the age of 21 years and completed three
months of service. The Company may contribute a discretionary matching
contribution as a percentage of an employee's salary reduction contribution.
Effective July 1, 1994, the Company elected to make a discretionary matching
contribution on a payroll by payroll basis, equal to 50% of the employee's
salary contribution up to a maximum of 4% of the employee's salary contribution.
The Company's contributions to the Plan were approximately $328,000, $275,000
and $200,000 in 1996, 1995 and 1994, respectively. Vesting on all employer
contributions is on a graduated schedule, with full vesting after the seventh
year of service with the Company.
8. RELATED PARTY TRANSACTIONS
In 1996, the Company had sales of approximately $3.2 million to Omnipoint
Communication, Inc. ("Omnipoint"). The President and Chief Executive Officer of
Omnipoint is a member of the Board of Directors of OSI. At June 30, 1996,
accounts receivable from Omnipoint were approximately $3.2 million.
In 1995 and 1994, the Company paid $225,000 and $380,000, respectively, for
software development costs and software licenses to a corporation in which the
Company's principal shareholders have a minority interest.
Notes receivable from shareholders, which bore interest at 6.66% and were
collateralized by deeds of trust, were collected in 1996.
9. SEGMENT AND GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
The Company conducts its business within one business segment. In 1996, no
customer accounted for more than 10% of total revenues. In 1995, two customers
accounted for 15.8% and 10.5% of total revenues, respectively. In 1994, one
customer accounted for 16.9% of revenues.
17
<PAGE>
Export sales information as a percentage of revenues is as follows ("Other"
consists of export sales to Latin America and Canada):
<TABLE>
<CAPTION>
-------------------------------------------------
YEARS ENDED JUNE 30,
-------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Europe................. 5% 6% 4%
Asia and Pacific Rim... 23 12 13
Other.................. 3 6 9
---------------------
Total.................. 31% 24% 26%
=====================
-------------------------------------------------
</TABLE>
10. SHAREHOLDERS' EQUITY
In November 1995, the Company completed the intital public offering of its
common stock. The Company sold 3,450,000 shares for net proceeds of $59.5
million.
PREFERRED STOCK: Upon the closing of the Company's initial public offering in
November 1995, all issued and outstanding shares of the Company's Series A
convertible preferred stock were converted into approximately 27,037,000 shares
of the Company's common stock.
STOCK OPTION PLANS: The Company's 1994 Non-Qualifying Stock Option Plan (the
"Non-Qualified Plan") provides for the granting of non-qualified stock options
to officers, key employees, consultants and directors of the Company to purchase
common stock at prices not less than the fair value of such stock at the date of
grant as determined by the Board of Directors. Options granted under the Non-
Qualified Plan generally become exercisable after one year in 20% annual
increments and expire ten years from the date of grant. The Company reserved
4,070,000 shares of common stock for issuance under the Non-Qualified Plan. No
shares are available for future grant under this plan.
In November 1994, the Company adopted the 1994 Stock Option Plan (the "1994
Plan") under which a total of 3,624,500 shares of common stock, as amended, were
reserved for issuance to employees and consultants. Options granted under the
1994 Plan generally vest ratably over four years and expire ten years from the
date of grant.
In August 1995, the Company adopted the 1995 Directors Stock Option Plan (the
"Director Plan") and reserved 550,000 shares of common stock for issuance
thereunder. Under the Director Plan, non-employee directors are granted options
to purchase common stock at the fair market value as of the date of grant.
Options vest ratably over four years and expire ten years from the date of
grant.
18
<PAGE>
Option activity under all plans was as follows (in thousands, except prices):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
AVAILABLE FOR OPTIONS PRICE
FUTURE GRANT OUTSTANDING RANGE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at July 1, 1993
Authorized......................... 5,500 -- --
Granted............................ (3,713) 3,713 $ 0.08
Cancelled.......................... 55 (55) $ 0.08
-------------------------------------------
Balance at June 30, 1994.............. 1,842 3,658 $ 0.08
Authorized......................... 2,250 -- --
Granted............................ (1,536) 1,536 $ 0.18-$10.18
Cancelled.......................... 619 (619) $ 2.11
Termination of Non-Qualified Plan.. (1,430) -- --
-------------------------------------------
Balance at June 30, 1995 1,745 4,575 $ 0.08-$10.18
Authorized......................... 1,925 -- --
Granted............................ (1,196) 1,196 $10.18 - $47.00
Exercised.......................... -- (776) $ 0.08 - $0.18
Cancelled.......................... 52 (52) $ 0.18 - $47.00
-------------------------------------------
Balance at June 30, 1996.............. 2,526 4,943 $ 0.08 - $47.00
===========================================
- --------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1996, options to purchase approximately 2,809,000 shares of common
stock were exercisable at prices ranging from $0.08 to $10.18 per share.
