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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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: O-26886
OBJECTIVE SYSTEMS INTEGRATORS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 68-0239619
(State or other jurisdiction of (I.R.S. Identification Number)
incorporation or organization)
100 BLUE RAVINE ROAD
FOLSOM, CALIFORNIA 95630
(Address of principal executive office, including zip code)
(916) 353-2400
(Registrant's telephone number, including area code)
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 No X
----- -----
Number of shares of registrant's common stock outstanding as of October 31,
1998: 34,816,503
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements........................................... 1
Condensed Consolidated Balance Sheets at September 30, 1998
and June 30, 1998..................................................................... 1
Condensed Consolidated Statements of Operations for the three
months ended September 30, 1998 and 1997.............................................. 2
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 1998 and 1997.............................................. 3
Notes to Condensed Consolidated Financial Statements.................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 5
Item 3. Quantitative and Qualitative Disclosure About Market Risk............................. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 15
Item 6. Exhibits and Reports on Form 8-K...................................................... 16
SIGNATURE....................................................................................... 16
Exhibit 99(A) Revised 1995 Employee Stock Purchase Plan
Exhibit 99(B) Excerpted from Letter Agreement for David M. Allen
Exhibit 99(C) Excerpted from Letter Agreement for Philip N. Cardman
Exhibit 99(D) Letter Agreement for Jerry P. Johnson
Exhibit 99(E) Employment Agreement for James K.J. Souders
Exhibit 99(F) Employment Agreement for Patric Olenczak
Exhibit 27.1 Financial Data Schedule
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- --------------
(UNAUDITED) (1)
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ASSETS
Current assets:
Cash and cash equivalents............................................... $ 29,469 $ 24,568
Short-term investments.................................................. 14,026 16,718
Accounts receivable (net of allowance of $1,521 and $1,517)............. 15,480 16,846
Deferred income taxes................................................... 23,167 23,194
Prepaid expenses and other current assets............................... 1,617 1,336
--------- ---------
Total current assets................................................. 83,759 82,662
Property and equipment, net............................................... 15,299 15,129
Other assets, net......................................................... 3,338 3,567
--------- ---------
Total assets......................................................... $ 102,396 $ 101,358
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 5,169 $ 5,162
Accrued liabilities..................................................... 7,896 7,704
Deferred revenue........................................................ 11,212 10,386
--------- ---------
Total current liabilities............................................ 24,277 23,252
Deferred income taxes..................................................... 502 586
Stockholders' equity:
Common stock............................................................ 86,617 86,434
Accumulated translation adjustment...................................... (1,287) (1,127)
Retained earnings (deficit)............................................. (7,713) (7,787)
--------- ---------
Total stockholders' equity........................................... 77,617 77,520
--------- ---------
Total liabilities and stockholders' equity........................... $ 102,396 $ 101,358
========= =========
</TABLE>
(1) Information in this column derived from the Company's audited consolidated
balance sheet as of June 30, 1998
See notes to condensed consolidated financial statements.
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
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THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1997
-------- ---------
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Revenues:
License....................................................... $ 11,428 $ 2,802
Service and other............................................. 6,532 4,601
-------- ---------
Total revenues............................................. 17,960 7,403
-------- ---------
Cost of revenues:
License....................................................... 449 311
Service and other............................................. 4,670 5,079
-------- ---------
Total cost of revenues..................................... 5,119 5,390
-------- ---------
Gross profit.................................................... 12,841 2,013
-------- ---------
Operating expenses:
Sales and marketing........................................... 7,379 7,367
Research and development...................................... 4,482 3,442
General and administrative.................................... 1,497 1,852
-------- ---------
Total operating expenses................................... 13,358 12,661
-------- ---------
Income (loss) from operations................................... (517) (10,648)
Other income, net............................................... 639 515
-------- ---------
Income (loss) before income taxes............................... 122 (10,133)
Provision (benefit) for income taxes 48 (3,323)
-------- ---------
Net income (loss)............................................... $ 74 $ (6,810)
======== =========
Earnings (loss) per share:
Basic......................................................... $ 0.00 $ (0.21)
======== =========
Diluted....................................................... $ 0.00 $ (0.21)
======== =========
Weighted-average shares outstanding:
Basic......................................................... 34,807 32,661
-------- ---------
Diluted....................................................... 35,930 32,661
======== =========
</TABLE>
See notes to condensed consolidated financial statements.
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1997
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Cash flows from operating activities:
Net income (loss)........................................................ $ 74 $ (6,810)
Adjustments to reconcile net income (loss) to net cash provided by (used
for) operating activities:
Depreciation and amortization........................................... 1,727 1,595
Deferred income taxes................................................... (50) (3,691)
Stock compensation expense.............................................. 105 93
Effect of changes in:
Accounts receivable................................................... 1,357 8,758
Prepaid expenses and other current assets............................. (456) (608)
Accounts payable...................................................... 9 (1,811)
Accrued liabilities................................................... 206 (865)
Deferred revenue...................................................... 826 (400)
-------- --------
Net cash provided by (used for) operating activities............... 3,798 (3,739)
-------- --------
Cash flows from investing activities:
Sales (purchases) of short-term investments............................. 2,692 (2,147)
Purchases of property and equipment..................................... (1,631) (1,612)
-------- --------
Net cash provided by (used for) investing activities............... 1,061 (3,759)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net............................. 250 34
Purchase of treasury stock.............................................. (172) ----
-------- --------
Net cash provided by financing activities.......................... 78 34
-------- --------
Effect of exchange rate changes on cash.................................... (36) 24
-------- --------
Net increase (decrease) in cash and cash equivalents............... 4,901 (7,440)
Cash and cash equivalents:
Beginning of the period.................................................. 24,568 17,817
-------- --------
End of the period........................................................ $ 29,469 $ 10,377
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
These unaudited, condensed, consolidated financial statements have been
prepared by Objective Systems Integrators, Inc. ("OSI") under the rules and
regulations of the Securities and Exchange Commission. In accordance with those
rules and regulations, some of the information normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted.
The information in this report reflects all adjustments which we believe
are necessary to fairly state OSI's financial position, the results of its
operations and cash flows for the periods presented. These adjustments consist
of items that are of a normally recurring nature.
These financial statements should be read in conjunction with the audited
financial statements and their notes contained in OSI's Annual Report on Form
10-K for the fiscal year ended June 30, 1998. Results for interim periods are
not necessarily indicative of the results expected for the full fiscal year or
for any other period.
2. NET INCOME (LOSS) PER SHARE
During the quarter ended December 31, 1997, we adopted Statement of
Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share. SFAS 128
requires that we compute net income (loss) per share using two different
calculations, basic and diluted, and that we disclose the methods we use for
this calculation. We have restated our earnings (loss) per share for prior
periods to conform with SFAS 128.
Under SFAS 128, basic net income (loss) per share is computed using the
weighted average of common shares outstanding. Diluted net income (loss) per
share is computed using the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares are
the incremental common shares that could be issued following the exercise of
stock options (using the treasury stock method). Common equivalent shares
outstanding are not included in the net loss per share computations as their
inclusion would have the effect of showing a smaller loss per share.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, Reporting
Comprehensive Income, which we adopted in the first quarter of fiscal 1999.
SFAS No. 130 requires companies to report a new, additional measure of income
on the income statement or to create a new financial statement that shows the
new measure of income. "Comprehensive Income" includes foreign currency
translation gains and losses and unrealized gains and losses on equity
securities that have been previously excluded from net income and reflected
instead in equity. The following table sets forth the calculation of
comprehensive income:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
(IN THOUSANDS) 1998 1997
--------------- ---------------
Net income (loss) $ 74 $ (6,810)
Foreign Currency Translation
Losses (160) (192)
--------------- ---------------
Total Comprehensive Income $ (86) $ (7,002)
=============== ===============
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this Report are "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995 ("Reform Act"). We have
identified them with an asterisk (*). Our actual results may differ materially
because in making these statements we have had to make a number of assumptions
about risks, both known and unknown. Some of these assumptions involve the
impact of fluctuations in our quarterly results, our ability to effectively
manage growth, the rate of expansion in our professional services and customer
support organizations, our management of product transitions, the impact of
product and customer concentrations on future growth, our ability to attract and
retain key employees, the growth of emerging markets for our products and their
ability to absorb new technologies, the effects of the Year 2000 transition on
OSI and our customer base, the effects of competition and technological change
in our markets, the impact of the current turmoil in international markets, the
relative strength of the U.S. dollar against other currencies, the continued
viability of our third-party relationships, our ability to protect our
proprietary technology, the effects of changes in, or our failure to comply
with, government regulations, and projections regarding overall economic and
business conditions. For a more detailed discussion of these risks and some of
the other factors that have and will affect our business, see OSI's Annual
---
Report on Form 10-K for the fiscal year ended June 30, 1998. See also the
--------
Section titled "Factors That May Affect Future Results" in this Report.
OVERVIEW
OSI develops, markets and supports object-oriented, client/server software for
service and network management. We were founded in June 1989 and began
shipments of our NetExpert(R) product line in August 1990. As of September 30,
1998, we had directly or indirectly licensed our products to more than 200
customers around the world.
