UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
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)
101 PARKSHORE DRIVE
FOLSOM, CALIFORNIA 95630
(Address of principal executive office, including zip code)
(916) 353-2400
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on August 31,
2000, as reported on The Nasdaq Stock Market, was approximately $215,874,902.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of August 31, 2000, the registrant had outstanding 37,107,412 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form 10-K
portions of its Proxy Statement for the Annual Meeting of Stockholders to be
held on December 13, 2000.
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
FISCAL YEAR 2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I. PAGE
Item 1. Business ............................................... 1
Item 2. Properties.............................................. 9
Item 3. Legal Proceedings....................................... 10
Item 4. Submission of Matters to a Vote of Security Holders .... 10
Item 4A. Executive Officers of the Registrant.................... 10
PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .......................... 12
Item 6. Selected Financial Data ................................ 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 13
Item 7a. Quantitative and Qualitative Disclosure
About Market Risk ...................................... 22
Item 8. Financial Statements and Supplementary Data............. 23
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.... 23
PART III.
Item 10. Directors and Executive Officers of the
Registrant ........................................... 23
Item 11. Executive Compensation ................................. 23
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................. 23
Item 13. Certain Relationships and Related Transactions ......... 23
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................... 24
Signatures.............................................. 27
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Some of the statements in this Report are "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995. They have been
identified with an asterisk (*). Underlying these statements are a number of
assumptions regarding risks, both known and unknown, which may cause the actual
results of Objective Systems Integrators, Inc. ("OSI") or its industry to differ
materially from those that are expressed or implied. Additional information
regarding these risks (including, but not limited to, concentration of product
and customers; growth of sales, customer support, and development organizations;
competition and technological change in the industry; international licensing;
dependence on third party relationships; risk of product defect; fluctuations of
quarterly results; and retention of key personnel) can be found throughout Item
1 Business, Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations, and Item 7a Quantitative and Qualitative Disclosure
About Market Risk.
GENERAL
We develop, market, and sell software that manages communications networks for
voice and e-services in the evolving communications market. Our company was
founded in 1989 to help telecommunications companies simplify the management of
their large-scale telephony networks. Since then, we have evolved our product
line to meet the changing needs of communication service providers, who are
increasingly focused on communications that use Internet technologies. As a
result of enhancements to our existing products and new products that we have
introduced during the past year, our NETeXPERT(R)1 family of management software
allows our customers to compete more successfully in the growing markets for
Internet-based communications services, such as wireless data and
voice-over-Internet-protocol. Our target markets include established and
emerging providers of long-distance and local voice services, Internet service
providers, application service providers, companies that host Web-based
services, and other next-generation communications service providers. We differ
from many of our competitors in that we provide software for managing not just a
single network function but a broad range of functions essential to delivering
and monitoring high-quality communications services. Our products are designed
to help our customers adapt continuously to changing business directions and
technologies, while minimizing service disruptions, wasted or duplicate software
investments, and costly customization. To accomplish this, our products have
been built on our Unified Management Architecture ("UMA"), which provides the
built-in flexibility to create a single integrated management system that
accommodates equipment and software from different vendors, using diverse
standards and protocols.
Given the increasing complexity of the environments they manage, communication
service providers are recognizing the need for streamlined, automated systems.
Building on our UMA, we have continued to extend our product line to facilitate
the ability of our customers to manage and automate their business processes
from end to end. In fiscal 2000, we added easy-to-use visual controls to
NETeXPERT Virtual Service Management ("VSM"), our network operations support
system framework, to boost operator productivity. In the first quarter of fiscal
2001, we released NETeXSIGHT, a package that, with the help of visual tools,
will allow users to automate the management of quality (network fault and
performance) in networks based on the Internet Protocol ("IP").* Internet
Protocol describes software that tracks the Internet addresses of nodes, routes,
outgoing messages, and recognizes incoming messages. We believe that this
entry-level product, which has been designed to be implemented without complex
programming,
------------------------------
1Please note the following trademarks we claim for our company and its products:
Objective Systems Integrators(TM), NETeXPERT(R), NETeXPERT(R) Virtual Business
Management (TM) (VBM(TM)), NETeXPERT(R) Virtual Process Management (TM)
(VPM(TM)), NETeXPERT(R) Virtual Service Management(TM) (VSM(TM)), NETeXEL(TM),
FM eXEL(TM) CM eXEL(TM), AM eXEL(TM), PM eXEL(TM), NETeXEC(TM), ASP eXEC(TM),
DSL eXEC(TM), GPRS eXEC(TM), IP eXEC(TM), CIRCUIT eXEC(TM), MOBILE eXEC(TM),
VIRTUAL eXEC(TM), NETeXTEND(TM), NETeXSIGHT(TM), Unified Management
Architecture(TM), (UMA(TM)), Reference Platform Model(TM), CORBA Access(TM),
DataArchiver(TM), DBSync(TM, IDEAS(TM), NXRI(TM), Peer-to-Peer(TM) Server,
Replica(TM), Visual Agent (TM), and WebOperator(TM).
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will position us to take advantage of new opportunities in the fast-growing ASP
and ISP markets.* We also believe that this product direction -- management
software for IP markets -- will benefit our installed base, most of whom have
begun to offer next-generation wireless and data services along with traditional
services based on wireless and wireline technologies.*
INDUSTRY BACKGROUND
A DIVERSE MARKET FOCUSED ON INTERNET TECHNOLOGY. We believe that the most
significant trend over the past 12 months has been the consolidation of services
around Internet technologies, which involves data transmitted in "packets" that
are reassembled at the destination. Networks based on IP can handle the huge
volumes of data traffic needed for today's most popular services and
applications, in the text- and-graphics-rich formats that appeal to both
individuals and businesses.* With market share as the prize, communication
service providers have invested large amounts of capital in new equipment and
software to get services to market. As communication service providers see these
outlays cutting into their ability to sustain high growth rates and
profitability, they are increasingly motivated to find ways to control their
costs.
IP-based networks provide access to new markets and the promise of additional
revenues. They also create the need to manage many more network resources in a
far more challenging environment than traditional voice networks. IP providers
must manage thousands -- even millions -- of network resources. Unlike the
physical circuits created for voice calls that travel over copper wire, packets
of IP data follow random "virtual" paths. This makes it more difficult to locate
the source of problems and to repair them quickly. It also makes it more
difficult to guarantee quality of service, a high priority with business
customers. In addition, most providers offer other kinds of services along with
IP, such as wireline and wireless voice. This, in turn, adds the challenge of
simultaneously managing different technologies. These factors, coupled with
consumer demand for greater bandwidth and guaranteed levels of service, make the
old ways of managing separate parts and functions of a network inefficient,
cumbersome, and expensive. To succeed in today's environment, communication
service providers need streamlined, integrated operations support systems
("OSS") for automating their business processes from end to end.
THE CHANGING ROLE OF MANAGEMENT SYSTEMS IN COMMUNICATIONS. Because of the recent
changes in the industry, communication service providers must now manage far
more than just basic network functions (fault, configuration, accounting, and
performance) for a heterogeneous network.* First, the convergence of providers,
which has been an ever-increasing part of the communications landscape, has
meant that basic network functions must often be managed across different
technologies. Second, to improve their ability to compete, the surviving
providers are finding that they now need to coordinate OSSs - the systems that
manage their network operations - with the software systems that manage their
customer services. The result is a move toward integration of service delivery,
service assurance, and service usage functions.2* Finally, the most progressive
communication service providers are learning that they can maximize their
advantage by integrating their OSS systems with their overall business processes
and long-term goals.* Neither legacy OSSs developed before speed and flexibility
became paramount, nor point solutions, which typically manage only a single
function such as fault or performance, can meet this challenge. Lacking a
flexible, open architecture, they neither integrate easily with other systems
nor expand sufficiently to meet the requirements of the Internet era. More
important, they lack the means to modify and improve business processes
efficiently or to combine this ability with other network management functions.
THE HIDDEN COSTS OF EXPLOSIVE GROWTH. In addition to spawning intensified
competition, the worldwide deregulation of communication service providers and
the rapid spread of Internet technology have raised the cost of managing diverse
network infrastructures. Companies that have combined operations as a result of
mergers or acquisitions often find themselves saddled with management systems
that don't work together efficiently, if at all. Faced with
--------------------------
2Service delivery is the process of introducing, activating, and updating
services. Service assurance involves monitoring faults and performance in
delivered services and managing them to ensure quality and fulfill
service-level obligations to customers. Service usage involves the collection of
billing and account detail for products and services delivered to customers. All
of these processes must be carefully managed and coordinated for optimum
efficiency in delivering and managing high-quality communications services.
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new requirements to enter the market for IP-based services, these companies need
to eliminate wasteful duplication and overlap in their systems.
Rapid growth in new markets and technologies has also raised the cost of serving
consumers. Accustomed by the Internet phenomenon to speedy, low-cost access to
information and services, consumers want access to voice, wireless, and data
services from a single provider, preferably with a single bill. Consumer
appetite for the latest innovations, such as Internet service on cellular phones
or handheld devices, has raised costs for communication service providers. They
must find a way to deliver these services while simultaneously trying to
coordinate the complex systems needed to support both existing and emerging
services.
THE OSI SOLUTION
DYNAMIC ARCHITECTURE FOR ADAPTING TO CHANGE. Our Unified Management Architecture
provides an architectural foundation for converging wireline, wireless, and data
services and networks in an era of rapid technological change. It has been
designed as a flexible model for managing different kinds of services and
networks. It also forms the basis of software products that can be configured to
allow open systems for managing and automating current and future business
processes. This design allows our customers to integrate the management of the
service delivery, assured quality, and billing data collection processes they
need to support today's communications services. The result is that a
communication service provider can now focus its resources on achieving business
goals rather than on making different equipment, systems, technologies, and
standards work together.* UMA preserves previous investments in equipment and
systems through its open design. UMA's modular approach also offers a
cost-effective way to automate the management of networks, services, and
applications by coordinating software investment with the growth and
profitability of a communication service provider's business.*
FOUNDATION FOR FUTURE SYSTEMS. Virtual Service Management is a flexible software
system that allows communication service providers to coordinate the management
of their services and networks -- independent of their equipment vendors,
standards, or protocols. Its object-oriented tools, open interfaces, framework,
and management gateways can be used to create an integrated management system.
Communication service providers can also use VSM to build their own applications
- without the need for complex programming - or to deploy our NETeXEL
applications to manage their wireline, wireless, or IP/data networks. From a
single system a communication service provider can control delivery of services,
assurances of quality, and monitoring of service usage. With a unified
management system, it also becomes possible to deliver new services with minimum
impact on the quality or availability of the services already in use.
VSM allows our customers to keep pace with market trends by adopting new
technologies and standards, such as CORBA (Common Object Request Broker
Architecture) and SNMP (Simple Network Management Protocol). It has been
designed specifically to accommodate new gateways as communications technologies
evolve. As a communication service provider converts its transport network to a
next-generation data network, VSM's intelligent gateways provide the necessary
two-way communication with equipment management ports, using common
communications protocols such as SNMP and CMIP (Common Management Information
Protocol). Custom interfaces to other OSSs are also available. Finally, VSM
provides the foundation for NETeXPERT VPM ("VPM"), a complementary technology
for controlling and automating evolving business processes, systems, and
resources.
Applications based on VSM can be used with Oracle(R) databases and run on
UNIX(R) platforms from Sun(R) Microsystems, Hewlett Packard, and IBM. This year
we added a Web-browser interface to VSM that gives users the ability to view,
monitor, and correct network problems in different systems and respond rapidly
to any that may affect service. This interface supports UNIX, Windows 98(R), and
Windows NT(R) client platforms.
APPLICATIONS FOR INTEGRATING MANAGEMENT FUNCTIONS. The NETeXEL series is a set
of application solutions for integrating and automating the management of
service delivery, service assurance, and service usage data. The solutions in
this series have been designed to share and compare data among fault,
configuration, accounting, and performance processes. The resulting management
system is more efficient and powerful than one using a single application to
manage each of these functions separately. Each NETeXEL solution can be
implemented to meet a
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particular set of requirements. They can also be used in combination to manage
network fault, configuration, accounting, and performance data across different
types of networks, such as wireline, wireless, and IP. To set up and deploy one
or more of our NETeXEL solutions, customers may use their own development staff,
consult with our internal professional services staff, or engage one of our
systems integrator partners. They also have the option of using VSM's gateways
and CORBA Access modules to integrate third-party management systems with our
NETeXEL solutions.
AUTOMATED BUSINESS PROCESSES FOR COMPETITIVE ADVANTAGE. Our Virtual Process
Management product offers communication service providers a competitive
advantage through its power to automate business processes, which make them
accessible for analysis and modification throughout an organization. Built on
our Unified Management Architecure, VPM's open technology product allows
communication service providers to link their business processes flexibly with
their network operations. It allows our customers to consolidate processes for
rapid service delivery and design. It also facilitates enterprisewide access to
information and allows them to modify their process flows for specific business
results. By combining process automation and workflow technology, VPM improves
the management of evolving business processes, systems, and resources. By
separating system functions from implementation, it frees communication service
providers from revising underlying software programs each time a process is
altered.
LICENSING OPTIONS. Customers can configure applications based on UMA to meet
their particular requirements, adding new functions as their needs change.