EMPLOYEE STOCK PURCHASE PLAN: In August 1995, The Company adopted an Employee
Stock Purchase Plan ("Purchase Plan") under Section 423 of the Internal Revenue
Code and reserved 687,500 shares of common stock for issuance under the Purchase
Plan. Eligible employees may purchase common stock at a price no less than 85%
of the lower of the fair market value at the beginning of each twenty four month
offering period or at the end of each six-month exercise period. The six month
periods begin in May and November. Purchases are limited to 15% of each
employee's compensation. Through June 30, 1996, 37,130 shares of common stock
had been issued under the plan and 650,370 shares were reserved for future
issuance.
DEFERRED STOCK COMPENSATION: The Company recorded deferred compensation of
$2,272,000 for the difference between the grant price and the deemed fair value
of certain of the Company's common stock options granted in 1994 and 1995. This
amount is being amortized over the vesting period of the individual options,
generally four years. Amortization of this compensation expense was $424,000,
$382,000 and $470,000 for the years ended 1996, 1995 and 1994, respectively.
RESTRICTED STOCK: In November 1995, the Company granted 33,077 shares of common
stock to an executive of the Company. These shares vest over a three year period
and compensation expense related to the granting of shares is being amortized
over the vesting period based on the fair market value at the date of grant.
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Objective Systems Integrators, Inc.
We have audited the accompanying consolidated balance sheets of Objective
Systems Integrators, Inc. and subsidiary (the Company) as of June 30, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Objective
Systems Integrators, Inc. and subsidiary at June 30, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
San Jose, California
August 2, 1996
20
<PAGE>
QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1996
- ----------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
(In thousands, except per share data) QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 9,959 $16,167 $13,789 $16,003
=======================================
Gross profit 7,159 12,523 10,745 12,306
=======================================
Income from operations 1,853 6,603 2,603 2,788
=======================================
Net income $ 1,103 $ 4,006 $ 2,183 $ 2,383
=======================================
Net income per share $ 0.04 $ 0.12 $ 0.06 $ 0.07
=======================================
Shares used in per share computation 31,407 32,806 35,348 34,225
=======================================
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1995
- ----------------------------------------------------------------------------------
<CAPTION>
FIRST SECOND THIRD FOURTH
(In thousands, except per share data) QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 9,644 $10,263 $ 7,476 $ 8,628
=======================================
Gross profit 7,845 8,121 4,822 5,633
=======================================
Income from operations 4,949 4,842 905 1,126
=======================================
Net income $ 2,947 $ 2,909 $ 592 $ 730
=======================================
Net income per share $ 0.09 $ 0.09 $ 0.02 $ 0.02
=======================================
Shares used in per share computation 31,410 30,980 30,977 31,410
=======================================
- ----------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
COMMON STOCK PRICES AND DIVIDENDS
The Company's common stock has been traded in Nasdaq National Market since the
Company's initial public offering in December 1995. According to records of the
Company's transfer agent, the Company had approximately 69 shareholders of
record as of June 30, 1996. Because many of such shares are held by brokers and
other institutions on behalf of shareholders, the Company is unable to estimate
the total number of shareholders represented by these record holders. The
following table sets forth the low and high sale price as of the close of market
of the Company's common stock in each of the Company's last three fiscal
quarters.
<TABLE>
<CAPTION>
LOW SALE PRICE HIGH SALE PRICE
-------------- ---------------
<S> <C> <C>
FISCAL 1996:
Period from December 1, 1995 (date
of initial public offering)
through December 31, 1995 $19.00 $54.75
Third quarter $31.50 $54.50
Fourth quarter $35.75 $56.25
</TABLE>
The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has not paid dividends and does not anticipate
declaring dividends on its common stock in the foreseeable future.
22
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
Objective Systems Integrators, Inc.:
We consent to the incorporation by reference in Registration Statement
No. 333-00986 of Objective Systems Integrators, Inc. on Form S-8 of our report
dated August 2, 1996, appearing in and incorporated by reference in this Annual
Report on Form 10-K of Objective Systems Integrators, Inc. for the year ended
June 30, 1996.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Objective Systems Integrators,
Inc., listed in Item 14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
September 25, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
JUNE 30, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 53,988
<SECURITIES> 0
<RECEIVABLES> 32,198
<ALLOWANCES> 987
<INVENTORY> 0
<CURRENT-ASSETS> 96,260
<PP&E> 14,619
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0
0
<COMMON> 73,207
<OTHER-SE> (996)
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<EPS-PRIMARY> 0.29
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</TABLE>