A typical NetExpert sale includes a combination of license fees, fees for
professional services and fees for customer support and training. Revenue from
licensing, servicing and supporting NetExpert products has accounted for
substantially all of our revenues since OSI was founded. In addition, a large
part of our revenue has come from substantial orders placed by large
organizations. We do not believe that these factors will change in the near
term.*
The timing of large orders and their fulfillment has caused material
fluctuations in our operating results, particularly on a quarterly basis. We do
not believe that this situation is likely to change.* For this reason and
others, some of which are discussed in "Factors That May Affect Future Results,"
you should expect that our quarterly revenues and operating results will vary
significantly in the future, that period-to-period comparisons of our revenues
and results are not necessarily meaningful and that quarterly revenues should
not be relied on as indications of future performance.*
Over the past several years, we have experienced a shift in our customer base
and in our product and services offerings. A growing percentage of our sales
are being made to new, emerging communications service providers. Rather than
buying "point" solutions for one requirement, they frequently procure a full
suite of service and network operational support systems using NetExpert and
NetExpert-based application components. In addition, many of these customers
do not have adequate in-house staff to rapidly deploy a full suite of
NetExpert solutions. Therefore, they tend to rely increasingly on us for help
in deploying their operational support systems.
The effects of this shift have been a lengthening of the sales cycle, an
increase in the relative percentage of our business involving professional
services, an increase in the time required for a
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successful implementation of our solutions and an increase in customer credit
risks. Another effect has been a relative increase in time between the execution
of a customer contract and time at which we recognize revenue from that
contract. Moreover, we expect that these effects will continue for the
forseeable future.*
We distribute and sell our NetExpert products in North America primarily through
a direct sales force. Outside of North America, we typically sell our products
and services through systems integrators, local distributors and, to a lesser
extent, through an in-region direct sales force. We intend to enter into
additional international markets and to continue to grow our operations outside
of North America by expanding our direct sales force, opening additional in-
region customer support and sales offices, adding distributors and pursuing
additional strategic relationships.* See further discussion in the "Results of
---
Operations" section below.
For the first quarter of fiscal 1999, we had a net income of $0.1 million
compared to a net loss of $6.8 million for the same period in fiscal 1998. Some
of the factors that contributed to this increase in net income are described in
the following "Results of Operations" section. We are continuing to follow a
strategy that is aimed at (1) focusing on the emerging and wireless service
provider markets, (2) narrowing our product development and professional
services efforts to achieve more reusable application components, (3) building
stronger sales and customer interface organizations, and (4) forging new
strategic alliances while strengthening our existing relationships. While we
believe this strategy helped the company to grow revenues and build a backlog of
orders during fiscal 1998, we can give no assurances that this strategy will
continue to be successful. Some orders we include in our backlog may be
cancelled without significant penalty.
RESULTS OF OPERATIONS
REVENUES:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------
(IN THOUSANDS, EXCEPT
PERCENTAGES) 1998 CHANGE 1997
--------- -------- ---------
License $ 11,428 308% $ 2,802
Percentage of revenues 64% 38%
Service and other $ 6,532 42% $ 4,601
Percentage of revenues 36% 62%
Total revenues $ 17,960 143% $ 7,403
OSI's revenues are derived primarily from license fees and fees for a full range
of services complementing our products, including professional services,
software maintenance, customer support and training. The increase in total
revenues for the three months ended September 30, 1998, compared with the three
months ended September 30, 1997, is a result of a greater volume of orders for
our products and professional services and an increase in customer acceptances
for licenses. List prices for our products and services did not change
significantly during the comparison periods. See additional discussion in the
---
"Overview" section above.
License Revenues. Software licenses are generally granted and priced on a per-
instance, per-server basis, although we sometimes grant site, network-wide or
enterprise-wide licenses for larger operating support systems or networks.
License revenues are generally recognized when a noncancellable license
agreement has been signed, the product has been shipped, the fees are fixed and
determinable, and collection is probable. Revenues under contracts that require
significant customization of our application components are recognized using the
percentage-of-completion method of contract accounting based on the ratio of
incurred costs to total estimated costs. Although our license agreements
generally do not provide for a right of return, we maintain reserves for returns
and potential credit losses.
6
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The increase in license revenues in absolute dollars and as a percentage of
total revenues for the three months ended September 30, 1998, compared with the
three months ended September 30, 1997, was due to an increase in orders for our
products from both existing and new customers. License revenues represented
the majority of total revenues for the three months ended September 30, 1998.
We anticipate that this will continue to be the case in the foreseeable
future.* However, we believe that historic growth rates in our license
revenues should not be relied on to predict future growth rates.*
We adopted Statement of Position 97-2 ("SOP 97-2"), "Software Revenue
Recognition", effective July 1, 1998. This did not have, and is not expected to
have, a material effect on our revenues and net income. However, the accounting
profession is currently developing guidelines on the proper implementation of
SOP 97-2. These guidelines could lead to changes in how we recognize revenue.
That, in turn, could have a material effect on our future revenue and net
income.
Services and Other Revenues. Revenues for training, consulting and
professional services are recognized as the services are performed and
acceptance criteria have been met. We offer support contracts to our customers
which provide for unlimited telephone support, product updates and technical
support during the support period. Support revenues are deferred and
recognized ratably over the term of the support agreement, typically 12
months. Payments for support are generally made in advance and are
nonrefundable. The growth in our service and other revenues in absolute
dollars for the three months ended September 30, 1998, compared with the three
months ended September 30, 1997, reflects the increase in our installed base
and active customer projects.
We expect that service and other revenues will continue to represent a
significant portion of our total revenues in future periods.* This is
primarily because we anticipate continued demand for professional services in
connection with licenses of NetExpert, renewal of existing support contracts
and new projects in a growing installed base.* However, historic growth rates
in our service and other revenues should not be relied on as an indication of
future growth rates.*
International Revenues. International revenues represented 45% and 29% of total
revenues for the three months ended September 30, 1998 and 1997, respectively.
Increased international revenues, both as a percentage of total revenues and in
absolute dollars, is due primarily to our on-going investment on this segment
of our business. The result has been an increase in orders for software for
both existing and new international customers. Given the current economic
uncertainties in world markets, we can give no assurances that this trend will
continue. A significant portion of our international revenues were derived
from increased sales in Asia/Pacific Rim, Europe and Latin America.
We believe that the weakened economies in the Asia-Pacific region are beginning
to have some effect on our revenues, but do not believe that the effect has been
material. However, we continue to see indications that this may not be the case
for future periods.* There can be no assurances that the economies in Asia-
Pacific will recover in the near term or that local currencies will strengthen
relative to the U.S. Dollar. The result could be delayed payments for pending
orders, a slowdown in the rate of privatization of telecommunications services
providers, a further slowing of economic growth in the region and a resulting
reduction in future purchases of our products and services.*
A majority of our international sales are currently denominated in U.S.
dollars.* As a result, our current exchange rate exposure is not material.
However, the increase in the value of the U.S. dollar relative to foreign
currencies has made our products more expensive for international purchasers
and therefore less competitive in markets outside the United States. In
addition, we are facing increased pressure to price and bid our products in
non-U.S. currencies. As a result, we can give no assurances that we will
continue to be successful in minimizing our exchange rate exposures.
OSI's international business involves a number of inherent risks. These include
longer accounts receivable collection periods, greater difficulty in
collections, difficulty in staffing and managing operations; longer sales
cycles; potentially unstable political conditions, language barriers; cultural
differences; unexpected changes in regulatory requirements; the burden of
complying with a wide
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variety of foreign laws, including reduced protection for intellectual property
rights; potentially adverse tax consequences and tariffs and other trade
barriers. While we expect that international revenues will continue to provide a
material portion of our total revenues, we can give no assurances that our
current international risk profile will remain stable.* Any changes could have a
material adverse effect on our future international sales and, therefore, our
overall operating results and financial condition.*
COST OF REVENUES:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------
(IN THOUSANDS, EXCEPT
PERCENTAGES) 1998 CHANGE 1997
---------- -------- ----------
Cost of license revenues $ 449 44% $ 311
Percentage of revenues 3% 4%
Cost of service and other $ 4,670 (8%) $ 5,079
revenues
Percentage of revenues 26% 69%
Total cost of revenues $ 5,119 (5%) $ 5,390
Percentage of revenues 29% 73%
Gross profit $12,841 538% $ 2,013
Percentage of revenues 71% 27%
Cost of License Revenues. Cost of license revenues consists 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, amortization of intangible costs, and related labor
costs. For the three months ended September 30, 1998, compared with the three
months ended September 30, 1997, cost of license revenues did not increase
nearly as much as license revenues because many of these costs are fixed and do
not vary with the amount of our licensing revenue.
Cost of Service and Other Revenues. Cost of service and other revenues consists
mainly of personnel costs related to providing professional and support services
to assist our customers in deploying our products. It also includes outside
service fees paid to third-party providers of professional services, related
travel costs and overhead. The cost of service revenues related to providing
professional services for our customers decreased for the three months ended
September 30, 1998, compared with the three months ended September 30, 1997.
This decrease was due to a reduction in the use of contractors, reduced travel
costs and reduced facilities and communications costs. A reduction in our
professional services costs was somewhat offset by an increase in our cost of
maintenance and support services. We added head count and increased our
spending for communications and computer-related items to provide support
services to a larger installed base.
Gross profit increased primarily because of the $8.6 million increase in
software license revenue for the three months ended September 30, 1998 as
compared to the three months ended September 30, 1997. In addition, decreased
costs in our professional services segment increased the gross profit for
service and other revenues.