License fees for VSM installations typically begin in the hundreds of thousands
of dollars and can increase to many millions of dollars, depending on the scope
of the network and the functionality required for a given communication service
provider's applications. We recently introduced performance-based pricing, which
bases license fees on a service provider's volume of use. This should allow us
to better penetrate smaller accounts with our UMA-based solutions, which can
then be expanded if and when customers' needs grow. We generally enter into
support agreements with our customers that provide for ongoing service and
product upgrades for a fixed annual fee.
CUSTOMERS
One of OSI's key assets is a worldwide customer base of premier communications
service providers and channel partners. They include Adelphia Communications,
ALLTEL, Anchorage Telecom, AT&T Broadband, AT&T Wireless Services, BayanTel
(Philippines), Bell South, Black & Veatch, COLT (Europe), Communications
Authority of Thailand, Dolphin (England), e.spire Communications, Excite@Home,
Global Crossing, Hong Kong Telecom CLS, KPN Belgium, Level 3 Communications,
Logica, Matav (Hungary), Mobile One, Nextel, Norigen (Canada), Nortel Networks,
NTT (Japan), Open Telecommunications, Pacific Bell, Qwest Communications, Siris
(France), SBC Communications, SingTel (Singapore), Sprint, Sumisho Net Solutions
(Japan), Swisscom (Switzerland), Telecom New Zealand, Teleglobe (Canada), TELMEX
(Mexico), Time Warner Cable, Transistemas (Argentina), Verio, Verizon
Communications, VoiceStream, Williams Communications, WinStar, and WorldCom.
As of June 30, 2000, we had directly or indirectly licensed our products to more
than 250 customers around the world. Our primary targets are providers that
offer wireline, mobile, and IP-based services.
A significant portion of our revenues in each fiscal period generally has
involved substantial orders from large organizations. As a result our revenues
were concentrated among a relatively small number of customers. In fiscal 2000,
1999, and 1998, revenues from the license of our products and services to our
five largest customers were approximately 35%, 28%, and 30% of total revenues,
respectively. One customer accounted for greater than 10% of total revenues in
fiscal 2000. No customer accounted for more than 10% of total revenues in fiscal
1999. One customer accounted for approximately 12% of total revenues in fiscal
1998. We expect that we will continue to depend upon large orders for a
significant portion of our future revenues.* As a result our business, operating
results, and financial condition will be materially adversely affected if
anticipated orders do not materialize, are deferred, or are delayed or
canceled.* There can also be no assurance that revenues from key customers,
individually or as a group, will continue at historical levels.
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SALES AND MARKETING
Our sales organization consists of account managers, sales engineers, and sales
management staff who sell directly to end-users and assist in sales by strategic
partners, systems integrators, and value-added resellers. In addition, we employ
domain experts in our marketing organization who are highly knowledgeable about
the specialized products and technologies of specific market segments. These
domain experts work directly with our sales force and our customers to define
product objectives, customer needs, and market requirements.
We expect to continue expanding our direct sales force, opening additional
customer support and sales offices, adding value-added resellers, and pursuing
additional strategic partnerships.* This will require significant management
attention and financial resources.* We anticipate funding this expansion by
growing our revenues. However, our operating results could be adversely affected
during any particular reporting period depending on the relative timing of
expenditures and the recognition of offsetting revenue.*
In North America we have nine sales and customer support offices in the greater
metropolitan areas of Atlanta, Chicago, Dallas, Denver, Mexico City, New York,
Sacramento, Toronto, and Washington, D.C.
Outside of North America, we license our products and services principally
through systems integrators, value-added resellers, and local distributors with
cultural familiarity, specific industry expertise, and the ability to respond to
customer needs on a timely basis. We currently have sales engineering and
technical support offices in Australia, China, England, France, Germany, Japan,
Netherlands, Philippines, Singapore, South Korea, Sweden, Taiwan, and Thailand.
Revenues outside of the United States accounted for 46% of total revenues in
fiscal 2000. This compares with 45% of total revenues in fiscal 1999 and 34% of
total revenues in fiscal 1998. A segmentation of revenues derived from sales
outside of the United States can be found in Note 9 to the Consolidated
Financial Statements included in this Form 10-K. We expect that our
international revenues will continue to account for a significant portion of our
total revenues.*
We expanded our sales and support infrastructure outside the United States in
fiscal 2000 and will continue to do so in fiscal 2001. To the extent that we do
not continue to establish additional operations outside of North America in a
timely manner, our ability to grow our international sales could be limited.*
This would, in turn, have a material adverse affect on our business, operating
results, and financial condition.* In addition, our international operations
involve a number of inherent risks, such as (1) longer sales cycles and
collection periods; (2) greater difficulty in collections, staffing, and
management; (3) unexpected changes in regulatory requirements, including a
slowdown in the rate of privatization of telecommunications service providers;
(4) reduced protection for intellectual property rights in some countries; (5)
variable economic conditions; and (6) other trade barriers.*
To supplement our direct sales efforts, we have established relationships with
strategic partners, including systems integrators, value-added resellers,
distributors, and network equipment vendors. Whenever possible, we work closely
with our partners to facilitate a complete customer solution. In addition to
assisting our sales efforts, these relationships provide us with insight into
new and emerging customer applications. The percentage of revenues derived from
partner relationships was 25% in fiscal 2000 and 15% in fiscal 1999.
Over the course of the current fiscal year, we expect to strengthen our
relationships with current partners and to add new partners.* There can be no
assurance that we will be able to retain current partners or attract new ones
able to market our products effectively. We believe that our success in
penetrating new markets depends in large part on our ability to maintain these
relationships, to cultivate additional relationships, and to cultivate
alternative relationships as our distribution needs change.*
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PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
We believe that highly competent professional services and technical customer
support organizations are critical to our continuing success in developing
long-term relationships with our customers.
To augment our sales efforts, we offer comprehensive professional services.
Professional services engineers work closely with our product developers, direct
sales personnel, partners, applications specialists, and others to assist with
pre- and post-sales consulting support. We offer a range of services, including
requirements analysis; project management; system design, sizing, customization
and integration services, installation and tuning; training; ongoing
consultation; and upgrade management. We also offer 12-month Basic Support and
Premium Support contracts to our customers. Both include technical support and
product maintenance during the support period. Premium Support also includes
access to product upgrades. Most of our customers purchased support from us in
fiscal 2000. Services and other revenue (as opposed to revenue from licensing
our software products) accounted for 44% of our total revenues in fiscal 2000.
This compares with 44% of our total revenues in fiscal 1999 and 45% of total
revenues in fiscal 1998.
We can give no assurances that our professional services and customer support
resources will be sufficient to manage the future growth of our business.
Failure to expand our professional services and customer support organizations
commensurate with the expansion of our installed base or failure to train those
organizations properly in our products would have a material adverse effect on
our business, operating results, and financial condition.*
RESEARCH AND DEVELOPMENT
Our research and development organization is responsible for the technology
research, design, development, and initial deployment of our products. We
develop most our technology and products internally. We also license
technologies and products from others to accelerate our introduction of new and
enhanced products or to add value and function to our existing products. We
invested more than $50 million in research and development over the last three
years ending in fiscal 2000. Although we still expect to continue making
substantial investments in new technologies, as well as in new and enhanced
products, we believe we will be able to reduce our product development
expenditures as a percentage of revenues in fiscal 2001.*
We believe that our investments in research and development will pay off by
allowing us to offer better, more sophisticated systems for the next generation
of networks and network services. Our common class library, which is shared by a
number of our application solutions under UMA, allows for more effective OSS
integration. It can help communication service providers operate more
efficiently while meeting their service-level commitments to their customers. It
is a key element for allowing our applications to be more tightly integrated as
part of our Unified Management Architecture.
In today's labor market it is also difficult to recruit and retain the highly
technical talent necessary to properly staff our research and development
organization. If we cannot continue to hire highly-qualified staff in a timely
manner, it would affect our efficiency and our ability to meet time-to-market
requirements for new products.
PRODUCTS AND DISTRIBUTION
During fiscal 2000, we developed NETeXSIGHT, our new application for managing IP
services, networks, and applications. NETeXSIGHT leverages on our VSM and our
UMA to allow the monitoring of network response time, processor usage, and
alerts. It has been designed to give communication service providers the
flexibility to incorporate industry standards and new technologies into
installed management systems, greater ability to increase network capacity, and
full IP compatibility. Because it is based on UMA, NETeXSIGHT was designed and
developed in a short period and it demonstrates the flexibility of the UMA-based
products. It was introduced in the first quarter of fiscal 2001.
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NETeXSIGHT provides an affordable, ready-made solution for managing start-up IP
networks. It uses graphical interfaces and three-dimensional tools for
multilevel viewing of network status and health. The NETeXSIGHT product includes
Sun(R) hardware and Oracle(R) software, packaged with OSI's service assurance
applications. Network operators, technicians, and engineers can quickly use it
to easily manage the quality and availability of carrier-grade IP networks.
Based on UMA, NETeXSIGHT is upgradable to our full suite of integrated
solutions.
In NETeXPERT Virtual Business Management ("VBM"), our universal data framework,
has been designed to enable communications service providers to collect data
pertaining to their networks and services in a single collection system.
Scheduled for delivery in the latter half of fiscal 2001, this product will make
it possible to share data and processing across the enterprise to help improve
the quality of customer care, marketing programs, service-level agreement,
management, and network planning.
We also released new versions of our CM eXEL, FM eXEL, and PM eXEL products, as
well as a new version of our VPM framework. Virtual Process Management allows
our customers to capture, control, and automate their business processes, such
as order management and customer service, with day-to-day network operations for
greater efficiency and cost control.
The market for our products is characterized by rapidly changing technologies,
evolving industry standards, frequent new product introductions, and ongoing
changes in customer requirements. This can quickly render existing products
obsolete and unmarketable. As a result, the life cycles for our products are
difficult to estimate. Our success depends on our ability to enhance our
existing products while developing and introducing, on a timely and
cost-effective basis, new products and product features.* We can give no
assurances that we will be able to do so. If we cannot, there would be a
material, adverse effect on our business, operating results, and financial
condition.*
Software products of the size and complexity that we offer are likely to contain
defects. While we test our products during development and before general
release, errors may well be found in existing and new products after commercial
licensing has begun.* This could result in delayed or lost revenues, loss of
market share, or failure to gain market acceptance.* Any of these would have a
material, adverse effect on our business, operating results, and financial
condition.*
We sell through a direct sales force and through indirect channels. In North
America we primarily engage in direct selling. A small portion of our sales in
the United States are made to government and enterprise customers, in most cases
through systems integrators and value-added resellers. In fiscal 2000, 54% of
our total revenues came from North America. Outside of North America our
regional sales organizations typically work through indirect channels and
provide support to network equipment manufacturers, systems integrators, and
local value-added resellers.
COMPETITION
Competition in our markets is intense. To maintain and improve our competitive
position, we must continually develop and introduce, in a timely and
cost-effective manner, new products and features that keep pace with the
increasingly sophisticated needs of our customers.* The principal competitive
factors for our business are product reputation, product functionality
(adaptability, scalability, flexibility in integrating with other products),
ease of use, product quality, performance and price, the availability and
quality of professional services, and customer support.
Our competitors offer a variety of OSS solutions that address the communication
service provider market. These companies generally fall into one of the
following four categories:
o Communications equipment vendors such as Alcatel, Cisco Systems, Lucent
Technologies, and Nortel Networks, which offer software for managing their
own network equipment;
o Custom software developers, which include a communication service
provider's internal development staff, and such independent integrators and
software vendors as Andersen Consulting, KPMG, and Perot Systems Inc.,
whose products are not based on a framework;
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o Hardware and software vendors that offer network management functionality,
such as Compaq, Hewlett-Packard, IBM, and Sun ; and
o Providers of "point" applications for a limited number of OSS functions,
such as ADC Metrica , Micromuse, TTI Telecom, and Vitria.
Because our products are flexible and work with the other systems and solutions,
we may sometimes work with these companies, and others, as well as compete with
them.
Some of our competitors have longer operating histories, greater name
recognition, a larger installed base and significantly greater financial,
technical, sales, customer support, marketing, and other resources. Our goal is
to differentiate OSI from our competition by offering integrated flexible
framework-based solutions under a unified architecture.
Both existing and potential customers for our products regularly evaluate
whether they should develop their own OSS systems or license them from outside
vendors. They sometimes have large internal staffs responsible for meeting their
internal needs. As a result, we must continuously address the advantages of our
products over an internally developed OSS and the products of our competitors.
While our UMA and open systems architecture differentiates us in the
marketplace, an open systems architecture can itself lead to increased
competition.* Competitors that focus on only one application may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements.* They may also be able to devote greater resources to the
development, promotion, and sale of their products.*
We believe that our products offer more functionality and a higher degree of
interoperability than do those of our competitors.* As a result, our products
have historically been priced at a premium. In fiscal 2000, we introduced a new
pricing model designed to help us increase our market share in certain market
segments. This new model is based on the volume of usage rather than fixed-price
components. Usage-based pricing should allow our customers to license products
more cost-effectively to meet their short-term usage levels while giving them
the flexibility to increase their usage as they grow.* Although we believe that
usage-based pricing will be effective in increasing our market share, increased
competition could result in further price reductions, reduced margins or a loss
of market share, any of which could materially, adversely affect our business,
operating results, and financial condition.*
INTELLECTUAL PROPERTY
To protect our proprietary rights, we rely on a combination of patent, trade
secret, copyright and trademark laws; a variety of technical measures; and
nondisclosure or other contractual agreements. We have been granted a number of
patents and currently have several patent applications pending in the United
States. As part of our confidentiality procedures, we enter into invention
assignment and proprietary information agreements with our employees and
consultants, and into nondisclosure agreements with our customers, system
integrators, value-added resellers, and distributors. We also limit access to
and distribution of our software, documentation, and other proprietary
information.