To provide for current and anticipated future professional service requirements,
we are continuing to evaluate the need for additional professional service
personnel. See comments in the "Overview" section for further discussion on
---
services and other revenues. We believe that the cost of service and other
revenues may increase in absolute dollars.*
8
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OPERATING EXPENSES:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
(IN THOUSANDS, EXCEPT
PERCENTAGES) 1998 CHANGE 1997
---------- -------- ----------
Sales and marketing $ 7,379 0% $ 7,367
Percentage of revenues 41% 100%
Research and development $ 4,482 30% $ 3,442
Percentage of revenues 25% 46%
General and administrative $ 1,497 (19%) $ 1,852
Percentage of revenues 8% 25%
Total operating expenses $13,358 6% $12,661
Percentage of revenues 74% 171%
Sales and Marketing. Sales and marketing expenses consist mainly of salaries,
commissions and bonuses for sales and marketing personnel, facilities costs
associated with our sales and customer support offices, and promotional
expenses. Sales and marketing expenses for the three months ended September 30,
1998, compared with the three months ended September 30, 1997, remained flat
despite the increase in revenue. The increase in sales commissions expense was
offset by a reduction in marketing costs for outside labor and marketing
programs. We expect that sales and marketing expenses in future periods will
continue to increase in absolute dollars.*
Research and Development. Research and development expenses increased for the
three months ended September 30, 1998, compared with the three months ended
September 30, 1997. This was due primarily to increased headcount and related
overhead, such as travel and computer operations. We expect to continue
committing significant resources to research and development in future periods
to enhance and extend our core technology and product lines.* We also expect
that research and development expenses in future periods will continue to
increase in absolute dollars.*
General and Administrative. General and administrative expenses consist mainly
of personnel costs for finance, human resources, and general management. Also
included are outside professional service fees, corporate insurance expense, and
provision for doubtful accounts. The decrease in general and administrative
expenses for the three months ended September 30, 1998 compared with the three
months ended September 30, 1997, was due mainly to reduced administrative,
legal, insurance and travel costs. General and administrative expenses may
increase in the future if the growth in our business continues and we hire
additional personnel.* Although we believe our allowance for doubtful accounts
is adequate as of September 30, 1998, we will continue to review this allowance
and adjust it as needed. There can be no assurances that future quarters will
not require significant charges which would be reflected as general and
administrative expenses.*
OTHER INCOME, NET:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
(IN THOUSANDS, EXCEPT
PERCENTAGES) 1998 CHANGE 1997
---------- ------------ ----------
Other income, net $ 639 24% $ 515
Percentage of revenues 4% 7%
Other Income, Net. The increase in other income, net was primarily due to
increased levels of cash and short-term investments which generated higher
interest income.
9
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BENEFIT FROM INCOME TAXES:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
(IN THOUSANDS, EXCEPT
PERCENTAGES) 1998 CHANGE 1997
---------- ---------- ----------
Benefit from income taxes $ 48 NM $(3,323)
Percentage of revenues 0% 45%
NM-Not meaningful
Provision (Benefit) for Income Taxes. The provision (benefit) for income taxes
includes federal, state and foreign income taxes. The effective tax rates for
the three months ended September 30, 1998, compared with the three months ended
September 30, 1997, were 39% and 33% respectively. The effective tax rates for
the three months ended September 30, 1998 and September 30, 1997 differ, from
the federal statutory rate primarily because of foreign taxes, state taxes and
research and development tax credits.
FACTORS THAT MAY AFFECT FUTURE RESULTS
For a more thorough discussion of the factors and risks that may affect OSI's
future results, we urge you to see OSI's Annual Report on Form 10-K for
---
the fiscal year ended June 30, 1998.
Our quarterly operating results have varied significantly in the past, and we
believe that they may vary significantly in the future.* The fluctuation in
quarterly license revenues is caused by the timing of fulfilling large orders by
our customers. These include global telecommunications providers and the new
emerging communications service providers as described more fully in the
"Overview" section. Large orders are typically preceded by long sales cycles*
Accordingly, it has been and will continue to be difficult to predict when they
will be received.* We expect that quarterly license revenues may continue to
vary significantly depending on the timing of large orders.* The failure to
obtain a large order during any given reporting period, for whatever reason,
will have a material, adverse effect on our reported business, operating
results and financial condition.*
This variance in operating results also is affected by such factors as the
capital spending patterns of our customers; changes in our pricing policies or
those of our competitors; increased competition; cancellation of licenses or
support agreements; changes in levels of operating expenses; personnel changes;
fluctuation in the demand for NetExpert; the number, timing and significance of
new products and product enhancements by OSI and our competitors; our ability to
develop, introduce and market new and enhanced versions of NetExpert on a timely
basis; the mix of direct and indirect sales; our assessment of allowance for bad
debts or sales returns; and general economic factors, among others.* Because of
these factors, our quarterly revenue and operating results are difficult to
forecast.*
Revenues are also difficult to forecast because our sales cycle, from initial
evaluation to product installation, varies substantially from customer to
customer. The purchase of a network operations support system and network
management applications generally involves a large commitment of capital. This
can add significant time to the sales cycle because of the customer's internal
approval procedures. It also may involve testing and acceptance of new
technologies that affect crucial customer operations. For these and other
reasons, the sales cycle for our products is often lengthy and subject to a
number of risks over which we have little or no control. See further discussion
---
of the shift of our customer base in the "Overview" section.
10
<PAGE>
In addition, we typically receive a significant portion of our orders, and
record the resulting revenue, in the last weeks or even days of a quarter.
Expense levels are planned in advance and are based, in part, on our
expectations of future revenues. If actual revenues are below expectations,
operating results can be adversely affected. In particular, because only a
small portion of our expenses varies with revenue, net income may be
disproportionately affected by a shortfall in anticipated revenue. We believe
this pattern will continue.*
OSI's transactions have historically been primarily in U.S. dollars. As we
expand our international operations, transactions in foreign currencies can be
expected to increase.* This will result in a corresponding increase in our
exchange rate risk. If exchange rates change unfavorably, this could result in
charges to operations.
OSI has an ongoing program of assessing the extent to which its internal systems
and products evaluate date information, and, if so, i.e. whether they can
properly process and evaluate dates on or after the Year 2000 (i.e., whether
they are "Year 2000 compliant"). We are taking remedial action where our systems
and products are not Year 2000 compliant. We are also evaluating contingency
plans for continuing operations if Year 2000 problems arise despite its steps to
avoid them. We expect these activities to continue throughout fiscal 1999.*
We believe that we have identified the Year 2000 dependencies in our internal
systems. We have examined all critical systems including manufacturing, sales,
development, communications and financial systems. We have also examined many
of our non-computer electronic devices which contain microprocessors (for
example, telephones and security systems). As these dependencies have been
identified, we believe that we are taking the remediation measures necessary
for our internal systems to be Year 2000 compliant. We are not currently aware
of any material operational issues or costs associated with preparing our
internal systems for the Year 2000. However, no assurances can be given that
we will not experience unanticipated material costs caused by undetected
errors or defects in our internal systems. Delays in implementation of new
information systems or a failure to identify all of our Year 2000 dependencies
could result in material adverse consequences.
We have also been taking measures to bring our products into Year 2000
compliance in a timely way. At this time, a Year 2000 compliant version of the
NetExpert framework is available and has been successfully tested on a number
of operating systems platforms for Year 2000 compliance using British
Standards Institutions' criteria. The changes needed to make other NetExpert
products compliant are currently either completed or are being coded and
tested. We expect these efforts to be completed by the end of this calendar
year.* However, we can give no assurances that our efforts will be successful
or that our compliant products will function properly when they are integrated
with other non-compliant products, including third-party software and
hardware. If our products are not able to manage and manipulate data related
to the Year 2000, the result could be a material adverse affect on our
business.
We have incurred and will incur various costs to conduct testing and
modification of our products and for those systems, products and deliverables
(including customized OSI software) for which our customers are responsible.
We have also incurred and will incur various costs to provide our customers
with customer support services regarding Year 2000 issues. We anticipate that
these costs will continue in fiscal year 1999 and thereafter.* We have
contacted each of our customers and provided them with information regarding
the Year 2000 compliance of our products. We have also offered them
professional services to assist with migrating their NetExpert based systems
to Year 2000 compliant versions. Finally, we have made information available
to our customers on our technical assistance website.
We are working with the key suppliers of products and services used in
connection with NetExpert to determine whether their products and services are
Year 2000 compliant.
11
<PAGE>
We are also attempting to monitor their progress toward Year 2000 capability and
compatibility with Year 2000 compliant versions of NetExpert. We
expect these efforts to be completed by the end of this calendar year.*
Our products are used in numerous operating environments. Even if we bring our
principle products into Year 2000 compliance, our customers may nevertheless
experience Year 2000 difficulties due to noncompliance of third party products
with which our products interoperate. Even if the we identify and notify our
customers of these third party software issues, they may nevertheless make
claims against the makers of all of the component parts of an operating
environment. Our agreements with our customers typically contain provisions
designed to limit our liability for these types of claims. It is possible,
however, that this will not provide adequate protection from liability under
existing or future federal, state or local laws or ordinances or under
unfavorable judicial decisions.* Any such claims, whether with or without
merit, could result in a material adverse effect on our business, financial
condition and results of operations.*
To date, we have incurred costs related to our Year 2000 readiness
program. As of September 30, 1998, these costs were estimated to be $4.0
million. We will incur additional costs for our Year 2000 readiness program
related to product testing and customer service requests. These costs are
currently not expected to exceed $5.0 million during the current fiscal year.*
The predominant portion of the costs incurred to date, as well as those
expected to be incurred, are research and development expenses related to the
modification and testing of our products. This estimate does not include
potential costs related to customer or other claims, or costs related to
internal software and hardware replaced in the normal course of business. This
estimate is based on a current assessment and is subject to change as our Year
2000 readiness program progresses.
We currently expect that the Year 2000 issue will not pose significant
internal, operational problems.* However, a delay in implementing new
information systems, or a failure to fully identify all Year 2000 dependencies
in our internal systems or in the systems of our suppliers, customers and
financial institutions could have material adverse consequences, including
delays in the delivery or sale of products. Therefore, we are developing
contingency plans for continuing operations should these types of problems
arise. We believe that our contingency planning will be completed and tested
by the end of this calendar year.*
We believe that the purchasing patterns of our customers and potential
customers may also be affected by the Year 2000 issues as they expend
significant resources to bring their current software systems into Year 2000
compliance.* These expenditures could result in reduced funds available to
purchase products such as those we offer. This could have a material adverse
effect on our business, operating results or financial condition.*
Finally, we believe that competition in our markets is increasing.* This
competition could result in price reductions, reduced gross margins or loss of
market share, any of which would have a material adverse effect on our business,
operating results and financial condition.*
Because of the factors described above, we believe our quarterly revenues and
operating results are likely to vary significantly in the future.* We also
believe that period-to-period comparisons of our results are not necessarily
meaningful and should not be relied on as indications of future performance.*
Further, it is likely that our revenues or operating results will be below the
expectations of public market analysts and investors in some future quarter.*
If that occurs, the price of our Common Stock could be materially, adversely
affected.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 1998, net cash provided by operations
of $3.8 million compared with net cash used for operations of $3.8 million for
the three months ended September 30, 1997. This was due mainly to the increase
in reported revenues and associated customer cash collections. In the three
months ended September 30, 1998, sales of short-term investments provided $2.7
million of cash, some of which we used for purchases of property and equipment
for our operations. We currently expect to make capital expenditures of $7.0
million to $10.0 million in the next twelve months, primarily for the
acquisition of technology and the purchase of computer equipment, related
software, furniture, fixtures, and leasehold improvements.*
In September, 1998 our Board of Directors authorized a stock repurchase
program under which we could purchase up to 1,000,000 shares of our common
stock on the open market. As of November 2, 1998 we had repurchased
approximately 307,500 shares of our common stock in the open market at an
average purchase price of $4.52 for a total cost of $1,392,000.
As of September 30, 1998, we had working capital of approximately $59.5 million,
including $43.5 million in cash, cash equivalents and short-term investments.
In addition, we have a $2.5 million unsecured revolving line of credit that
expires in December 1998. Under the line of credit, borrowings bear interest at
either (1) a fluctuating rate equal to the prime lending rate in effect or (2) a
fixed rate that is 2% above the London Inter-Bank Offered Rate. As of September
30, 1998, we had not borrowed under our line of credit. The agreement for the
line contains certain financial covenants. As of September 30, 1998, we were in
compliance with those covenants.
From time to time, some of our accounts receivable are beyond their payment
terms. We maintain an allowance for doubtful accounts that we believe is
adequate to cover potential credit losses.* On September 30, 1998, our
reserves for doubtbul accounts and sales returns were $1.5 million. We believe
the current reserves are adequate to provide for potential credit losses or
sales returns.*
We also believe that our cash balances and cash flow from operations are
sufficient to support our working capital requirements for at least the next
twelve months.* Thereafter, if cash generated from operations cannot satisfy
our working capital requirements, we may need to raise additional funds.
Financing may not be available or, if it is, may not be obtainable on terms
favorable to us or our stockholders.* If we raise additional capital by issuing
equity or convertible debt securities, ownership dilution to stockholders will
result. If funds are unavailable, our business may be adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to a variety of risks, including changes in interest rates
affecting the rate of return on our investments and fluctuations in the value
of international currencies. In the normal course of business, we employ
established policies and procedures to manage our exposure to fluctuations in
interest rates and foreign currency values.
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We have not used derivative financial
instruments in our investment portfolio. We invest with high quality issuers
and limit the amount of credit exposure to any one issuer. We protect and
preserve our invested funds by limiting default, market and reinvestment risk.
We have, as of September 30, 1998, a portfolio of short term investment
securities valued at approximately $14.0 million. We have determined that the
interest rate risk to that portfolio from reasonably possible near-term
changes in interest rates is not material.
13
<PAGE>
The net assets of the our Australian subsidiary are denominated in Australian
Dollars. We operate in certain countries in Latin America, Eastern Europe and
Asia Pacific where there are limited forward currency exchange markets. We
have unhedged transaction exposures in these currencies. We have not entered
into forward foreign exchange contracts for speculative or trading purposes.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be a party to litigation incident to the
ordinary course of business. As of the date of this Report, we do not believe
that there is material litigation pending against OSI. However, any litigation
involving OSI, whether we are the plaintiff or defendant and regardless of the
outcome, could result in substantial costs and significant diversion of effort
by our technical and management personnel. In addition, we can give no
assurances that material litigation, either by or against OSI, will not be
necessary to resolve issues that may arise in the future. Given the
uncertainties of litigation, any litigation could have a material adverse effect
on our business, financial condition or operating results.
On February 13, 1998, suit was filed against OSI in the United States District
Court for the Eastern District of California by Timothy J. Sebring, a former
employee of OSI, for breach of contract relating to various matters involving
his employment. OSI does not believe that the allegations in the complaint have
merit and intends to vigorously defend the action. However, there can be no
assurances that OSI will prevail. If we do not prevail, we could be required
to pay monetary damages which might have a material adverse effect on our
operating results and financial condition.*
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 99 (A) Revised Employee Stock Purchase Plan
Exhibit 99 (B) Excerpted from Letter Agreement for David M. Allen
Exhibit 99 (C) Excerpted from Letter Agreement for Philip N. Cardman
Exhibit 99 (D) Letter Agreement for Jerry P. Johnson
Exhibit 99 (E) Employment Agreement for James K.R. Souders
Exhibit 99 (F) Employment Agreement for Patrick Olenczak
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OBJECTIVE SYSTEMS INTEGRATORS, INC.
/s/ David M. Allen
Dated: November 13, 1998 By: _______________________________________
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
15
<PAGE>
EXHIBIT 99(A)
OBJECTIVE SYSTEMS INTEGRATORS, INC.
1995 EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED THROUGH OCTOBER 17, 1998)
The following is the 1995 Employee Stock Purchase Plan of Objective Systems
Integrators, Inc.
1. PURPOSE. The purpose of the Plan is to provide employees of Objective
-------
Systems Integrators, Inc. and its Designated Subsidiaries with an
opportunity to purchase OSI's Common Stock through accumulated payroll
deductions. It is intended that this Plan qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as
amended. The provisions of the Plan, accordingly, will be construed to
extend and limit participation in a manner consistent with the requirements
of that Section of the Code.
2. DEFINITIONS.
-----------
(a) BOARD. The Board of Directors of Objective Systems Integrators, Inc.
-----
(b) CODE. The Internal Revenue Code of 1986, as amended.
----
(c) COMMON STOCK. The Common Stock of Objective Systems Integrators,
------------
Inc.
(d) OSI. Objective Systems Integrators, Inc. and any of its Designated
---
Subsidiaries.
(e) COMPENSATION. All of a Participant's W-2 compensation.
------------
(f) DESIGNATED SUBSIDIARIES. Each Subsidiary which has been designated by
-----------------------
the Board, from time to time and in its sole discretion, as eligible
to participate in the Plan.
(g) EMPLOYEE. An individual who is employed by OSI for tax purposes and
--------
whose customary employment with OSI is at least 20 hours per week and
at least five months in any calendar year. For purposes of the Plan,
the employment relationship will be treated as continuing intact while
an individual is on sick leave or other leave of absence approved by
OSI. If the period of leave exceeds 90 days and the individual's right
to reemployment is not guaranteed either by statute or by contract,
the employment relationship will be deemed to have ended on the 91st
day of the leave.
(h) ENROLLMENT DATE. The first day of each Offering Period.
---------------
(i) EXERCISE DATE. The last day of each Purchase Period.
-------------
(j) FAIR MARKET VALUE. As of any date, the value of Common Stock
-----------------
determined as follows:
(1) If the Common Stock is listed on an established stock exchange or
a national market system, Fair Market Value will be the closing
sale price (or the mean of the closing bid and asked prices, if
no sales were reported), as quoted on the exchange (or the
exchange with the greatest volume of trading in Common Stock) or
system on the date of the determination, as reported in The Wall
Street Journal or such other source as the Board deems reliable,
or;
(2) If the Common Stock is quoted on the Nasdaq National Market of
the National Association of Securities Dealers, Inc. Automated
Quotation System (but not on the Nasdaq National Market thereof)
or is regularly quoted by a recognized securities dealer but
selling prices are not reported, Fair Market Value will be the
mean of the closing bid and asked prices for the Common Stock on
the date of the determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common Stock,
Fair Market Value will be determined in good faith by the Board.
OSI 1995 Employee Stock Purchase Plan
October 17, 1998
Page 1
<PAGE>
(4) For purposes of the Enrollment Date for the first Offering
Period, Fair Market Value will be the price to the public as set
forth in the final Prospectus included in the Registration
Statement (Form S-1) filed with the Securities and Exchange
Commission for the initial public offering of OSI's Common Stock.
(k) OFFERING PERIOD. The period of approximately 6 months during which an
---------------
option granted under the Plan may be exercised, beginning on the first
Trading Day on or after May 1 and November 1 of each year and ending
on the last Trading Day of the period six months later. The first
Offering Period will begin on the effective date of OSI's initial
public offering of Common Stock registered with the Securities and
Exchange Commission and will end on the last Trading Day on or before
October 31, 1997. The duration and timing of Offering Periods may be
changed under Section 4.
(l) PLAN. This Employee Stock Purchase Plan.
----
(m) PURCHASE PRICE. An amount equal to 85% of the Fair Market Value of a
--------------
share of Common Stock on the Enrollment Date or on the Exercise Date,
whichever is lower.
(n) PURCHASE PERIOD. The approximately six-month period beginning after
---------------
one Exercise Date and ending with the next Exercise Date, except that
the first Purchase Period of an Offering Period will begin on the
Enrollment Date and end with the next Exercise Date.