Despite these efforts, others may attempt to copy our products or to obtain and
use information that we regard as proprietary.* In addition, effective
copyright, trademark, patent, and trade secret protection may be unavailable or
limited in certain countries, making the possibility of misappropriation more
likely.* The steps that we have taken may prove insufficient to protect
proprietary technology or prevent misappropriation.* Moreover, they may not stop
competitors from developing products with functionality or features similar to
our products.* We believe that, because of the rapid pace of technological
change in the market for our products, legal protections of our proprietary
technology are not as significant to our success as are the knowledge, technical
expertise, ability, and experience of our employees, the frequency of our
product enhancements, and the quality of the professional services and customer
support we provide.*
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We do not believe that our products infringe on the proprietary rights of third
parties, and there are currently no pending claims to that effect. However, we
expect that software companies will be increasingly subject to infringement
claims as the number of products and competitors grows and the functionality of
products in different industry segments increasingly overlaps.* Claims of this
kind, with or without merit, could be time-consuming, result in costly
litigation and divert our technical and management personnel, cause product
shipment delays, and require us to develop noninfringing technology or enter
into royalty or licensing agreements.* Moreover, royalty or licensing
agreements, if required, may not be available or may be available only on terms
that we find unacceptable.* A successful claim of product infringement, if
noninfringing technology could not be developed or licensed, would materially,
adversely affect our business, operating results, and financial condition.
We also rely on software that is licensed from others, including software that
is integrated with our internally developed software and used to perform key
functions. This third-party software may, at some future point, be unavailable
to us on commercially reasonable terms.* The suppliers of that software also may
not adequately support or enhance their current products or develop new products
on a timely and cost-effective basis.* We may not be able to replace the
functionality provided by third-party software if it is defective or becomes
obsolete or incompatible with future versions of our products.* The loss of this
software, or the inability of our suppliers to enhance their products, could
result in delays or reductions in our product shipments until we could
internally develop equivalent software or identify, license, and integrate
alternative third-party products.* Any of these factors could also have a
material, adverse effect on our business, operating results, and financial
condition.*
EMPLOYEES
As of June 30, 2000, we had 390 employees. None of our employees in the United
States are represented by a collective bargaining agreement. Some employees in
our French subsidiary, SARL, are represented by the Syntec Collective Bargaining
Agreement. There have been no work stoppages and we believe that our relations
with our employees are good.
Our success depends to a significant degree on continuing contributions by key
personnel, the loss of whom could have a material, adverse effect on our
business.* Our future success will also depend in large part on our ability to
attract and retain highly skilled employees. Competition for qualified personnel
in the software industry is intense, and we may not be successful in attracting
and retaining the people that we need.* Failure to do so would have a material,
adverse effect on our business, operating results, and financial condition.*
ITEM 2. PROPERTIES
Our principal administrative, sales and marketing, customer support, and product
development facilities are located in two buildings, of approximately 55,000
square feet each, in Folsom, California. Both facilities are leased. The leases
on these facilities expire in 2014.
We also lease offices in the following greater metropolitan areas: Atlanta,
Bangkok, Chicago, Dallas, Denver, Frankfurt, London, Manila, Mexico City, New
York, Nice, Reno, Seoul, Singapore, Stockholm, Sydney, Taipei, Tokyo, Toronto,
and Washington, D.C.
We believe that our existing facilities are adequate to meet our current needs
and that, as required, suitable additional or alternative space will be
available to us in the future on commercially reasonable terms.*
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be a party to litigation incident to the ordinary
course of our business. As of the date of this Report, we do not believe that
there is material litigation pending against us or involving our business.
However, any litigation, 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
9
<PAGE>
give no assurances that material litigation, either by or against us, 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.*
Proceedings have been filed against OSI with the Bureau de Conciliation in
Grasse, France by Patric R. Olenczak, a former employee, which is ongoing and
previously disclosed in OSI's Quarterly Report on Form 10-Q for the period ended
September 30, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
NAME AGE POSITION
Jeffrey T. Boone 36 Vice President and Chief Information Officer
Philip N. Cardman 52 Vice President and General Counsel, and
Secretary
Lawrence F. Fiore 45 Vice President and Chief Financial Officer
Roger A. Hosier 43 Vice President and Chief Technology Officer
Tom L. Johnson 55 Co-Chief Executive Officer and Co-Chairman of
the Board
Dan Line 49 Senior Vice President, Worldwide Sales and
Support Services
Bud J. Mullanix 42 Vice President, Human Resources
James T. Olsen 53 Executive Vice President
Richard G. Vento 60 Co-Chief Executive Officer and Co-Chairman of
the Board
JEFFREY T. BOONE, Vice President and Chief Information Officer - Since joining
OSI in 1993, Jeff has held a series of technical and managerial roles. In fiscal
1997, he was named Vice President, products and technology. In fiscal 2000, he
was made our Chief Information Officer. Before joining OSI, Jeff held various
software engineering, management, and consulting positions with IBM, ICOT
Corporation, RD Labs Inc, and Systems Center Inc. He holds a degree in
computer science from California State University, Sacramento.
PHILIP N. CARDMAN, Vice President, General Counsel and Secretary - Phil joined
OSI in 1996 as our Vice President, General Counsel, and Secretary. Before
joining OSI, he held various legal and business development positions with
Convex Computer Corporation and Tandem Computers, Inc. He holds a bachelor's
degree from Washington University and a law degree from Duke University.
LAWRENCE F. FIORE, Vice President and Chief Financial Officer - Larry joined OSI
in 1995 as our Corporate Controller. He was promoted to Vice President of
Finance in March 1999, and was named Chief Financial Officer in June 1999.
Before joining OSI, Larry was responsible for revenue, contracts, budgeting, and
planning as Director of
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<PAGE>
Financial Operations at Unify Corporation. He holds a Bachelor's degree in
business from Texas Tech University and is a Certified Public Accountant.
ROGER A. HOSIER, Vice President and Chief Technology Officer - Since joining OSI
in 1991, Roger held a number of positions before being named Chief Technology
Officer in December, 1999. He has been involved in product development and
installation, pre- and post-sales, professional services, custom software
development, and training. Before joining OSI, Roger worked on MRP, network
management, and call accounting software.
TOM L. JOHNSON, Co-Chief Executive Officer and Co-Chairman of the Board of
Directors - As one of our founders, Tom has been largely responsible for our
technology developments. Before starting OSI, he held executive management
positions with Computer Sciences Corporation and Control Data Service Bureau.
Tom also co-founded TelWatch, a telecommunications hardware and software
company. He holds degrees in mathematics and business administration from the
University of Houston.
DAN LINE, Senior Vice President, Worldwide Sales and Support Services - Dan
joined OSI in 1993. In 1996, he became our Vice President of Global Accounts and
Partner Alliances. In 1999, he was promoted to Vice President of Global Sales
and in fiscal 2000 was promoted to his current position. Before joining OSI, Dan
held executive sales positions in GTE and TMC Limited, a division of Philips NV.
His university studies were in international business.
BUD J. MULLANIX, Vice President, Human Resources - Bud joined OSI in fiscal
2000. Before joining OSI, he held a number of Human Resources executive
positions with Degussa Electronics, Hewlett-Packard, and Hitachi. He holds a
degree in business administration from Stanton University.
JAMES T. OLSEN, Executive Vice President - Jim joined OSI in 1998 as Vice
President of Marketing. He was promoted to his current position in fiscal 2000.
Before joining OSI, he spent 15 years developing and directing marketing
programs targeted at the telecom industry. Most recently, Jim was Vice President
of Marketing for the switch and intelligent network divisions at DSC
Communications. His university studies were in business administration, with
post-graduate studies in managing critical resources at the University of
Virgina's Darden School of Business. Jim was a guest staff associate at the
Fuqua School of Business, Duke University, for Telecommunications.
RICHARD G. VENTO, Co-Chief Executive Officer and Co-Chairman of the Board of
Directors - Dick founded OSI with Tom Johnson in 1989, following a management
career with leading communications software companies-- ADP Network Services,
Computer Sciences Corporation, and TYMSHARE, Inc. He has served OSI in several
executive positions, including President. Dick also co-founded TelWatch, a
telecommunications hardware and software company. He holds degrees in economics
and business statistics(BS), and mathematics (BA) concurrently from San
Francisco State University.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK PRICES AND DIVIDENDS
Our common stock has been traded on The Nasdaq Stock Market since 1995. It
trades under the symbol OSII. According to the records of our transfer agent, we
had approximately 167 stockholders of record as of June 30, 2000. Because many
of our shares are held by brokers and other institutions on behalf of
stockholders, we are not able to estimate the total number of stockholders
represented by the record holders. In October 1999, we distributed proxy
materials to approximately 6100 stockholders for the 1999 Annual Stockholders'
Meeting. The following table sets forth the high and low sales price for our
common stock:
<TABLE>
<CAPTION>
FISCAL 2000: HIGH SALE PRICE LOW SALE PRICE
<S> <C> <C>
First Quarter............................... $ 3.75 $ 2.25
Second Quarter ............................. $ 8.94 $ 2.06
Third Quarter .............................. $ 24.00 $ 6.19
Fourth Quarter.............................. $ 15.75 $ 5.50
FISCAL 1999: HIGH SALE PRICE LOW SALE PRICE
First Quarter............................... $ 9.31 $ 4.25
Second Quarter ............................. $ 6.06 $ 3.13
Third Quarter .............................. $ 5.25 $ 2.56
Fourth Quarter.............................. $ 3.56 $ 2.13
</TABLE>
Our policy has been to reinvest earnings for future growth. As a result, we have
not paid dividends and do not expect that we will do so in the future.*
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATION DATA:
<TABLE>
<CAPTION>
As of June 30, 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues....................................... $ 67,140 $ 64,790 $ 60,575 $ 51,712 $ 55,918
Gross profit......................................... 48,968 44,421 35,809 27,283 41,985
Income (loss) from operations........................ (3,432) (12,270) (20,171) (31,228) 13,847
Net income (loss).................................... (2,834) (34,137) (12,170) (18,464) 9,675
Net income (loss) per share, diluted................. $ (0.08) $ (0.97) $ ( 0.36) $ ( 0.58) $ 0.29
Shares used in per share computation................. 36,157 35,142 33,724 2,080 33,447
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA:
As of June 30, 2000 1999 1998 1997 1996
---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term
investments....................................... $ 44,044 $ 31,582 $ 41,286 $ 43,241 $ 53,988
Working capital...................................... 40,684 28,796 59,410 63,169 85,370
Total assets......................................... 76,723 66,424 101,358 108,031 107,078
Total stockholders' equity........................... 48,239 43,862 77,520 85,443 95,058
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We develop, market, and sell software that manages communications networks for
voice and e-services in the evolving communications market. Our OSS framework
and application software is designed to operate under the umbrella of our
Unified Management Architecture, which provides the blueprint for integrating
the management of our customers' communications networks, services,
applications, and processes. As of June 30, 2000, we had directly or indirectly
licensed our products to more than 250 customers around the world.
We were founded in 1989 and began shipping our NETeXPERT products 1990. In
fiscal 1999 we announced our next-generation products: our VSM framework, our
VPM framework and our NETeXEL solution series. We began shipments of these new
products in fiscal 2000.
Revenue from licenses, service, and support of our NETeXPERT products has
accounted for substantially all of our revenues since we were founded. A typical
sale generally includes a combination of license fees, fees for professional
services, and fees for customer support and training. We believe that
substantially all of our revenues for the foreseeable future will be derived
from the license, service, and support of our NETeXPERT product line.* A
significant portion of revenues has been, and will continue to be, derived from
substantial orders placed by large organizations.* The timing of these orders
and their fulfillment has caused, and may in the future cause, material
fluctuations in our revenues and operating results, particularly on a quarterly
basis.* As a consequence, we believe that period-to-period comparisons of
revenue and results of operations are not necessarily meaningful.* We also
believe that our quarterly revenues should not be relied upon as an indicator of
future performance.*
We distribute and sell our products to end-users in North America primarily
through a direct sales organization. Outside of North America, we sell through
systems integrators, local value-added resellers and, to a lesser extent, an
in-region direct sales force. We intend to continue growing our sales and
support operations by expanding our direct sales force, opening new in-region
offices, adding value-added resellers, and pursuing additional strategic
relationships.* See further discussion in the "Results of Operations" section
below.