(o) RESERVES. The number of shares of Common Stock covered by each option
--------
under the Plan which have not yet been exercised plus the number of
shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(p) SUBSIDIARY. A corporation, domestic or foreign, of which not less
----------
than 50% of the voting shares are held by OSI or a Subsidiary, whether
or not that corporation now exists or is later organized or acquired
by OSI or a Subsidiary.
(q) TRADING DAY. A day on which national stock exchanges and the Nasdaq
-----------
System are open for trading.
3. ELIGIBILITY.
-----------
(a) Any Employee who is employed by OSI on a given Enrollment Date is
eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee will be granted an option under the Plan (1) if, immediately
after the grant, the Employee (or any other person whose stock would
be attributed to the Employee under Section 424(d) of the Code) would
own capital stock of OSI and/or hold outstanding options to purchase
such stock possessing five percent or more of the total combined
voting power or value of all classes of OSI's capital stock or that of
any Subsidiary, or (2) which permits the Employee's rights to purchase
stock under all employee stock purchase plans of OSI and its
subsidiaries to accrue at a rate which exceeds $25,000 worth of stock
(determined at the fair market value of the shares at the time the
option is granted) for each calendar year in which the option is
outstanding at any time.
4. OFFERING PERIODS. The Plan will be implemented by consecutive Offering
----------------
Periods, with a new Offering Period beginning on the first Trading Day on
or after May 1 and November 1 each year, or on such other date as the Board
determines, and continuing thereafter until terminated in accordance with
Section 19. The first Offering Period will begin on the Effective Date of
OSI's initial public offering of Common Stock registered with the
Securities and Exchange Commission. The Board may change the duration of
Offering Periods (including their commencement dates) for future offerings
without shareholder approval if the change is
OSI 1995 Employee Stock Purchase Plan
October 17, 1998
Page 2
<PAGE>
announced at least five days before the scheduled beginning of the first
Offering Period to be affected.
5. PARTICIPATION.
-------------
(a) An eligible Employee may become a Participant in the Plan (a
"Participant") by completing a subscription agreement in the form of
Exhibit A to this Plan and filing it with OSI's payroll office before
the applicable Enrollment Date.
(b) Payroll deductions for Participants will begin on the first payroll
after the Enrollment Date and will end on the last payroll in the
Offering Period to which the authorization is applicable, unless
sooner terminated by a Participant under Section 10.
6. PAYROLL DEDUCTIONS.
------------------
(a) At the time a Participant files a subscription agreement, the
Participant will elect to have payroll deductions made on each pay day
during the Offering Period. Deductions may not exceed 15% of the
Compensation which the Participant receives on each pay day. The
aggregate of all payroll deductions during an Offering Period may not
exceed 15% of the Participant's Compensation during the Offering
Period.
(b) Payroll deductions will be credited to a Participant's account under
the Plan and will be withheld in whole percentages only. Participants
may not make any additional payments into their accounts.
(c) Participants may stop participating in the Plan as provided in Section
10. They may also increase or decrease their rate of payroll
deductions once during a Purchase Period by filing a new subscription
agreement with OSI authorizing the change. The Board may, in its
discretion, limit the number of rate changes during any Purchase
Period. Rate changes will be effective with the first full payroll
period that begins at least five business days after OSI receives the
new subscription agreement unless OSI elects to process a given change
more quickly. Subscription agreements will remain in effect for
successive Offering Periods unless terminated under Section 10.
(d) Notwithstanding the foregoing, to the extent necessary to comply with
Section 423(b)(8) of the Code and Section 3(b) of this Plan, a
Participant's payroll deductions may be decreased to 0% during a
Purchase Period ("Current Purchase Period") if the sum of all payroll
deductions previously used to purchase stock under the Plan in an
earlier Purchase Period ending during the same calendar year, plus all
payroll deductions accumulated for the Current Purchase Period, equals
$21,250. Thereafter, payroll deductions will recommence at the
beginning of the first Purchase Period which ends in the next calendar
year and at the rate in the Participant's subscription agreement,
unless terminated by the Participant under Section 10.
(e) At the time the option is exercised, in whole or in part, or at the
time some or all of the Common Stock issued under the Plan is disposed
of, Participants must make adequate provision for OSI's federal,
state, or other tax withholding obligations, if any, which arise on
the exercise of the option or the disposition of the Common Stock. OSI
may, but will not be obligated to, withhold from a Participant's
compensation at any time the amount necessary for it to meet
applicable withholding obligations, including withholding required to
make available to OSI any tax deductions or benefits attributable to
the Participant's sale or early disposition of Common Stock.
7. GRANT OF OPTION. On the Enrollment Date of each Offering Period, eligible
---------------
Employees participating in the Offering Period will be granted an option to
purchase on each Exercise Date during the Offering Period (and at
OSI 1995 Employee Stock Purchase Plan
October 17, 1998
Page 3
<PAGE>
the applicable Purchase Price) up to a whole number of shares of Common
Stock determined by dividing the payroll deductions accumulated by the
Employee before the Exercise Date and retained in the Employee's account as
of the Exercise Date, by the applicable Purchase Price. The preceding
sentence notwithstanding, (a) no Participant can purchase during a Purchase
Period more than a number of shares determined by dividing $12,500 by the
Fair Market Value of a share of Common Stock on the Enrollment Date, and
(b) all purchases will be subject to the limitations in Sections 3(b) and
12. Exercise of the option will occur as provided in Section 8 (unless the
Participant has withdrawn under Section 10) and will expire on the last day
of the Offering Period.
8. EXERCISE OF OPTION. Unless a Participant withdraws from the Plan under
------------------
Section 10, the option to purchase shares will be exercised automatically
on the Exercise Date. The maximum number of whole shares subject to option
will be purchased for each Participant at the applicable Purchase Price
with the accumulated payroll deductions in the Participant's account. No
fractional shares will be purchased. Any payroll deductions accumulated in
the Participant's account which are insufficient to purchase a whole share
will be retained for the subsequent Purchase Period or Offering Period,
subject to earlier withdrawal under Section 10. Any other money left over
in a Participant's account after the Exercise Date will be returned. During
a Participant's lifetime, only the Participant can exercise the option to
purchase shares under the Plan.
9. DELIVERY. As promptly as practicable after each Exercise Date on which a
--------
purchase of shares occurs, OSI will arrange for the delivery to each
Participant, as appropriate, of a certificate representing the shares
purchased on exercise of the option.
10. WITHDRAWAL AND TERMINATION OF EMPLOYMENT.
----------------------------------------
(a) At any time, Participants may withdraw all but not less than all of
the payroll deductions credited to their account and not yet used to
exercise an option under the Plan. Withdrawal will be effected by
giving OSI notice in the form of Exhibit B. All of the payroll
deductions credited to a Participant's account will be paid to the
Participant promptly after OSI receives notice of withdrawal, the
Participant's option for the Offering Period will automatically be
terminated and no further payroll deductions for the purchase of
shares will be made for the Offering Period. If a Participant
withdraws from an Offering Period, payroll deductions will not resume
at the beginning of the next Offering Period unless the Participant
has delivered a new subscription agreement to OSI.
(b) On ceasing to be an Employee for any reason, Participants are deemed
to have withdrawn from the Plan. The payroll deductions credited to
the Participant's account during the Offering Period but not yet used
to exercise the option will be returned to the Participant (or, in the
case of the Participant's death, to the person entitled to them under
Section 14) and the Participant's option will automatically be
terminated. The preceding sentences notwithstanding, Participants who
receive payment in lieu of termination notice will be treated as
continuing to be Employees for their customary number of hours per
week of employment during the period in which they are subject to the
payment in lieu of notice.
11. INTEREST. No interest will accrue on the payroll deductions of
--------
Participants.
12. COMMON STOCK.
------------
(a) The maximum number of shares of Common Stock that will be made
available for sale under the Plan is 1,487,500, subject to adjustment
on changes in OSI's capitalization as provided in Section 18. If, on
any Exercise Date, the number of shares for which options are to be
exercised exceeds the number of shares then available under the Plan,
OSI will make a pro rata allocation of the shares remaining available
for purchase in as uniform a manner as practicable and as it
determines to be equitable.
(b) Participants will have no interest or voting right in shares covered
by their options until the options have been exercised.
(c) Shares to be delivered to Participants under the Plan will be
registered in the name of each Participant or in the name of each
Participant and his or her spouse.
OSI 1995 Employee Stock Purchase Plan
October 17, 1998
Page 4
<PAGE>
13. ADMINISTRATION. The Plan will be administered by the Board or a committee
--------------
of the Board duly appointed by the Board (either, as applicable, being
referred to as the "Board"). The Board will have full and exclusive
discretionary authority to construe, interpret and apply the terms of the
Plan, to determine eligibility and to adjudicate all disputed claims filed
under the Plan. Every finding, decision or determination made by the Board
will, to the fullest extent permitted by law, be final and binding on all
parties.
14. DESIGNATION OF BENEFICIARIES.
----------------------------
(a) A Participant may file a written designation of a beneficiary who is
to receive the shares and cash, if any, from the Participant's account
if the Participant dies after an Exercise Date but before the shares
and cash have been delivered to the Participant. A Participant may
also file a written designation of a beneficiary who is to receive any
cash from the Participant's account if the Participant dies before the
option is exercised. If a Participant is married and the designated
beneficiary is not his or her spouse, spousal consent will be required
for these designations to be effective.
(b) Participants may change their designated beneficiary at any time by
notice to OSI. If a Participant dies and there is no validly
designated beneficiary who is living at that time, OSI will deliver
the shares and/or cash to the executor or administrator of the
Participant's estate. If no executor or administrator has been
appointed to OSI's knowledge, then OSI, in its discretion, may deliver
the shares and/or cash to the spouse or to any one or more of the
Participant's dependents or relatives. If no spouse, dependent or
relative is known to OSI, then OSI, in its discretion, may deliver the
shares and/or cash to such other person as OSI designates.