During fiscal 2000 we had a net loss of $2.8 million. This compares to a net
loss of $34.1 million for fiscal 1999 and a net loss of $12.1 million for fiscal
1998. Some of the factors that contributed to this improvement are described in
the following "Results of Operations" section. We are continuing to follow a
strategy aimed at meeting the service management, network management, and
process integration needs of communication services providers. In fiscal 1998
and fiscal 1999, we placed heavy emphasis on development of new products that
can be integrated under our UMA. In fiscal 2000 we launched our new product
lines, built stronger sales and customer interface organizations, forged new
strategic alliances, and strengthened our existing relationships.* While we
believe this strategy is helping us grow our revenues and backlog of orders, we
can give no assurances that it will continue to be successful.* Some orders
included in our backlog may be cancelled without significant penalty.
RESULTS OF OPERATIONS
REVENUES:
<TABLE>
<CAPTION>
(in thousands, except percentages) FISCAL FISCAL FISCAL
YEAR 2000 CHANGE YEAR 1999 CHANGE YEAR 1998
------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Licenses............................... $ 37,811 4% $ 36,296 9% $ 33,252
PERCENTAGE OF REVENUES................. 56% 56% 55%
Services and other..................... $ 29,329 3% $ 28,494 4% $ 27,323
PERCENTAGE OF REVENUES................. 44% 44% 45%
Total revenues.................... $ 67,140 4% $ 64,790 7% $ 60,575
</TABLE>
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<PAGE>
Our revenues are derived from license fees and fees for services that complement
our products, including professional services, software support, customer
support, and training. In fiscal 2000 our total revenues increased over those in
fiscal 1999. This was primarily the result of increased sales to new customers
in North America and Europe. Service revenues increased slightly as a result of
higher revenue associated with achievement of project milestones for customers
in our foreign operations.
In fiscal 1999 our total revenues increased over those in fiscal 1998. This was
due to a relative increase in sales outside of North America. These increases
were partially offset by decreased North American sales. Service revenues also
increased in fiscal 1999 because of higher maintenance and support revenues from
our larger customer base.
List prices for our products and services did not change significantly during
the comparison periods. However, we did institute a new pricing model in fiscal
2000 based on product performance and customer usage levels. This model gives
our customers greater flexibility and additional choices when selecting and
licensing our products. The change could negatively impact our short-term
revenues if we are not able to continue to attract sufficient volume to offset
our lower entry prices.*
LICENSE REVENUES. In earlier periods, software licenses were generally granted
and priced on a per-server basis although we did grant some site, networkwide or
enterprisewide licenses for larger installations. Going forward, licenses will
be granted on customer usage basis, or what we refer to as performance-based
pricing. We generally recognize license revenues when a noncancelable license
agreement has been signed, product has been shipped, there are no uncertainties
surrounding product acceptance, the fees are fixed and determinable, and
collection is probable. We recognize revenue under contracts requiring
significant customization using the percentage-of-completion method of contract
accounting, based on the ratio of incurred costs to total estimated costs.
Although generally our license agreements do not provide for a right of return,
we maintain reserves for returns and potential credit losses. In fiscal 2000, we
did not add to our reserves for sales returns. This compares to $1.1 million
that was reserved in fiscal 1999 and $2.9 million in fiscal 1998. We did this to
reflect changes in the perceived risks associated with customer returns. Failure
to maintain adequate reserves could have a material, adverse effect on our
business, operating results, and financial condition.*
License revenues increased in actual dollars during fiscal 2000 but remained
constant as a percentage of our total revenues. The primary areas that generated
the growth during fiscal 2000 were our wireless and wireline segments. License
revenues increased in fiscal 1999 over those in fiscal 1998, both in actual
dollars and as a percentage of revenues. The primary areas that generated the
growth during this period were our data/IP and wireline market segments.
We are continuing to increase the size and competency of our direct sales force
and to build relationships with current and new distribution partners. We added
additional sales staff during the fiscal year and expect to continue doing so
during the coming fiscal year.* Given the significant number of new products
that we have introduced, the need to train our sales and support personnel in
those products and the relatively short average tenure of our direct sales
force, historic per-salesman productivity rates may be difficult to achieve in
the near term.*
We anticipate that our license revenues will continue to represent a majority of
total revenues.* However, we also believe that historic growth rates in our
license revenues should not be used as an indication of growth rates for future
periods.* We expect that recent implementation of new strategies or
usage-pricing models may have an effect on our revenues.* While the number of
orders placed by new and existing customers may increase, the license revenue
per customer may potentially be reduced in any given reporting period.* We also
believe that competition in our markets is increasing.* This 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.*
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<PAGE>
SERVICES AND OTHER REVENUES. We recognize revenues for training, consulting, and
professional services as the services are performed and acceptance criteria are
met. We offer support contracts to our customers. These contracts provide
telephone support, updates, and maintenance of our products during the support
period. Revenues from support contracts are deferred and recognized ratably over
the term of the support agreement. Payments for support fees are generally made
in advance and are nonrefundable.
During fiscal 2000, service and other revenues increased from those in fiscal
1999 in absolute dollars and remained flat as a percentage of our total
revenues. The growth in absolute dollars reflected increased services revenues
from customers in our European, Asia-Pacific, and Latin American operations.
During fiscal 1999, service and other revenues increased in absolute dollars
over those in fiscal 1998 but declined as a percentage of total revenues. The
growth in absolute dollars represents increased maintenance revenues from a
larger customer base with an increased number of licenses. The decrease as a
percentage of revenues reflects an increase in license revenues.
During fiscal 1999, revenues from our professional services declined from those
reported in fiscal 1998. This decrease was primarily due to decreased orders in
the emerging service provider market. In fiscal 1998 we experienced an increase
in the orders from the emerging service providers as they built and deployed
their network operations. In fiscal 1999 many of the emerging service providers
had their networks in place and we experienced a reduced demand for professional
services.
We expect that our services and other revenues will continue to represent a
significant portion of total revenues.* We anticipate a continued demand for
professional services in connection with the licensing of our products, renewal
of existing support contracts, and incremental support revenues attributable to
a growing installed base.* We also believe that prior growth rates for services
and other revenues may not be sustainable and should not be relied on as an
indication of future growth rates.*
INTERNATIONAL REVENUES. Revenues from outside of the United States represented
46% of total revenues for fiscal 2000. This compares with 45% of total revenues
in fiscal 1999 and 34% of total revenues in fiscal 1998. Revenues from customers
in Asia-Pacific accounted for 18% of total revenues in fiscal 2000. This
compares with 19% of total revenues in fiscal 1999 and 14% of total revenues in
fiscal 1998. Revenues from Europe accounted for 21% of total revenues in fiscal
2000. This compares with 14% of total revenues in fiscal 1999 and 10% of total
revenues in fiscal 1998. The European communications market is growing, as
privatization in the region continues to create a more competitive service
provider market. We have been building our European operations by actively
increasing our sales and support staff throughout the region in anticipation of
the opportunity for increased business in this market and expect to continue
doing so during the coming fiscal year.*
We expect that our revenues outside of North America will continue to account
for a material portion of total revenues in future periods.* International
business involves a number of inherent risks, including longer collection
periods, greater difficulty in collections, fluctuations in the real cost of
services given changes in relative exchange rates, difficulty in staffing and
managing operations, a longer sales cycle, potentially unstable political and
economic conditions, unexpected changes in regulatory requirements, including a
slowdown in the rate of privatization of telecommunications services, reduced
protection for intellectual property rights, potentially adverse tax
consequences, and tariffs or other trade barriers. In addition, access to
foreign markets is sometimes difficult due to the established relationships
between government-owned or government-controlled communications providers and
local suppliers of communications products. As a result, we may not be able to
continue penetrating international markets successfully. In addition, we cannot
give assurances we will be able to sustain or increase revenue from
international licensing and services or that the factors listed above will not
adversely affect our future international business. Any of these factors could
have a material, adverse effect on our business, operating results, and
financial condition.*
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COST OF REVENUES:
<TABLE>
<CAPTION>
(in thousands, except percentages) FISCAL FISCAL FISCAL
YEAR 2000 CHANGE YEAR 1999 CHANGE YEAR 1998
--------------- ---------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Cost of license revenues............... $ 2,073 5% $ 1,978 3% $ 1,922
PERCENTAGE OF REVENUES................. 3% 3% 3%
Cost of services and other revenues.... $16,099 (12%) $ 18,391 (19%) $ 22,844
PERCENTAGE OF REVENUES................. 24% 28% 38%
Total cost of revenues............ $18,172 (11%) $ 20,369 (18%) $ 24,766
PERCENTAGE OF REVENUES................. 27% 31% 41%
Gross profit........................... $48,968 10% $ 44,421 24% $ 35,809
PERCENTAGE OF REVENUES................. 73% 69% 59%
</TABLE>
COST OF LICENSE REVENUES. Cost of license revenues consists primarily of license
fees paid to third-party software vendors and the costs of product media and
duplication, manuals, packaging materials, shipping expenses, amortization of
capitalized software costs, and related labor costs. In fiscal 2000 the cost of
license revenues increased in absolute dollars. This increase was a result of
the larger license revenue in fiscal 2000 compared with fiscal 1999 and the
associated costs for third-party software licenses.
In fiscal 1999 the cost of license revenues, both in absolute dollars and as a
percentage of revenues, remained relatively flat compared with fiscal 1998.
Although our license revenues increased, the cost of license revenues did not
increase proportionately. This occurred because we were able to achieve cost
savings by reducing the cost of third party software licenses. These cost
savings were partially offset by increased costs related to the amortization of
purchased technology.
Gross profit from license revenues was 95% in fiscal 2000. This compares with
95% in fiscal 1999 and 94% in fiscal 1998. While our gross profits remained the
same, the costs for license fees paid for third-party software increased during
the period as a result of the increased license revenue. However, we expect to
continue licensing third-party software and expect that these costs are likely
to increase in absolute dollars.*
COST OF SERVICES AND OTHER REVENUES. Cost of services and other revenues
consists primarily of personnel costs related to providing professional services
and maintenance services in connection with our products. It also includes
outside service fees paid to third-party providers of professional services,
related travel costs, overhead, and estimated losses related to professional
services contracts. Professional services costs in fiscal 2000 decreased from
those in fiscal 1999 because of lower average headcount and associated personnel
costs. Professional services costs decreased in fiscal 1999 from those in fiscal
1998 for the same reasons. Cost of service revenues for maintenance services
increased in fiscal 2000 compared with those in fiscal 1999. This was the result
of increased outside labor costs associated with technical support for certain
of our customers. Costs of service revenues for maintenance services increased
in fiscal 1999 from those in fiscal 1998 due to increased computer-related costs
and services performed for customer support by other functional areas within
OSI. We expect cost of services and other revenues will continue to increase in
absolute dollars but decrease as a percentage of total revenues.*
In fiscal 2000 gross profit (loss) percentages from service and other revenues
was 45%. This compares with 35% in fiscal 1999 and 16% in fiscal 1998. We expect
to maintain a gross profit in our services business. However, if the costs for
providing these services increases, there could be losses in the future.*
OPERATING EXPENSES:
<TABLE>
<CAPTION>
(in thousands, except percentages) FISCAL FISCAL FISCAL
YEAR 2000 CHANGE YEAR 1999 CHANGE YEAR 1998
------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Sales and marketing.................... $28,408 (1%) $28,712 (12%) $32,509
PERCENTAGE OF REVENUES................. 42% 44% 53%
Research and development............... $17,233 (19%) $21,247 30% $16,295
PERCENTAGE OF REVENUES................. 26% 33% 27%
General and administrative............. $ 6,759 0% $ 6,732 (6%) $ 7,176
PERCENTAGE OF REVENUES................. 10% 10% 12%
Total operating expenses.......... $ 52,400 (8%) $56,691 1% $55,980
PERCENTAGE OF REVENUES............ 78% 87% 92%
</TABLE>
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<PAGE>
SALES AND MARKETING. Sales and marketing expenses consist mainly of salaries,
commissions, and bonuses for sales and marketing personnel, facilities costs
associated with sales and customer support offices, promotional expenses, and
contract administration. In fiscal 2000 sales and marketing expenses remained
relatively flat compared with fiscal 1999. In fiscal 1999 sales and marketing
expenses decreased from those in fiscal 1998, both in absolute dollars and as a
percentage of revenues. The decline resulted from lower head count and a
reduction in associated costs such as travel, communications, and computer
expenses. In addition, we used fewer outside contractors for strategic marketing
efforts during the comparison period.
We expect that our sales and marketing expenses in future periods will continue
to increase in absolute dollars. This increase in costs is due to our active
hiring program, increased focus on marketing programs, and agreements with
various partners involved in the sale of our products.*
RESEARCH AND DEVELOPMENT. Research and development expenses decreased in fiscal
2000. This resulted from a decline in average head count. Research and
development expenses increased in fiscal 1999 from those in fiscal 1998. The
increase resulted primarily from higher head count attributable to development
of new products. Higher costs were also incurred in fiscal 1999 for travel,
facilities, communications, and computer-related expenses because of the
increased head count. We also expect that research and development expenses will
continue to increase in absolute dollars.* We do not anticipate that research
and development expenses will increase as a percentage of total revenues.*
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist mainly
of personnel costs for finance, human resources, legal affairs, and general
management. Also included are outside legal and accounting fees, corporate
insurance expenses, and provision for doubtful accounts. In fiscal 2000 general
and administrative expenses remained constant both in actual dollars and as a
percentage of revenues. In fiscal 1999 general and administrative expenses
decreased from those in fiscal 1998, both in actual dollars and as a percentage
of total revenues. This was the result of lower head count and reduced travel
expenses.
General and administrative expenses may increase in the future with continued
growth and the hiring of additional personnel.* Although we believe our
allowance for doubtful accounts is adequate at the end of fiscal 2000, we will
continue to review this allowance and adjust it as needed. This could result in
additional charges to general and administrative expenses.*
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<PAGE>
We have recorded deferred compensation expense for certain stock options granted
since February 1994. The amortization of deferred compensation expense is
allocated among sales and marketing, research and development, and general and
administrative expenses. The deferred compensation expense was completely
amortized as of June 30, 1999, and no exposure was recorded in fiscal 2000. The
amortization resulted in a charge to operations of $211,000 for fiscal 1999 and
$370,000 for fiscal 1998.
OTHER INCOME, NET:
<TABLE>
<CAPTION>
(in thousands, except percentages) FISCAL YEAR FISCAL YEAR FISCAL YEAR
2000 CHANGE 1999 CHANGE 1998
------------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Other income, net ..................... $ 1,431 (10%) $ 1,596 (12%) $ 1,823
PERCENTAGE OF REVENUES................. 2% 2% 3%
</TABLE>
OTHER INCOME, NET. Other income, net consists primarily of interest income,
gains or losses on foreign exchange, and miscellaneous bank charges. The decline
in other income, net was due primarily to losses associated with foreign
currency fluctuations. The decrease for fiscal 1999 compared with fiscal 1998
was due to lower interest income from reduced levels of cash and short-term
investments.
PROVISION (BENEFIT) FOR INCOME TAXES:
<TABLE>
<CAPTION>
(dollars in thousands) FISCAL YEAR FISCAL YEAR FISCAL
2000 CHANGE 1999 CHANGE YEAR 1998
------------- ----------- ------------- ---------- --------------
<S> <C> <C> <C>
Provision (benefit) for income
Taxes............................. $833 * $23,463 * $ (6,178)
PERCENTAGE OF REVENUES................. 1% * 36% * (10%)
</TABLE>
*Not meaningful
PROVISION (BENEFIT) FOR INCOME TAXES. Our effective tax rate was 41% for fiscal
2000. This compares with 41% in fiscal 1999 and 36% in fiscal 1998. The
effective tax rates for these periods differ from the federal statutory rate due
mainly to state income taxes, partially offset by certain research and
development tax credits. In fiscal year 1999, we set up a reserve for the
balance of our deferred tax assets. For a further explanation, see Note 5 of
Notes to Consolidated Financial Statements.
YEAR 2000 READINESS
To date, we have not experienced any significant Year 2000 problems with our
internal systems or with our customers' systems. However, we continue to monitor
whether our systems and products correctly evaluate date information. We took
remedial action whenever we were able to identify any systems and products that
were not Year 2000 compliant and expect to continue reviewing the situation
throughout the remainder of the calendar year.*
Despite having neither experienced nor received reports of customer problems
over the Year 2000 transition, we can give no assurances that problems will not
occur or that our products will continue to function properly when integrated
with other third-party products. If our products are part of a system that is
not able to manage and manipulate data related to the Year 2000, or if residual
Year 2000 problems cause the failure of the technologies, software, or systems
necessary to operate our business, we could lose customers, suffer significant
disruptions in our business, lose revenues, or incur substantial liabilities and
expenses. The results could have a material adverse effect on our business.*
We have incurred costs related to our Year 2000 readiness program but have not
maintained separate cost accounting for them. Our Year 2000 readiness efforts
were undertaken by existing employees, and the associated costs were treated as
normal operating expense. As of June 30, 2000, we estimate these costs were
approximately $8.0 million.
18
<PAGE>
This 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
our business. We do not expect to incur additional costs.*
We have provided our customers with limited assurances regarding those of our
products that are Year 2000-compliant. Except as specifically provided for in
our contracts and other limited written assurances that we have given, we do not
believe that we are legally responsible for costs that may be incurred by our
customers to ensure the Year 2000 compliance of their software, systems, and
operations.* Our customer agreements typically contain provisions designed to
limit our liability for these types of claims. However, it is possible that
these provisions will not provide adequate protection from liability under
applicable law or unfavorable judicial decisions.* Even if we have disclaimed
responsibility for Year 2000 problems, our customers may nevertheless make
claims against all suppliers of the component parts of their operating
environment.* Any Year 2000 claims, whether with or without merit, could result
in a material, adverse effect on our business, financial condition, and results
of operations.*
FACTORS THAT MAY AFFECT FUTURE RESULTS
QUARTERLY RESULTS. Our quarterly operating results have varied significantly in
the past and we expect that this will continue to be the case going forward.*
Fluctuation in quarterly license revenues is caused by the timing of large
orders by our customers, including global telecommunication providers and new,
emerging communication service providers. Orders are typically preceded by long
sales cycles and, accordingly, it has been and will continue to be difficult to
predict when they will be received.* The failure to obtain a large order during
any given reporting period, for whatever reason, could have a material, adverse
effect on our business.
We typically receive a significant portion of our orders and record the
resulting revenue in the last month of a quarter, and frequently in the last
weeks or even days of a quarter. Expense levels are based, in part, on our
expectations of future revenues. If actual revenues are below expectations,
operating results will be adversely affected. In particular, because only a
small portion of our expenses vary with revenue, net income may be
disproportionately affected if anticipated revenues are not realized.* We
believe this customer buying pattern will continue.*
Our quarterly operating results have also varied and will continue to vary
significantly from quarter to quarter based on factors such 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 operating expenses; personnel changes; fluctuation in
product demand; the number, timing and significance of new products and product
enhancements by us and by our competitors; our ability to develop, introduce and
market new and enhanced versions of our products in a timely manner; the mix of
direct and indirect sales; our assessment of our allowance for doubtful
accounts; sales returns; and general economic factors, among others.*
Because of these factors, quarterly revenue and operating results have been and
will continue to be difficult to forecast.*
SALES CYCLE. Revenues are also difficult to forecast because the sales cycle,
from initial evaluation to product installation, varies substantially from
customer to customer. Purchase of an OSS application generally involves a
significant commitment of capital, with the attendant time requirements often
associated with a customer's internal approval procedures. It also involves the
need to test and accept new technologies that affect crucial operations. For
these and other reasons, the sales cycle for our products is typically lengthy
and subject to a number of significant risks over which we have little or no
control.
KEY PERSONNEL. Our future success depends to a significant degree on the
continuing contributions of key management, sales, professional services,
customer support and product development personnel.* The loss of, or the
inability to attract and retain, key personnel could adversely affect our
business.* We have experienced and continue to experience difficulty in
recruiting qualified personnel. Competition for qualified employees is intense
in the software industry, and there can be no assurance that we will be
successful in attracting and retaining the people we need. The complex nature of
our customers' networks requires that we recruit and hire personnel with
expertise in,
19
<PAGE>
and a broad understanding of, the telecommunications industry. There are only a
limited number of qualified personnel available for employment. Failure to
attract and retain key personnel would have a material adverse effect on our
business condition.*
GROWTH. To compete effectively and manage future growth, we also need to improve
our internal operational, financial, and management information systems,
procedures, and controls in a timely manner. Management of future growth also
means that we must expand, train, motivate, and manage our workforce. We can
give no assurances that our personnel, systems, procedures, and controls will be
adequate to support existing and future operations. The failure to improve
operational, financial, and management systems, or to expand, train, motivate,
and manage employees, could have a material, adverse effect on our business.*
PRODUCT DEFECTS. Software products as complex as those we offer are likely to
contain defects when they are introduced or when new versions are released.
Although we are not aware of any material software defects in our products, we
can give no assurances, despite extensive testing both by us and by our
customers, that errors will not be found after commercial licensing begins. This
could result in delayed or lost revenue, loss of market share, or failure to
achieve market acceptance.* Any of these could have a material, adverse effect
on our business.
COMPETITION. Our products are designed for use in an evolving network operations
support and management applications market. Competition in this market is
intense, with customer consolidation and resulting network operations
convergence, rapidly changing technologies, evolving industry standards,
frequent new product introductions, and rapid changes in customer requirements.
Our competitors offer a variety of solutions to address this market. We believe
that competition has increased and will continue to increase.* Additionally,
some of our customers regularly evaluate whether to design and develop their own
network operations support and management applications or to acquire them from
outside vendors. We can give no assurances that our current or potential
competitors will not develop lower-cost products that are comparable or superior
to ours or that they will not be able to adapt more quickly to new technologies,
evolving industry trends, or changes in customer requirements. If we are not
able to compete successfully against current and future competitors, our
business will be materially and adversely affected.
INTERNATIONAL BUSINESS. We expect that our international business will continue
to account for a significant portion of our total revenues.* We intend to
continue expanding our operations outside of North America.* This will require
significant management attention and the expenditure of significant financial
resources.* The result could adversely affect our operating margins if the
investments are not accompanied by sufficient revenue growth.
Historically, our transactions have been primarily in U.S. dollars. However, as
we further expand our operations outside of the United States, transactions in
other currencies are likely 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. Although we have tried to reduce the risk
of fluctuations in exchange rates by pricing our products and services in U.S.
dollars whenever possible, we pay our local expenses in local currencies. We do
not engage in hedging transactions with respect to those obligations. Currency
exchange fluctuations in countries where we license our products could have a
material, adverse effect on our business by making our pricing noncompetitive
with products priced in local currencies.*
RESELLER RELATIONSHIPS. A key element of our business strategy is to expand our
distributor, systems integrator, and value-added reseller channels. We are
currently investing, and plan to continue investing, significant resources to
develop these channels of distribution.* Though we are in discussions with a
number of interested firms we can give no assurances that we will be able to
attract additional partners who can market our products effectively. If we are
unable to develop these relationships or if our partners are unable to market
our products effectively, our business operating results and financial condition
would be materially and adversely affected.*
PROPRIETARY TECHNOLOGY. Our success and ability to compete depends in large part
on our proprietary software technology. To protect our proprietary rights, we
rely on a combination of various technical measures, as well as trade secret,
copyright, and trademark laws. We also rely on nondisclosure agreements and
other contractual arrangements. Despite our efforts, unauthorized parties may
attempt to copy our products or to obtain and use our proprietary information.*
The steps we have taken may be insufficient to prevent misappropriation of our
20
<PAGE>
technology. Our precautions may not preclude competitors from developing
products with functionality or features that are similar to those in our
products. In addition, effective copyright and trade secret protection may be
unavailable or limited in certain countries outside the United States. While we
believe that our products and trademarks do not infringe upon the proprietary
rights of third parties, infringement claims may arise in the future as the
number of products and competitors in our industry increases. Any such claim,
with or without merit, could be time-consuming, result in costly litigation and
divert the attention of our technical and management personnel.* This could
result in a material, adverse impact on our business.*
THIRD-PARTY SOFTWARE. Finally, we rely on software licensed from third parties,
including software that is integrated with internally developed software and
used to perform key functions. The continued availability of this software
cannot be assured. Nor can we give assurances that, on expiration of our current
agreements, renewals will be available on commercially reasonable terms. Absence
of these licenses could have a material, adverse effect on our business.*
Based upon all of the above, we believe that our quarterly revenues and
operating results may vary significantly in the future.* We also believe that
period-to-period comparisons of results are not necessarily meaningful and
should not be relied on as indications of future performance.* Further, we
believe that it is likely that our revenues or operating results could be below
the expectations of public market analysts and investors in some future
quarter.* If this occurs, the price of our Common Stock could be materially,
adversely affected.*
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 2000 we experienced a net increase in cash and cash equivalents of
$11.8 million. This compares with a net decrease of $8.8 million in fiscal 1999
and a net increase of $7.3 million in fiscal 1998. The increase in fiscal 2000
mainly consisted of $9.0 million in net cash from operations and $6.9 million in
net proceeds from the issuance of common stock. This increase was offset by $4.5
million we used in investment activities, which included the purchase of $0.7
million in short-term investments and $3.6 million in property and equipment.
The decrease in cash and cash equivalents during fiscal 1999 resulted mainly
from $4.5 million in net cash used for operations, purchases of $6.0 million
worth of property, equipment and other assets, and the purchase of $2.2 million
of treasury stock. The decrease in net cash used for operations came primarily
from our $34.1 million net loss, partially offset by our adjustment for deferred
income taxes of $22.3 million. We generated $2.3 million of net cash by the
exercise of stock options.
The fiscal 1998 increase came mainly from $5.4 million of short-term investment
sales and $4.4 million from the exercise of stock options. These sources of cash
were offset by $2.9 million of cash used in our operations. The decline in net
cash from operations was caused primarily by a $12.2 million loss from
operations, partially offset by $7.8 million in depreciation and amortization, a
$4.1 million increase in accounts receivable and a $3.9 million increase in
deferred revenue.
As of June 30, 2000, we had working capital of approximately $40.7 million. This
included $44.0 million in cash, which expires in December 2002, cash
equivalents, and short-term investments. We also have a $2.5 million secured
revolving line of credit. Under our line of credit, borrowings bear interest at
either (1) a fluctuating rate per year equal to the prime lending rate then in
effect, or (2) a fixed rate per year that is 2% above the London Inter-Bank
Offered Rate. As of June 30, 2000, no amounts had been borrowed under our line
of credit.