15. TRANSFER. Participants may not assign, transfer, pledge or otherwise
--------
disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14) either payroll deductions
credited to their account or any rights with regard to the exercise of
options or the receipt of shares under the Plan. Any attempt at assignment,
transfer, pledge or other disposition will be without effect, except that
OSI may treat the attempt as an election to withdraw from an Offering
Period under Section 10.
16. USE OF FUNDS. All payroll deductions received or held by OSI under the
------------
Plan may be used by OSI for any corporate purpose. OSI will not be
obligated to segregate payroll deductions.
17. REPORTS. Individual accounts will be maintained for each Participant.
-------
Statements of account will be given to each Participant at least once per
year. These statements will set forth the amounts of payroll deductions,
the Purchase Price, the number of shares purchased and the remaining cash
balance, if any.
18. ADJUSTMENTS ON CHANGES IN CAPITALIZATION, DISSOLUTION, LIQUIDATION, MERGER
--------------------------------------------------------------------------
OR ASSET SALE.
-------------
(a) Subject to any required action by OSI's stockholders, the Reserves and
the price per share of Common Stock covered by unexercised options
under the Plan will be proportionately adjusted for any change in the
number of issued shares of Common Stock as a result of a stock split,
reverse stock split, stock dividend, combination or reclassification
of the Common Stock, or any other change in the number of shares of
Common Stock effected without OSI receiving consideration. For
purposes of the Plan, however, the conversion of any convertible
securities of OSI will not be deemed to have been "effected without
receipt of consideration". This adjustment will be made by the Board,
whose determination will be final and binding. Except as provided in
the Plan, no issuance by OSI of any class of stock or securities
convertible into shares of any class of stock, will affect (and no
adjustment by reason of such an issuance will be made with respect to)
the number or price of Common Stock under option.
(b) Unless otherwise provided by the Board, if dissolution or liquidation
of OSI is proposed, the Offering Periods will end immediately before
the proposed action is consummated.
(c) If a sale of all or substantially all of OSI's assets or a merger of
OSI with or into another corporation is proposed, each option under
the Plan will be assumed (or an equivalent option will be substituted
by) the successor corporation, its parent or one of its subsidiaries,
unless the Board determines, in its sole
OSI 1995 Employee Stock Purchase Plan
October 17, 1998
Page 5
<PAGE>
discretion and in lieu of the assumption or substitution, to shorten
the Offering Periods then in progress by setting a new Exercise Date
(the "New Exercise Date"). If the Board sets a new Exercise Date, it
will notify each Participant in writing, at least 10 business days
before the New Exercise Date. This notice will set forth that the
Exercise Date has been changed to the New Exercise Date and that
options will be exercised automatically on the New Exercise Date,
unless before that date the Participant has withdrawn from the
Offering Period as provided in Section 10. For purposes of this
Subsection, an option will be deemed to have been assumed if, after
the sale or merger, the option confers the right to purchase, for each
share of Common Stock subject to the option immediately before the
transaction, the same consideration (whether stock, cash or other
securities or property) received in the transaction by holders of
Common Stock for each share of their Common Stock. In making this
determination, if the holders of Common Stock were offered a choice of
consideration, the type of consideration chosen by the holders of a
majority of the outstanding shares of Common Stock will apply.
Notwithstanding the preceding sentences, if the consideration received
in the transaction was not solely common stock of the successor
corporation or its parent (as defined in Section 424(e) of the Code),
the Board may, with the consent of the successor corporation, provide
for the consideration to be received on exercise of the option to be
solely common stock of the successor corporation or its parent equal
in fair market value to the per share consideration received by
holders of Common Stock in the transaction.
19. AMENDMENT OR TERMINATION.
------------------------
(a) The Board may, at any time and for any reason, amend or terminate the
Plan. Except as provided in Section 18, (1) no amendment may make any
change in an option previously granted which adversely affects the
rights of a Participant, and (b) no termination can affect options
previously granted, except that the Board may terminate an Offering
Period on any Exercise Date if it determines that termination of the
Offering Period is in the best interests of OSI and its stockholders.
To the extent necessary to comply with any applicable law, rule or
regulation, OSI will obtain all required stockholder approvals for
amendments to the Plan.
(b) Without stockholder consent and without regard to whether any
Participant rights have been "adversely affected," the Board may
change the Offering Periods, limit the frequency and/or number of
changes in the amount withheld during an Offering Period, establish
the exchange ratio applicable to amounts withheld in a currency other
than U.S. dollars, permit payroll withholding in excess of the amount
designated by a Participant in order to adjust for delays or mistakes
in OSI's processing of properly completed withholding elections,
establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the
purchase of Common Stock for each Participant properly correspond with
amounts withheld from the Participant's Compensation, and establish
such other limitations or procedures as the Board determines, in its
sole discretion, to be advisable and consistent with the Plan.
20. NOTICES. All notices or other communications by a Participant to OSI in
-------
connection with the Plan will be in writing and will be deemed to have been
duly given when received in the form specified by OSI and at the location,
or by the person, designated by OSI to receive it.
21. CONDITIONS ON ISSUANCE OF SHARES.
--------------------------------
(a) Shares will not be issued with respect to an option unless the
exercise of the option and the issuance and delivery of the shares
complies with all applicable provisions of law, domestic or foreign,
and has been approved in respect of that compliance by counsel to OSI.
This includes, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated under
both, and the requirements of any stock exchange on which the Common
Stock may then be listed.
(b) If a representation is required in the opinion of OSI's counsel, then
OSI may require the person
OSI 1995 Employee Stock Purchase Plan
October 17, 1998
Page 6
<PAGE>
exercising an option to represent and warrant, as a condition of
exercise and at the time of exercise, that the Common Stock is being
purchased only for investment and without any present intention to
sell or distribute it.
22. TERM OF PLAN. The Plan will become effective on the earlier of its
------------
adoption by the Board or its approval by the stockholders of OSI. It will
continue in effect for a term of 10 years unless sooner terminated under
Section 19.
23. AUTOMATIC TRANSFER TO LOWER PRICE OFFERING PERIOD. To the extent permitted
-------------------------------------------------
by applicable law, if the Fair Market Value of the Common Stock on an
Exercise Date in an Offering Period is lower than the Fair Market Value of
the Common Stock on the Enrollment Date of the Offering Period, then all
Participants in the Offering Period will be automatically withdrawn from
that Offering Period immediately after the exercise of their options on the
Exercise Date and automatically re-enrolled in the immediately following
Offering Period as of its first day.
OSI 1995 Employee Stock Purchase Plan
October 17, 1998
Page 7
<PAGE>
EXHIBIT A
---------
OBJECTIVE SYSTEMS INTEGRATORS, INC.
1995 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. ________ elects to participate in the Objective Systems Integrators, Inc.
1995 Employee Stock Purchase Plan (the "Plan") and subscribes to purchase
shares of OSI's Common Stock in accordance with this Subscription Agreement
and the Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
_____ of my Compensation on each payday (1-15%) during the Offering Period
in accordance with the Plan. (Please note that no fractional percentages
are permitted.)
3. I understand that these payroll deductions will be accumulated for the
purchase of OSI Common Stock at the applicable Purchase Price determined in
accordance with the Plan. I understand that if I do not withdraw from an
Offering Period, any accumulated payroll deductions will be used to
automatically exercise my option.
4. I have received a copy of the complete Plan. I understand that my
participation in the Plan is in all respects subject to the terms of the
Plan. I understand that my ability to exercise the option under this
Subscription Agreement is subject to obtaining shareholder approval of the
Plan.
5. Shares purchased for me under the Plan should be issued in the name(s) of
(Employee or Employee and spouse only): _____________________________.
6. I understand that if I dispose of any shares received by me under the Plan
within 2 years after the Enrollment Date (the first day of the Offering
Period during which I purchased the shares) or one year after the Exercise
Date, I will be treated for federal income tax purposes as having received
ordinary income at the time of disposition in an amount equal to the excess
of the fair market value of the shares at the time such shares were
purchased over the price which I paid for them. I AGREE TO NOTIFY OSI IN
------------------------
WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY DISPOSITION OF MY SHARES AND I
---------------------------------------------------------------------------
WILL MAKE ADEQUATE PROVISION FOR FEDERAL, STATE OR OTHER TAX WITHHOLDING
------------------------------------------------------------------------
OBLIGATIONS, IF ANY, WHICH ARISE ON THE DISPOSITION OF THE COMMON STOCK.
-----------------------------------------------------------------------
OSI may, but will not be obligated to, withhold from my compensation the
amount necessary to meet any applicable withholding obligation including
any withholding necessary to make available to OSI any tax deductions or
benefits attributable to my sale or early disposition of Common Stock. If I
dispose of shares at any time after the expiration of the 2-year and 1-year
holding periods, I understand that I will be treated for federal income tax
purposes as having received income only at the time of disposition, and
this such income will be taxed as ordinary income only to the extent of an
amount equal to the lesser of (a) the excess of the fair market value of
the shares at the time of disposition over my purchase price, or (b) 15% of
the fair market value of the shares on the first day of the Offering
Period. The remainder of the gain, if any, recognized on disposition will
be taxed as capital gain.
7. I agree to be bound by the terms of the Plan. The effectiveness of this
Subscription Agreement depends on my eligibility to participate in the
Plan.
8. If I die, I designate the following as my beneficiary(ies) to receive all
payments and shares due me under the
OSI 1995 Employee Stock Purchase Plan
October 17, 1998
Page 8
<PAGE>
Plan:
NAME: (Please print) _____________________________________________
(First) (Middle) (Last)
_____________________________________
Relationship
_____________________________________________
_____________________________________________
_____________________________________________
Address
Employee's Social
Security Number: _____________________________________________
Employee's Address: _____________________________________________
_____________________________________________
_____________________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT WILL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS I TERMINATE IT.