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.* In fiscal 2000 we increased our allowance for doubtful accounts
by $0.6 million. In fiscal 1999 we increased our allowance for doubtful accounts
by $0.6 million and in fiscal 1998 we increased it by $0.4 million. At June 30,
2000, reserves for doubtful accounts and sales returns were $2.3 million. We
believe our present reserves are adequate to provide for potential credit losses
or sales returns.*
21
<PAGE>
In fiscal 2000 we spent $3.6 million for capital items, principally computer
hardware, computer software, and communications equipment. We expect that
capital expenditures will increase in fiscal 2001 and in the future. This
increase will be necessary to support the planned growth in our head count and
related equipment and infrastructure requirements.
We believe that our cash balances and our 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
working capital requirements, we may need to raise additional funds. Financing
may not be available or, if it is, it may not be obtainable on terms that are
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.*
In 1998 our Board of Directors authorized a stock repurchase program under which
we were authorized to purchase up to 1,000,000 shares of our common stock. As of
June 30, 2000, we had repurchased 493,000 shares of common stock on the open
market, at an average purchase price of $4.47, for $2,208,000. We may continue
repurchasing shares in the future.*
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market rate risk based on a change in interest rates relates
primarily to our investment portfolio, which consists of cash equivalents and
short-term investments. Cash equivalents are highly liquid investments with
original maturities of three months or less and are stated at cost. We do not
believe our exposure to interest rate risk is material for these balances, which
were $4.8 million on June 30, 2000. The securities in our short-term investment
portfolio are generally classified as available-for-sale. Short-term investments
were $16.5 million on June 30, 2000. We do not use derivative financial
investments in our short-term investment portfolio; we place our investments
with high-quality issuers and, by policy, limit our credit exposure to any one
issuer. We are averse to principal loss and attempt to ensure the safety of our
investment funds by limiting default, market, and reinvestment risk. If market
interest rates were to change immediately and uniformly by 10% from the rates in
effect on June 30, 2000, the fair value of our cash equivalents and short-term
investments would change by an insignificant amount.
FOREIGN CURRENCY EXCHANGE RATE RISK
As a global business, we face exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices
evolve and they could have a material adverse impact on our business, operating
results, and financial position.* Historically, our primary exposure has related
to local currency expenses since the functional currencies of our foreign
subsidiaries are local. A hypothetical 10% change in foreign currency rates
would have an insignificant impact on our business, operating results, and
financial position.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section in Part IV, Item
14(a)(1), and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning members of our Board of
Directors is incorporated by reference from the section "Election of Directors"
in our Proxy Statement for the Annual Meeting of Stockholders, to be held
December 13, 2000 ("Proxy Statement"). We will file our Proxy Statement with the
Securities and Exchange Commission within 120 days of the end of our fiscal
year. The information required by this item concerning executive officers is set
forth in Part I, Item 4A of this Report. The information required by this item
regarding compliance with Section 16(a) of the Exchange Act is incorporated by
reference from the section captioned "Compliance with Section 16(a) of the
Exchange Act" in our Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "Executive Compensation and Other Matters" in our Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "Record Date and Principal Share Ownership" in our Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
sections captioned "Compensation Committee Interlocks and Insider Participation"
and "Certain Transactions With Management" in the Proxy Statement.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements are filed as part of this report:
PAGE
Independent Auditor's Report.................................................28
Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 2000, and 1999 ...............29
Consolidated Statements of Operations for Years Ended June 30,
2000, 1999, and 1998...............................................30
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2000, 1999,and 1998 ................................31
Consolidated Statements of Cash Flows for the Years
Ended June 30, 2000, 1999, and 1998................................32
Notes to Consolidated Financial Statements............................33
(a)(2) FINANCIAL STATEMENT SCHEDULES
II - Valuation and Qualifying Accounts
Additional schedules are not required under the related schedule instructions or
are inapplicable and therefore have been omitted.
(a)(3) EXHIBITS
3.1/4 Certificate of Incorporation
3.2/4 Bylaws, as amended to date
10.1/1 Stock Option Plan and form of agreement
10.2/7 1994 Stock Option Plan, as amended, and Form of Agreement
thereto
10.3/7 1995 Employee Stock Purchase Plan, as amended, and form of
agreement thereto
10.4/1 1995 Director Stock Option Plan
10.4/1 Forms of Agreement to 1995 Director Stock Option Plan
10.5/1 Form of Indemnification Agreement between the Registrant
and its officers and directors
10.6/1 Standard Office Lease-Gross between Registrant and PIWI
Investments dated February 14, 1994
10.7/1* Stockholder Rights Agreement among Registrant, Tom L.
Johnson, Richard G. Vento and the purchasers of Preferred
Stock named therein dated September 27, 1995
10.8/1 Voting Agreement among Registrant, Tom L. Johnson, Richard
G. Vento, and the purchasers of Preferred Stock named
therein dated September 27, 1995
10.9/4 Form of Indemnification Agreement between the Registrant
and its directors and officers
10.10/5 Business Sale Agreement between the Registrant and Open
Technology Pty. Limited dated March 14, 1997
10.11/5 Contract of Purchase and Sale for purchase of real
property between Registrant and The John A. Sobrato 1979
Trust dated April 7, 1997
10.12/6 Lease between Objective Systems Integrators, Inc. and
Redsky Enterprises, Inc. dated January 13, 1997, as
amended on March 30, 1998
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<PAGE>
10.13/6 Agreement to Purchase Real Property between Objective
Systems Integrators, Inc. and Redsky Enterprises, Inc.
dated March 39, 1998
10.14/6 Relocation Loan Agreement between Objective Systems
Integrators, Inc. and James K.R. Souders dated April 14,
1998
10.15/6 Promissory Note Secured by Deed of Trust between Objective
Systems Integrators, Inc. and James K.R. Souders dated
April 14, 1998
10.16/6 Deed of Trust with James K.R. Souders as Grantor and
Objective Systems Integrators, Inc. as Beneficiary dated
April 14, 1998
10.17/3 Letter Agreement for Philip N. Cardman \
10.18.3 Letter
Agreement for Jerry P.Johnson
10.19/3 Employment Agreement for James K.R. Souders
10.20/3 Employment Agreement for Patric Olenczak
10.21/7 Employment Agreement for Lawrence F. Fiore
10.22/8* Enterprise-Wide License Agreement between Registrant and
Adelphia Communications Corporation dated December 20,
1999
10.23/8 Enterprise-Wide Professional Services Agreement between
Registrant and Adelphia Communications Corporation dated
December 20, 1999
10.24/8 Severance Agreement of Jeffrey T. Boone
10.25/8 Severance Agreement of Phjlip N. Cardman
10.26/8 Severance Agreement of Lawrence F. Fiore
10.27/8 Severance Agreement of Danny D. Line
10.28/8 Severance Agreement of James T. Olsen
10.29/9* Master Software License Agreement Between Registrant and
Sprint/United Management Company
10.30/9* License Agreement No. 325 Between Registrant and
VoiceStream Wireless Corporation
10.31/9 Offer Letter of Bud Mullanix
10.32/9 Severance Agreement of Bud Mullanix
10.33/9 Indemnification Agreement of Bud Mullanix
23.1 Independent Auditors' Consent
24.1 Power of Attorney (See page 23.)
27.1 Financial Data Schedule
-----------------------
* Confidential treatment has been granted with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the SEC.
/1 Incorporated by reference to exhibits filed with OSI's Registration
Statement on Form S-1 (Reg. No. 33-97506) as declared effective by the
Commission on November 30, 1995
/2 Incorporated by reference to exhibits filed with OSI's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1995
/3 Incorporated by reference to exhibits filed with OSI's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998
/4 Incorporated by reference to exhibits filed with OSI's Registration
Statement on Form 8-B (Reg. No. 000- 26886) as declared effective by
the SEC on February 4, 1997
25
<PAGE>
/5 Incorporated by reference to exhibits filed with OSI's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997
/6 Incorporated by reference to exhibits filed with OSI's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998
/7 Incorporated by reference to exhibits filed with OSI's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999
/8 Incorporated by reference to exhibits filed with OSI's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1999
/9 Incorporated by reference to exhibits filed with OSI's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000
(b) Reports on Form 8-K. OSI did not file any reports on Form 8-K
during the quarter ended June 30, 1998.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Dated: September 27, 2000 OBJECTIVE SYSTEMS INTEGRATORS, INC.
By: /s/ TOM L. JOHNSON
--------------------------------------------
Tom L.Johnson, Co-Chief Executive Officer and
Co-Chairman of the Board of Directors
Dated: September 27, 2000 OBJECTIVE SYSTEMS INTEGRATORS, INC.
By:
/s/ RICHARD G. VENTO
----------------------------------------------
Richard G. Vento, Co-Chief Executive Officer and
Co-Chairman of the Board of Directors
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Tom L. Johnson, Richard G. Vento, and Lawrence F.
Fiore, and each of them, his true and lawful attorneys-in-fact and agents, each
with full power of substitution and resubstitution, to sign any and all
amendments (including post-effective amendments) to this Annual Report on Form
10-K and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, or any of
them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------- ------------------------------------------ ------------------
<S> <C> <C>
/S/ RICHARD G. VENTO Co-Chief Executive Officer and September 27, 2000
(Richard G. Vento) Co-Chairman of the Board of Directors
/S/ TOM L. JOHNSON Co-Chief Executive Officer and September 27, 2000
(Tom L. Johnson) Co-Chairman of the Board of Directors
/S/ LAWRENCE F. FIORE Vice President and Chief Financial Officer September 27, 2000
(Lawrence F. Fiore) (Principal Financial and Accounting Officer)
/S/ GARY D. CUCCIO
(Gary D. Cuccio) Director September 27, 2000
/S/ GEORGE F. SCHMITT Director September 27, 2000
(George F. Schmitt)
/S/ DR. KORNEL TERPLAN
(Dr. Kornel Terplan) Director September 27, 2000
</TABLE>
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Objective Systems Integrators, Inc.
We have audited the accompanying consolidated balance sheets of Objective
Systems Integrators, Inc. and its subsidiaries ("OSI") as of June 30, 2000, and
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
2000. Our audits also included the financial statement schedule listed in Item
14(a)(2). These financial statements and financial statement schedule are the
responsibility of OSI's management. Our responsibility is to express an opinion
on the financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of OSI and subsidiaries at June 30,
2000 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information contained therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
San Jose, California
July 28, 2000
28
<PAGE>
OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------
2000 1999
---------------- ----------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents........................................................ $ 27,591 $ 15,811
Short-term investments........................................................... 16,453 15,771
Accounts receivable, net of allowances of $1,950 in 2000 and $1,865 in 1999...... 18,887 17,251
Prepaid expenses and other current assets........................................ 1,700 1,515
---------------- ----------------
Total current assets.......................................................... 64,631 50,348
Property and equipment, net.......................................................... 9,570 11,319
Other assets, net.................................................................... 2,522 4,757
---------------- ----------------
Total assets.................................................................. $ 76,723 $ 66,424
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 5,606 $ 5,822
Accrued compensation............................................................. 6,801 5,315
Accrued liabilities.............................................................. 1,507 1,347
Deferred revenue................................................................. 10,033 9,068
---------------- ----------------
Total current liabilities..................................................... 23,947 21,552
Deferred revenue..................................................................... 4,422 1,010
Other liabilities.................................................................... 115 --
---------------- ----------------
Total liabilities 28,484 22,562
---------------- ----------------
Commitments (Note 6)
Stockholders' equity:
Common stock, $0.001 par value; authorized 100,000,000 shares;
shares outstanding: 37,034,000 in 2000 and 35,614,000 in 1999................. 94,597 86,703
Accumulated other comprehensive income (loss)................................. (1,044) (917)
Accumulated deficit........................................................... (45,314) (41,924)
---------------- ----------------
Total stockholders' equity.................................................... 48,239 43,862
---------------- ----------------
Total liabilities and stockholders' equity.................................... $ 76,723 $ 66,424
================ ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE>
OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
2000 1999 1998
--------- ----------- -----------
<S> <C> <C> <C>
Revenues:
License.................................................................. $ 37,811 $ 36,296 $ 33,252
Service and other........................................................ 29,329 28,494 27,323
--------- ----------- -----------
Total revenues....................................................... 67,140 64,790 60,575
--------- ----------- -----------
Cost of revenues:
License.................................................................. 2,073 1,978 1,922
Service and other........................................................ 16,099 18,391 22,844
--------- ----------- -----------
Total cost of revenues............................................... 18,172 20,369 24,766
--------- ----------- -----------
Gross profit................................................................. 48,968 44,421 35,809
--------- ----------- -----------
Operating expenses:
Sales and marketing...................................................... 28,408 28,712 32,509
Research and development................................................. 17,233 21,247 16,295
General and administrative............................................... 6,759 6,732 7,176
--------- ----------- -----------
Total operating expenses............................................. 52,400 56,691 55,980
--------- ----------- -----------
Loss from operations......................................................... (3,432) (12,270) (20,171)
Other income, net............................................................ 1,431 1,596 1,823
--------- ----------- -----------
Loss before income taxes..................................................... (2,001) (10,674) (18,348)
Provision (benefit) for income taxes......................................... 833 23,463 (6,178)
--------- ----------- -----------
Net loss..................................................................... $ (2,834) $ (34,137) $(12,170)
========= =========== ===========
Loss per share:
Basic................................................................... $ (0.08) $ (0.97) $ (0.36)
========= =========== ===========
Diluted................................................................. $ (0.08) $ (0.97) $ (0.36)
========= =========== ===========
Shares used in loss per share calculations:
Basic................................................................... 36,157 35,142 33,724
========= =========== ===========
Diluted................................................................. 36,157 35,142 33,724
========= =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE>
OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED RETAINED
OTHER EARNINGS
COMMON STOCK COMPREHENSIVE (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT INCOME (LOSS) DEFICIT) TOTAL INCOME (LOSS)
---------- ----------- ------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE at June 30, 1997.......... 32,571 $ 81,386 $ (326) $ 4,383 $ 85,443
Common stock issued under stock
option plans, net............... 2,221 4,377 -- -- 4,377
Amortization and adjustment of
deferred stock compensation..... -- 370 -- -- 370
Tax benefit of exercise of stock
options......................... -- 301 -- -- 301
Translation adjustment............ -- -- (801) -- (801) $ (801)
Net loss.......................... -- -- -- (12,170) (12,170) (12,170)
---------- ----------- ------------- --------------- ------------ ---------------
BALANCE at June 30, 1998.......... 34,792 86,434 (1,127) (7,787) 77,520 $ (12,971)
===============
Common stock issued under stock
option plans, net............... 1,315 2,266 -- -- 2,266
Purchase of treasury stock ....... (493) (2,208) -- -- (2,208)
Amortization and adjustment of
deferred stock compensation..... -- 211 -- -- 211
Translation adjustment............ -- -- 210 -- 210 $ 210
Net loss.......................... -- -- -- (34,137) (34,137) (34,137)
---------- ----------- ------------- --------------- ------------ ---------------
BALANCE at June 30, 1999.......... 35,614 86,703 (917) (41,924) 43,862 $ (33,927)
===============
Common stock issued under stock
option plans, net............... 1,194 6,858 -- -- 6,858
Issuance of treasury stock for
employee stock purchase plan.... 226 1,036 -- (556) 480
Unrealized loss on securities..... -- -- (21) -- (21) $ (21)
Translation adjustment............ -- -- (106) -- (106) (106)
Net loss.......................... -- -- -- (2,834) (2,834) (2,834)
---------- ----------- ------------- --------------- ------------ ---------------
BALANCE at June 30, 2000.......... 37,034 $ 94,597 $ (1,044) $ (45,314) $ 48,239 $ (2,961)
========== =========== ============= =============== ============ ===============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
<PAGE>
OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------------
2000 1999 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $ (2,834) $ (34,137) $ (12,170)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation and amortization.................................. 7,381 8,085 7,765
Deferred income taxes.......................................... -- 22,332 (6,382)
Stock compensation expense..................................... -- 211 370
Loss on disposal of property and equipment..................... 112 114 --
Effect of changes in:
Accounts receivable, net................................... (1,667) (367) 4,119
Prepaid expenses and other current assets.................. (37) 47 1,397
Accounts payable........................................... (424) 379 (2,201)
Accrued liabilities........................................ 2,079 (845) 308
Deferred revenue........................................... 4,377 (308) 3,868
-------------- ------------- --------------
Net cash provided by (used for) operating activities............. 8,987 (4,489) (2,926)
-------------- ------------- --------------
Cash flows from investing activities:
Sales (purchases) of short-term investments, net............... (703) 947 8,706
Purchases of property and equipment............................ (3,610) (3,142) (3,943)
Purchases of other assets...................................... (183) (2,819) --
Proceeds from sale of property and equipment................... -- 702 598
-------------- ------------- --------------
Net cash provided by (used for) investing activities............. (4,496) (4,312) 5,361
-------------- ------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net.................... 7,388 2,266 4,377
Repurchase of common stock..................................... -- (2,208) --
-------------- ------------- --------------
Net cash provided by financing activities........................ 7,338 58 4,377
-------------- ------------- --------------
Effect of exchange rates on cash................................... (49) (14) (61)
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents............. 11,780 (8,757) 6,751
Cash and cash equivalents:
Beginning of the year............................................ 15,811 24,568 17,817
------------- ------------- --------------
End of the year.................................................. $ 27,591 $ 15,811 $ 24,568
============== ============= ==============
Cash paid during the year for:
Interest.......................................................... $ -- $ -- $ --
Income taxes...................................................... $ 783 $ 960 $ 258
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
<PAGE>
OBJECTIVE SYSTEMS INTEGRATORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Objective Systems Integrators, Inc. ("OSI") provides software that simplifies
the integration and management of communications networks in large-scale,
complex, multi-vendor environments. Our VSM family of products includes a
software framework, high-level development tools, service and management
application components, and related professional services. These products and
services are designed for use in complex, critical networks to enable the rapid
deployment of new and enhanced services and management of other services and
business processes.
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of OSI and its
wholly owned subsidiaries after elimination of significant intercompany
transactions and balances.
USE OF ESTIMATES
The preparation of financial statements that conform to accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect (1) the reported amounts of assets and liabilities,
(2) disclosure of contingent assets and liabilities as of the date of the
financial statements, and (3) the reported amounts of revenues and expenses
during the reporting period. Actual results inevitably will differ from those
estimates and the differences may be material.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on deposit with banks and high-quality
money market instruments with remaining maturities of 90 days or less when
purchased. Because of the short period to maturity, fair values of cash
equivalents approximate cost.
SHORT TERM INVESTMENTS
Short-term investments are classified as available-for-sale. On June 30, 2000
and 1999, respectively, investments consisted of approximately $4.0 million and
$6.0 million, respectively, of debt securities issued by U.S. Government
agencies, and approximately $12.5 million and $9.8 million, respectively, of
corporate debt securities, both carried at fair value. On June 30, 2000 and
1999, gross unrealized gains and losses on available-for-sale investments were
not significant. Amortized cost approximates fair value. Contractual maturities
of short-term investments on June 30, 2000 and June 30, 1999, were generally
within one year.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful life of the asset, which ranges
from three to seven years. Amortization of leasehold improvements is taken over
the shorter of the useful life of the asset or the related lease term.
33
<PAGE>
OTHER ASSETS
Other assets consist primarily of goodwill and purchased technology. Costs for
the research and development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. Once feasibility has been
established, additional costs are capitalized until the product is available for
general release to customers. Software development costs are amortized over the
estimated economic life of the products, not to exceed three years. Intangible
assets are amortized over the estimated useful life of the asset, which ranges
from three to seven years.
LONG-LIVED ASSETS
Whenever events indicate that the carrying values of long-lived assets or
identifiable intangibles may not be recoverable, we evaluate the carrying values
of those assets using future, undiscounted cash flows. If the sum of the
anticipated, undiscounted future cash flows is less than the carrying amount of
the asset, we recognize an impairment loss equal to the difference between the
fair value and the carrying value.
REVENUE RECOGNITION
In December 1999 the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB
101"). SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. We are
required to adopt SAB 101 in fiscal year 2001.
Revenues consist primarily of fees for licenses of our software products,
maintenance, customer support and consulting contracts.
LICENSE REVENUES: In earlier periods, software licenses were generally granted
and priced on a per-server basis although we did grant some site, networkwide or
enterprisewide licenses for larger installations. In fiscal 2000 we began to
grant licenses on a customer usage or number of transactions basis. We generally
recognize license revenues when a noncancelable license agreement has been
signed, product has been shipped, there are no uncertainties surrounding product
acceptance, the fees are fixed and determinable, and collection is probable. We
recognize revenue under contracts requiring significant customization using the
percentage-of-completion method of contract accounting, based on the ratio of
incurred costs to total estimated costs. Although generally our license
agreements do not provide for a right of return, we maintain reserves for
returns and potential credit losses. In fiscal 2000 we did not add to our
reserves for sales returns. This compares with $1.1 million that was reserved in
fiscal 1999 and $2.9 million in fiscal 1998. We did this to reflect changes in
the perceived risks associated with customer returns.
SERVICE AND OTHER REVENUE: Revenue from customer support contracts is recognized
ratably over the term of the agreement, which is typically one year. Other
revenue is derived primarily from professional services. This revenue is
generally recognized using the percentage-of-completion method or on a
time-and-materials basis. At June 30, 2000 and 1999, respectively, accrued
liabilities included an accrual of $0.3 million and $0.4 million, respectively,
for estimated losses on service contracts in progress.
DEFERRED REVENUE: Deferred revenue includes unearned amounts received under
support contracts, amounts billed to customers but not recognized as revenue,
and reserves for sales returns.
CONCENTRATION OF CREDIT RISKS
We license our products primarily to customers in the communications industry.
We perform periodic credit evaluations of our customers and generally do not
require collateral or other security to support accounts receivable. An estimate
of credit losses has been provided for in our consolidated financial statements.
34
<PAGE>
NET LOSS PER SHARE
We compute net loss per share using two different methods, basic and diluted.
Basic net (loss) per share is calculated using the weighted average number of
shares outstanding during the period. Diluted net (loss) per share is computed
based on the weighted average number of common shares outstanding plus the
dilutive effect of outstanding stock options using the "treasury stock" method.
During loss periods, we exclude the outstanding options from the calculation as
including them would be antidilutive.
When we calculate diluted shares outstanding, we do not include common stock
equivalents that might be dilutive in the future. To do so would have an
antidilutive effect on net loss per share. Common stock equivalents not included
in the calculation were 3.5 million in fiscal 2000, 0.5 million in fiscal 1999,
and 2.3 million in fiscal 1998.
STOCK-BASED COMPENSATION
We account for stock-based awards using the intrinsic value method of accounting
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related interpretations. As such,
compensation is recorded on the date of issuance or grant as the excess of the
current estimated fair value of the underlying stock over the purchase or
exercise price. Any deferred compensation is amortized over the respective
vesting periods of the equity instruments, if any. The Company has adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits
entities to provide pro forma net loss and net loss per share disclosure for
stock-based compensation as if the fair value method defined in SFAS No. 123 had
been applied.
FOREIGN CURRENCY TRANSLATION
The functional currency of our foreign operations is the local currency.
Consequently, we translate assets and liabilities of operations outside of the
United States into U.S. dollars using year-end exchange rates. We translate
results of operations using average rates. We include the effects of foreign
currency translation adjustments as a component of stockholders' equity.
INCOME TAXES
Deferred tax assets and liabilities reflect the anticipated future tax
consequences of temporary differences that exist between the amounts we carry on
our financial statements and the tax bases of those assets and liabilities. We
record a valuation allowance to reduce deferred tax assets so that their
realization is more likely than not.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes foreign currency translation gains and
losses as well as unrealized gains and losses on short-term investments that are
excluded from net income and reflected instead in other comprehensive income.
Our adoption of SFAS No. 130 resulted in a change in the presentation of our
financial statements, but had no impact on our consolidated financial position,
results of operations, or cash flows.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In 1998 the Financial Accounting Standards Board issued SFAS No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES. SFAS No. 133, as amended,
is effective for fiscal years beginning July 1, 2000. This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. The statement requires balance sheet recognition of derivatives as
assets or liabilities measured at fair value. Accounting for gains and losses
resulting from changes in the values of derivatives is dependent on the use of
the derivative and whether it qualifies for hedge accounting. We have determined
that the adoption of SFAS No. 133 will not have a material effect on the
Company's financial position or results of operations.
35
<PAGE>
RECLASSIFICATION
Certain prior-year balances have been reclassified to conform to current-year
presentation. Such reclassifications had no impact on net loss or stockholders'
equity.
2. PROPERTY AND EQUIPMENT
Property and equipment at June 30 consists of dollars (in thousands, estimated
useful lives in parenthesis):
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Land................................................ $ 1,329 $ 1,329
Computer equipment and software (3 to 7 years)...... 26,187 24,489
Furniture and fixtures (7 years).................... 2,836 2,772
Machinery and equipment (5 years)................... 2,524 2,307
Trade show equipment (5 years)...................... 461 461
Leasehold improvements (lesser of 5 years or lease term) 1,852 928
----------- ----------
Total............................................. 35,189 32,286
Accumulated depreciation and amortization........... (25,619) (20,967)
---------- ----------
Property and equipment, net..................... $ 9,570 $ 11,319
=========== ==========
</TABLE>
3. OTHER ASSETS
Other assets at June 30 consists of (in thousands):
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Software development costs........................... $ 221 $ 221
Purchased technology ................................ 3,082 3,184
Deposits............................................. 362 369
Goodwill and other intangibles....................... 2,750 2,829
----------- -----------
Total.............................................. 6,415 6,603
Accumulated amortization............................. (3,893) (1,846)
----------- -----------
Other assets, net.................................. $ 2,522 $ 4,757
=========== ===========
</TABLE>
4. LINE OF CREDIT
We have a $2.5 million revolving line of credit, secured by bank balances, which
expires in December 2002. Under our line, borrowings bear interest at either (1)
a fluctuating annual rate equal to the prime lending rate then in effect, or (2)
a fixed annual rate that is 2% above the London Inter-Bank Offered Rate. The
method for calculating interest is at our discretion. As of June 30, 2000, we
had not borrowed under our line. As of June 30, 2000, we had three letters of
credit outstanding, each collateralized by our line of credit, for the total
amount of approximately $189,000.