Dated: _________________________ ________________________________________
Signature of Employee
________________________________________
Spouse's Signature (If beneficiary other
than spouse)
OSI 1995 Employee Stock Purchase Plan
October 17, 1998
Page 9
<PAGE>
EXHIBIT B
---------
OBJECTIVE SYSTEMS INTEGRATORS, INC.
1995 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned Participant in the Offering Period of the Objective Systems
Integrators, Inc. 1995 Employee Stock Purchase Plan which began on ____________,
19__ (the "Enrollment Date") gives notice to OSI of his or her election to
withdraw from the Offering Period. The Participant directs OSI to pay to the
Participant as promptly as practicable all the payroll deductions credited to
the Participant's account with respect to that Offering Period. The Participant
understands and agrees that the option for this Offering Period will be
automatically terminated. The Participant also understands and agrees that no
further payroll deductions will be made for the purchase of shares in the
current Offering Period. The Participant will be eligible to participate in
succeeding Offering Periods only by delivering a new Subscription Agreement to
OSI.
Name and Address of Participant:
________________________________________
________________________________________
________________________________________
Signature:
________________________________________
Date: __________________________________
OSI 1995 Employee Stock Purchase Plan
October 17, 1998
Page 10
<PAGE>
EXHIBIT 99(B)
The following has been excerpted from a Letter Agreement, dated June 10, 1996,
and entered into between OSI and David M. Allen ("Letter Agreement"). This
exceprt sets forth the relevant provisions of the Letter Agreement relating to
the obligations of OSI in the event Mr. Allen's employment is terminated.
* * * *
SEVERANCE: In the event of involuntary termination, other than for cause, base
salary will continue to be paid for a period of one year from your termination
date. In addition, you will be paid a pro-rated amount of incentive consistent
with your defined incentive program and based upon the portion of the year
completed at the time of termination. Your stock option vesting will cease upon
termination in any event.
* * * *
<PAGE>
EXHIBIT 99(C)
The following has been excerpted from a Letter Agreement, dated May 20, 1996,
and entered into between OSI and Philip N. Cardman ("Letter Agreement"). This
exceprt sets forth the relevant provisions of the Letter Agreement relating to
the obligations of OSI in the event Mr. Cardman's employment is terminated.
* * * *
SEVERANCE: OSI will provide salary continuation for a period of two years if at
any time you are involuntarily terminated, other than for cause. In addition,
if your employment with OSI is voluntarily terminated at any time during the
first 24 months of your employment due to a change in OSI's Chief Executive
Officer from J.T. Ambrozy, OSI will provide you with the following salary
continuation:
- Within the first six months, you will receive 24 months salary continuation;
and
- After six months, but less than 12 months, you will receive 18 months salary
continuation; and
- After 12 months, but less than 18 months, you will receive 12 months salary
continuation; and
- After 18 months, but less than 24 months, you will receive 6 months salary
continuation; and
- Thereafter, no salary continuation will apply.
To be eligible for severance upon a change in the CEO, your voluntary
termination must occur within three months after the resignation or termination
of Mr. Ambrozy. In either of the above events, stock option vesting will cease
on the date of your termination.
* * * *
<PAGE>
EXHIBIT 99(D)
September 4, 1997
Mr. Jerry P. Johnson
1601 Francisco Drive
El Dorado Hills, CA 95762
Dear Jerry:
OSI is pleased to confirm our offer of employment to you for the position of
Chief Technology Officer in our Folsom location reporting to Tom Johnson and
Dick Vento. Your start date will be September 2, 1997. In this position, your
base salary will be $7,292 paid semi-monthly, which equates to $175,000 per
year.
You will receive a signing bonus of $40,000 (less normal withholdings and
deductions). The bonus is to be paid when the company is profitable and after
payment of all other employee bonuses.
In addition, you will be eligible to receive incentive compensation earnings up
to 25% of your base salary at target performance. 33% of target incentive
earnings may be paid semi-annually based upon completion of individual
performance objectives mutually agreed upon in writing between yourself and your
management. The balance of your incentive earnings, or 67% of target incentive
compensation, will be based upon corporate financial performance defined by the
Board of Directors and OSI executive management and will be paid on an annual
basis. All incentive compensation will be based upon base earnings for the
period between your hire date and the end of OSI's fiscal year.
Upon hire, OSI will grant 250,000 stock options of OSII common stock priced at
Fair Market Value on the day the Board of Directors approves the option grant.
Options vest over 4 years from the date of grant in accordance with the
following schedule: 25% of the Shares subject to the Option shall vest twelve
(12) months after the Vesting Commencement Date, and 1/48 of the Shares subject
to the Option shall vest each month thereafter provided the employee is in
active service with OSI.
A performance review will be given after a three month New Employee Introductory
Period with performance evaluations conducted annually thereafter in accordance
with our standard policy.
Your insurance benefits will become effective on the first day of the month
following the completion of 30 calendar days of employment based upon your hire
date. During your first year of employment you will earn three weeks of
vacation/sick time in accordance with our
<PAGE>
Jerry P. Johnson
page 2
policy. Based upon OSI's success and profitability, a discretionary contribution
may be placed in the OSI Profit Sharing Program at the end of each fiscal year
in accordance with the plan guidelines and eligibility requirements (completion
of 90 days of employment and over 1000 hours of service in the plan year July 1
through June 30.) Additionally, you may choose to contribute any amount up to a
specified tax limit of before tax compensation to the OSI 401(k) program. You
may also participate in the Employee Stock Purchase Plan beginning with the
earliest eligible enrollment date of either May 1st or November 1st.
You will need to agree to the terms of and sign the attached Employee Invention
agreement. Other such agreements may be required on a per client basis and you
will be expected to approve it in order to work on that client's project. In
accordance with the Immigration and Naturalization Act of 1986, this offer is
made contingent upon your ability to provide proof of your right to work in this
country and completion of INS Form I-9. Your employment shall be governed by the
traditional legal principals of employment at will, and either you or OSI have
the right at anytime to terminate the employment relationship with or without
notice and with or without cause. OSI will provide salary continuation for a
period of one year if at any time you are involuntarily terminated, other than
for cause. In addition, stock vesting will continue one year. Except for the
employment at will relationship, OSI reserves the right to modify job
assignments, wages, hours and working conditions for any employee at any time.
We are eager for you to join us and encourage you to accept this rewarding and
challenging opportunity. We would appreciate your signing this letter below and
returning it to me along with the signed Employee Invention agreement and the
completed Form I-9 as soon as possible. Please return copies of supporting
identification(s) specified on the Form I-9 or be prepared to provide them on
your first day of employment.
This letter contains all details relating to the agreed offer of employment. No
OSI person has the authority to modify or add new terms or conditions without
the signed approval of an officer of the Corporation. Please feel free to
contact me at (916) 353-2590 x4701 if you have any questions. This offer will
be rescinded within seven working days if no reply is received.
Sincerely, Accepted by:
____________________________ _____________________________
BECKY WAGNER JERRY P. JOHNSON Date
Director of Human Resources
BW/Klh
<PAGE>
EXHIBIT 99(E)
EXECUTIVE VP SALES & MARKETING
------------------------------
RESPONSIBILITIES
Provide strategic direction and management of the Sales & Marketing
organizations, and provide directions to the Product Management and Business
Development departments towards a cohesive and responsive market leading
position.
Represent OSI market strategy to industry experts, investment community, and
customer executive management.
Management oversignt responsibility including Regional Sales VP's (APO, Global &
Americas), VP of Marketing, and VP of Business Development. Build and manage
this team to maximize the recognition and acceptance of OSI products into the
marketplace through all sales & distribution channels.
Strategic Planning to include working with CTO and CEO's to ensure that company
is developing, refining, and implementing a strategic plan consistent with the
goals of the shareholders.
COMPENSATION (FOR CALENDAR YEAR 1998)
Target at 120% of street average = $500K
Base pay - $175K/yr.
Target MBO bonus - $100K/yr. - paid quarterly
Target Bookings bonus - $90K/yr. - paid quarterly
Revenue Commission - $135K/yr. - earned at billing; paid on receipt of cash
New Options:
200K shares on a 7 yr. vesting program
Vesting - None of these shares vest until 1/1/99, at which time 1/7 vest
and the remainder vest in equal monthly amounts such that the last
increment ends 6 years later. In other words standard OSI vesting over 7
years.
MBO'S
MBO Bonuses will be $100K maximum for calendar year 1998. This plan is subject
to adjustments in June.
DSO's
No bonus is paid in any quarter in which DSO's are over 100 days. $2,000 is
paid when DSO's are between 90 and 100 days. $10,000 is paid when DSO's are
less than 90 and over 60 days. $12,000 is paid when DSO's are equal to or
less than 60 days.
<PAGE>
Product Mix Goal is 70% License and 30% Services
(NetExpert functionality must increase to accomplish)
Q3 Q4 Q1 Q2
-- -- -- --
L:S ratio 60:40 63:37 67:33 70:30
bonus $7,500 $7,500 $7,500 $7,500
Market Focus
Goal is based on the strategy to focus primarily on wireless and emerging
carriers. If each quarter's wireless % of company revenue is 30% or greater than
a $3,500 bonus will be paid. If emerging carriers % is over 40% then $4,000
bonus will be paid.
The following are based on whole company bookings and revenues.
TARGET BOOKING BONUS
This bonus has a potential of $90K/yr and is based on premise that we must book
significantly more than we bill quarter over quarter next year. If the Book to
Bill ratio is 1.5 or better where Bill is the previous quarter's billing, then
$22.5K bonus will be paid.