36
<PAGE>
5. INCOME TAXES
The provision (benefit) for income taxes for the years ended June 30 consists of
(in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal............................................ $ 50 $ -- $ --
State.............................................. 45 135 --
Foreign............................................ 738 999 204
----------- ----------- -----------
Total Current .................................. 833 1,134 204
----------- ----------- -----------
Deferred:
Federal............................................ -- 16,811 (5,245)
State.............................................. -- 5,518 (1,137)
Total deferred.................................. -- 22,329 (6,382)
----------- ----------- -----------
Total provision (benefit) for income taxes........... $ 833 $ 23,463 $ (6,178)
=========== =========== ===========
</TABLE>
The income tax benefit related to the exercise of stock options reduces taxes
currently payable and is credited to common stock. There was no benefit recorded
for fiscal years 2000 and 1999, and the benefit was $0.3 million in fiscal 1998.
Total income tax (benefit) expense for the years ended June 30 differs from the
amounts computed by applying the statutory federal income tax rate to income
before taxes as a result of the following (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
----------- ------------ -----------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate......... $ (787) $ (3,736) $ (6,422)
State tax expense (benefit), net of federal benefit.... (102) (342) (209)
Research and other tax credits......................... (675) (846) (616)
Other.................................................. 564 459 1,069
Valuation Allowance.................................... 1,833 27,928 --
----------- ------------ -----------
Total provision (benefit) for income taxes........... $ 833 $ 23,463 $ (6,178)
=========== ============ ===========
</TABLE>
The components of deferred tax assets and liabilities at June 30 consist of (in
thousands):
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowances for doubtful accounts and sales returns................ $ 958 $ 1,158
Accrued expense................................................... 906 1,530
Net operating loss carryforwards and tax credit carryforwards..... 34,011 32,822
----------- -----------
Total deferred tax assets..................................... 35,875 35,510
----------- -----------
Deferred tax liabilities:
Depreciation and amortization..................................... (355) (228)
Capitalized software.............................................. (2) (4)
Goodwill and intangible assets.................................... -- 6
Other............................................................. (117) (1,716)
----------- -----------
Total deferred tax liabilities................................ (474) (1,942)
----------- -----------
Deferred Income Taxes 35,401 33,568
Valuation Allowance (35,401) (33,568)
----------- -----------
Deferred income taxes, net................................. $ -- $ --
=========== ===========
</TABLE>
As of June 30, 2000, we had net operating loss carryforwards of approximately
$66.1 million and $18.9 million for federal and state purposes, respectively.
These expire at various dates between 2001 and 2021. We also had federal
37
<PAGE>
and state credit carryforwards of approximately $6.4 million and $3.1 million,
respectively. These will expire at various dates between 2001 and 2021.
6. LEASE OBLIGATIONS AND COMMITMENTS
We lease office facilities under operating lease agreements. Rent expense was
approximately $2.9 million in fiscal 2000, $2.9 million in fiscal 1999, and $2.7
million in fiscal 1998.
Future minimum lease payments under noncancelable operating leases are as
follows (in thousands):
YEAR ENDING JUNE 30,
2001...................... $ 3,070
2002...................... 2,593
2003...................... 2,013
2004...................... 1,508
2005...................... 1,499
Thereafter................ 13,754
----------------
Total..................... $ 24,437
================
7. EMPLOYEE BENEFIT PLAN
We have a 401(k) Profit Sharing Plan under which we may contribute a
discretionary matching contribution as a percentage of an employee's
contribution. We currently make a discretionary matching contribution of 50% of
the employee's contribution, up to a maximum of 6%. Our matching contributions
to the 401(k) Plan were approximately $322,000 for fiscal 2000, $383,000 for
fiscal 1999, and $391,000 for fiscal 1998. We may make also a discretionary lump
sum profit sharing contribution to the Plan that would vest over seven years. No
discretionary lump sum contributions were made in fiscal 2000, 1999, or 1998.
8. RELATED-PARTY TRANSACTIONS
In fiscal 1998 we had revenues of approximately $0.3 million from Omnipoint
Communications, Inc. ("Omnipoint"). We had no revenue from Omnipoint in fiscal
1999 or fiscal 2000. A member of our Board of Directors served as Omnipoint's
President and CEO.
9. SEGMENT AND GEOGRAPHIC INFORMATION
We conduct our business in one business segment. In fiscal 2000 one customer
accounted for approximately 11% of our total revenues. In fiscal 1999 no
customer accounted for more than 10% of our total revenues. In fiscal 1998
revenues from one customer accounted for approximately 12% of our total
revenues.
38
<PAGE>
The following shows our net revenues as of June 30, 2000, 1999, and 1998. It
also shows our long-lived assets as of June 30, 2000, 1999, and 1998 by
geographic area (in thousands). Net revenues are based on the country where the
product was sold. No revenues from any one country outside the United States
were 10% or more of our total revenues for the years ended June 30, 2000, 1999,
and 1998.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------
2000 1999 1998
--------------- ------------- -------------
Revenues:
<S> <C> <C> <C>
United States............. $ 36,580 $ 35,473 $ 39,981
Europe.................... 13,936 9,334 6,057
Asia and Pacific Rim...... 11,917 12,019 8,481
Other..................... 4,707 7,964 6,056
--------------- ------------- -------------
Total Consolidated $ 67,140 $ 64,790 $ 60,575
=============== ============= =============
Long-lived assets:
United States............. $ 10,649 $ 14,349 $ 15,888
Asia and Pacific Rim...... 1,182 1,592 2,689
Europe.................... 261 135 119
--------------- ------------ ------------
Total Consolidated........ $ 12,092 $ 16,076 $ 18,696
=============== ============ ============
</TABLE>
10. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
Our 1994 Non-Qualified Stock Option Plan ("Plan") provides for grants of
nonqualified stock options to officers, key employees, consultants, and
directors. Options are priced not less than fair market value on the date of
grant. Options granted under the Plan generally vest over five years and expire
ten years from the date of grant. No shares are available for future grant under
the Plan.
Under our 1994 Stock Option Plan ("1994 Plan"), 3,624,500 shares of common stock
were reserved for issuance to employees and consultants. Options granted under
the 1994 Plan generally vest ratably over four years and expire ten years from
the date of grant. On June 30, 2000, there were 3,699,816 shares available for
grant under the 1994 Plan. On July 24, 1999, the Board of Directors amended the
1994 Plan to provide for the grant of stock options to nonemployee directors.
Under our 1995 Director Stock Option Plan ("Director Plan"), 550,000 shares of
common stock were reserved for issuance. Nonemployee directors are granted
options to purchase common stock at fair market value on the date of grant.
Initial options vest ratably over four years and expire ten years from the date
of grant. Subsequent options vest ratably over one year and expire ten years
from the date of grant. On July 24, 1999, the Board of Directors terminated the
Director Plan.
39
<PAGE>
Option activity under all plans was as follows (in thousands, except prices):
<TABLE>
<CAPTION>
OPTIONS WEIGHTED
OUTSTANDING AVERAGE PRICE
---------------- -----------------
<S> <C> <C>
Balance at June 30, 1997.................................... 5,622 $ 4.29
Granted.................................................. 1,414 $ 9.16
Exercised................................................ (1,629) $ 1.36
Canceled................................................. (429) $ 5.19
----------------
Balance at June 30, 1998.................................... 4,978 $ 6.58
Granted.................................................. 1,570 $ 3.99
Exercised................................................ (771) $ .38
Canceled................................................. (1,343) $ 5.80
----------------
Balance at June 30, 1999.................................... 4,434 $ 6.98
Granted.................................................. 2,895 $ 3.32
Exercised................................................ (871) $ 7.08
Canceled................................................. (892) $ 6.70
----------------
Balance at June 30, 2000.................................... 5,566 $ 5.11
================
</TABLE>
A summary of outstanding and exercisable stock options as of June 30, 2000, is
as follows (in thousands, except prices):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ --------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------------- --------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
$0.08-$ 0.18 148 3.98 $ 0.12 147 $ 0.12
$2.50-$ 4.38 3,602 8.92 $ 2.89 574 $ 3.75
$5.19-$ 7.00 678 6.25 $ 6.11 617 $ 6.01
$7.31-$14.50 938 7.98 $ 9.34 476 $ 10.40
$25.50 200 6.05 $ 25.50 196 $ 25.50
--------------- -------------
$0.08-$25.50 5,566 8.20 $ 5.11 2,010 $ 7.87
=============== =============
</TABLE>
At June 30, 1999 and 1998, 1,998,000 and 1,960,000 of the outstanding options
were exercisable at weighted average exercise prices of $8.26 and $5.31,
respectively.
EMPLOYEE STOCK PURCHASE PLAN
Our Employee Stock Purchase Plan ("Purchase Plan") allows eligible employees to
purchase common stock at a price that is 85% of the lower of (1) the fair market
value at the beginning of each six-month offering period, or (2) the fair market
value at the end of the period. The six-month periods begin in May and November.
Purchases are limited to 15% of an employee's compensation. In fiscal 2000,
550,000 shares of common stock were issued under the Purchase Plan, and 505,000
shares were reserved for future issuance. In fiscal 1999, 544,000 shares were
issued, and in 1998, 592,000 shares were issued.
ADDITIONAL STOCK PLAN INFORMATION
We follow the provisions of APB No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, for financial reporting purposes. We
have adopted the disclosure-only provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION.
40
<PAGE>
The weighted average "estimated grant date fair value," as defined by SFAS No.
123, for options granted under our stock option plans in fiscal 2000 was $2.38
per share. It was $2.89 per share for fiscal 1999 and $5.67 per share for fiscal
1998. The weighted average "estimated grant date fair value" for purchases under
our Employee Stock Purchase Plan in fiscal 2000 was $2.12 per share. It was
$3.48 per share for fiscal 1999 and $4.09 per share for fiscal 1998. These
estimates are calculated using the Black-Scholes model, which was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions. This differs significantly from our situation. The
Black-Scholes model also requires highly subjective assumptions, including
future stock price volatility and expected time until exercise, which greatly
affect the calculated grant date fair value.
The following weighted average assumptions are included in the estimated grant
date fair value calculations for our stock option and stock purchase programs:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ---------
<S> <C> <C> <C>
STOCK OPTION PLANS:
Expected dividend yields................................ -- -- --
Expected stock price volatility......................... 110.0% 91.0% 77.0%
Risk-free interest rate................................. 6.2% 4.9% 5.7%
Expected life following vesting (years)................. 1.7 1.7 1.7
STOCK PURCHASE PLAN:
Expected dividend yields................................ -- -- --
Expected stock price volatility......................... 110.0% 91.0% 77.0%
Risk-free interest rate................................. 6.0% 4.7% 5.5%
Expected life (years)................................... 0.5 0.5 0.5
</TABLE>
PRO FORMA NET LOSS AND NET LOSS PER SHARE
Under SFAS No. 123, had we recorded compensation expense based on the estimated
grant date fair value for awards based on grants under our stock option and
stock purchase plans, our net loss and net loss per share would have changed.
The amounts below represent the pro forma amounts for fiscal 2000, 1999, and
1998 (in thousands, except for per share amounts):
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net loss as reported......................... $ (2,834) $ (34,137) $ (12,170)
Pro forma net loss........................... $ (5,139) $ (38,274) $ (22,984)
Diluted loss per share....................... $ (0.08) $ (0.97) $ (0.36)
Pro forma diluted loss per share............. $ (0.14) $ (1.09) $ (0.68)
</TABLE>
In accordance with SFAS No. 123, we have excluded the impact of outstanding
stock options granted before fiscal 1996 from this calculation. As a result, the
calculation does not reflect future period adjustments that will apply to all
stock options.
DEFERRED STOCK COMPENSATION
In fiscal 1996 we recorded deferred compensation of $2,272,000 to reflect the
difference between the grant price and the deemed fair value of certain stock
options granted in 1994 and 1995. This amount was amortized over the vesting
period of the options, generally four years. The deferred compensation expense
has been completely amortized as of June 30, 1999. Amortization of this
compensation expense was $211,000 and $370,000 for fiscal 1999 and fiscal 1998,
respectively.
* * * * * *
41
<PAGE>
SCHEDULE II
OBJECTIVE SYSTEMS INTEGRATORS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
(Reversals)
Balance at Charged Balance at
CLASSIFICATION Beginning of (Credited) to End of
-------------- Period Operations Deductions Period
---------------- ---------------- -------------- -------------
Allowance for Doubtful Accounts:
Year Ended:
<S> <C> <C> <C> <C>
June 30, 1998........................ $ 4,212 $ 400 $ (3,095) $ 1,517
=============== ============= ============= ===========
June 30, 1999........................ $ 1,517 $ 642 $ (294) $ 1,865
=============== ============= ============= ===========
June 30, 2000........................ $ 1,865 $ 620 $ (535) $ 1,950
=============== ============= ============= ===========
Allowance for Sales Returns:
Year Ended:
June 30, 1998........................ $ 2,300 $ 2,894 $ (2,882) $ 2,312
=============== ============= ============= ===========
June 30, 1999........................ $ 2,312 $ 1,130 $ (2,280) $ 1,162
=============== ============= ============= ===========
June 30, 2000........................ $ 1,162 $ (830) $ 0 $ 332
=============== ============= ============= ===========
</TABLE>
42