REVENUE COMMISSION ($135K Target Range)
At less than 75% of Street Average in a quarter no commission is paid that
quarter. Otherwise base commission rate.
CQASR = Current Quarter Average Street Revenue
$135,000 x 100
--------------
Base % Commission/Qtr = CQASR x 4
If Actual Current Quarter Revenue = 75% of CQASR the commission equal 75%
of Base Commission. If Actual Current Quarter Revenue equals 120% of CQASR then
commission equals base commission. Commission in-between are linearly
proportional to the ratio of actual Revenue to CQASR. If Actual Current
Quarterly Revenue is over 120% CQASR then commissions are 150% of base for al1
revenues.
Commissions paid upon cash receipt.
Old plan commissions paid in this Q3 then new plan commissions paid through next
Q3.
<PAGE>
CONTRACT TERMS
A two (2) year employment contract renewed every year with annual target
compensation to be determined by compensation committee. In the event of
termination, or failure to renew the contract within thirty (30) days of the
annual anniversary date, base salary will be paid for the remaining term of the
contract, and acceleration of the stock vesting for all options which would have
vested during the remainder of the then current contract term.
RELOCATION
The company will reimburse all costs associated with moving to Folsom, including
Realtor fee's and closing costs incurred for selling home in Seattle, and
purchasing a home in Folsom. In the event of involuntary termination in the
first twenty-four (24) months, the company will absorb any cost associated with
selling the home in Folsom.
_____________________________
Richard G. Vento
_____________________________
Tom L. Johnson
_____________________________
Jim K. Souders
<PAGE>
EXHIBIT 99(F)
EMPLOYMENT AGREEMENT
--------------------
BETWEEN:
OBJECTIVE SYSTEMS INTEGRATORS, INC., a corporation organized under the laws of
the State of California, United States of America, with its principal offices
located at 100 Blue Ravine Road, Folsom, California 95630, United States of
America, represented by its Vice President and General Counsel, Mr. Philip N.
Cardman (the "Company"),
ON THE ONE HAND,
AND
MR. PATRIC OLENCZAK, an American citizen resident at 25, rue de Lorraine, 78100
Saint Germain en Laye (France) (hereinafter "Mr. Olenczak"),
ON THE OTHER HAND.
ARTICLE 1 - HIRING
- ------------------
Mr. Olenczak, who declares that he is free of any conflicting commitment,
including any applicable notice period and non-competition clause, is hired by
the Company as Managing Director, Europe, Middle-East and Africa (the
"Territory").
This Agreement is governed by the provisions of the applicable collective
bargaining agreement for all questions not expressly dealt with by this
Agreement. Mr. Olenczak agrees to not disclose any of the terms of this
Agreement both during and after the term of his employment.
ARTICLE 2 - CONTRACTUAL INDEMNITY FOR TERMINATION
- -------------------------------------------------
In light of Mr. Olenczak's responsibilities with the Company, it is agreed that
if this Agreement is terminated for any reason by the Company (other than
serious fault of Mr. Olenczak), the Company will pay to him an indemnity equal
to twelve months' salary. This fixed sum is intended to indemnify Mr. Olenczak
against harm from which he might suffer pursuant to a termination of this
Agreement by the Company and will be the Company's sole and exclusive obligation
for any such termination, in addition to the obligations in Article 11. It is
also agreed that if Mr. Olenczak is dispensed by the Company from carrying out
part or all of his statutory termination notice period (as provided for in
Article 11), the contractual indemnity for termination provided for in this
Article 2 will be reduced by the amount which Mr. Olenczak receives from the
Company for the non-executed notice period.
ARTICLE 3 - TERM OF THE AGREEMENT
- ---------------------------------
Subject to the provisions of Article 1, this Agreement is concluded for an
indefinite term beginning on January 1, 1997.
<PAGE>
ARTICLE 4 - DUTIES
- ------------------
Mr. Olenczak will carry out his activities as Managing Director for the
Territory, responsible for the sales and operations of the Company in the
Territory.
Mr. Olenczak will report directly to Joseph T. Ambrozy, President and C.E.O. of
the Company, or such other person(s) as will be determined by the Company.
Moreover, the duties of Mr. Olenczak may evolve as a function of the
requirements and needs of the Company, on the one hand, and as a function of the
capacity and development of the competence of Mr. Olenczak, on the other hand.
ARTICLE 5 - PLACE OF WORK
- -------------------------
Mr. Olenczak will carry out his duties in the Paris area, and will assist the
Company in establishing its European office.
In addition, Mr. Olenczak may be asked to perform short or medium-term missions
located in France or abroad.
ARTICLE 6 - COMPENSATION
- ------------------------
In consideration for his services, Mr. Olenczak will receive a yearly base
salary of US $160,000.
This salary will be paid to Mr. Olenczak at such place as he will indicate to
the Company. In addition, Mr. Olenczak will be paid, at his option, in French
Francs or United States dollars. If he is paid in French Francs, his salary
will be converted at an exchange rate to be defined on January 1st of each year.
However, if the exchange rate between the United States dollar and the French
Franc varies by more than 5%, such exchange rate will be promptly modified to
take the variation into account.
In addition, Mr. Olenczak will receive a commission of .75% on the net amount of
all license revenues for which payment has been received by the Company for
transactions with end-users in the Territory, payable within thirty days after
receipt of the corresponding amount by the Company. This commission rate will
be reviewed and may be adjusted by the Company at the beginning of each of the
Company's fiscal years.
For business generated with customer accounts not currently on the Company's
prospect list (as approved by the President/C.E.O. of the Company), the
following commission plan will apply through June 30, 1997, in lieu of the plan
defined above:
5% of the net sale amount, when recognized by the Company in
accordance with Generally Accepted Accounting Purposes ("GAAP"), for
the quarter ending March 31, 1997, and
3% of the net sale amount, when recognized by the Company in
accordance with GAAP, for the quarter ending June 30, 1997;
such amounts will be paid to Mr. Olenczak within thirty days after receipt of
the corresponding amount by the Company. This exceptional commission plan will
expire as of June 30,1997.
The payment of any commission to Mr. Olenczak will be in accordance with the
instructions which he will provide to the Company.
<PAGE>
In addition, Mr. Olenczak will receive all employee benefits accorded by French
law and business practices, as well as any supplementary benefits which the
Company offers to its executive level employees, provided that the totality of
such benefits will not exceed those offered to the Company's other executive
level employees.
At least once per year on the anniversary date of this Agreement, Mr. Olenczak
will be called to a meeting the purpose of which is to review his performance
and the quality of his work and to consider revision of his compensation.
Finally, the Company will recommend to its Board of Directors that Mr. Olenczak
be granted an option to purchase 25,000 shares of the Company's Common Stock.
The option price will be the fair market value of the Company's Common Stock on
the date of the grant and will vest in accordance with the provisions of OSI's
1994 Employee Stock Option Plan. In addition, Mr. Olenczak will be eligible for
additional grants on an annual basis based upon the Company's and his individual
performance. Stock option vesting will cease upon termination of this
Agreement.
ARTICLE 7 - PROFESSIONAL EXPENSES
- ---------------------------------
The professional expenses incurred by Mr. Olenczak will be reimbursed to him
each month on receipt by the Company of appropriate vouchers and receipts.
In addition, all travel expenses of Mr. Olenczak which he has incurred for the
purposes of fulfilling his obligations under this Agreement will be reimbursed
to him under the conditions provided for by the Company's internal regulations
and the applicable Collective Bargaining Agreement, if any.
ARTICLE 8 - PAID VACATION
- -------------------------
Mr. Olenczak will profit from all legal paid vacations as required by French
law.
ARTICLE 9 - EXCLUSIVITY
- -----------------------
During the entire term of this Agreement, Mr. Olenczak agrees to reserve his
professional activities exclusively for the Company. Consequently, he cannot
have any other professional activity which is competitive with the activities of
the Company.
ARTICLE 10 - CAR
- ----------------
The Company will make available to Mr. Olenczak, as Managing Director for the
Territory, a company car the leased expense of which will not exceed FRF 3,750
(US $750) per month and the Company will assume all expenses thereof, such as
all insurance premiums and repairs, for the purposes of permitting Mr. Olenczak
to carry out his professional duties as Managing Director for the Territory.
Mr. Olenczak will return the car in accordance with the Company's instructions
on the last day of his employment, irrespective of the reason for termination of
his employment, or in the event that Mr. Olenczak assumes a position with the
Company for which the Company does not typically provide a company car.
ARTICLE 11 - TERMINATION OF THE AGREEMENT
- -----------------------------------------
Each of the parties to this Agreement may terminate it at any time in accordance
with the conditions provided for by French law, and a prior notice period of
three months will be respected by both parties, irrespective of the reason for
termination of this Agreement (except for very serious fault). Such notice
period will commence on the date on which registered letter (return receipt
requested) is sent. The
<PAGE>
Company will have the right if it so desires to dispense Mr. Olenczak from
carrying out his notice period of three months by paying him the corresponding
indemnity.
ARTICLE 12 - NON COMPETITION
- ----------------------------
If this Agreement is terminated for any reason, and irrespective of the party
which terminates this Agreement, Mr. Olenczak is prohibited from accepting
employment from any company whose activities are competitive with those of the
Company, for a period of one year following the effective date of termination of
this Agreement.
This Agreement has been signed in two originals in Folsom, California, and
Paris, France on December 16, 1996.
OBJECTIVE SYSTEMS INTEGRATORS Patric OLENCZAK
By: Philip N. Cardman ____________________________
Its: Vice President and General Counsel
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 29,469
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0
0
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</TABLE>
