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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 JANUARY 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File number: 0-15810
OSICOM TECHNOLOGIES, INC.
(Exact name of Registrant as specified in charter)
NEW JERSEY 22-2367234
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
2800 28TH STREET, SUITE 100
SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices) (Zip Code)
(310) 581-4030
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.30 NASDAQ
Title of each class Name of exchange on which registered
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 is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in a 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 Registrant's revenues for its most recent fiscal year were $68,372,000.
The aggregate market value of voting stock based upon the bid and ask price held
by non-affiliates of the Registrant on April 26, 2000 was $539,177,000.
Number of shares outstanding of the Registrant's only class of common stock as
of April 26, 2000 (the latest practicable date): 11,553,299.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
This Form 10-K, future filings of the registrant, press releases of the
registrant, and oral statements made with the approval of an authorized
executive officer of the Registrant may contain forward looking statements. In
connection therewith, please see the cautionary statements and risk factors
contained in Part I, Item 1. "Business - Forward Looking Statements - Cautionary
Statement" and "Business - Risk Factors", which identify important factors which
could cause actual results to differ materially from those in any such
forward-looking statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
We are a developer and marketer of metropolitan optical networking systems,
through our optical networking subsidiary Sorrento Networks, and network access
products, through our Entrada Networks subsidiary, that are used in both
interoffice and access networks. We offer customers an end-to-end optical
networking solution that improves bandwidth utilization, reduces network costs
and complexity and provides a scalable and efficient platform to meet the
rapidly growing demand for bandwidth. Our systems are specifically designed to
meet the unique requirements of the metropolitan market by supporting a wide
variety of protocols, mixed speeds of traffic and changing traffic patterns. We
believe we were the first company to commercially ship an optical networking
system that utilizes dense wavelength division multiplexing, or DWDM, technology
for the metropolitan market.
UNDERSTANDING OUR MARKET
(A glossary can be found beginning on page 17 for technical terms used
throughout this document.)
Over the past decade, the volume of high-speed data traffic transmitted across
telecommunications networks has grown significantly. According to Ryan, Hankin &
Kent, a telecommunications industry research group, public network bandwidth
must increase by over 2000% between 1998 and 2002 to satisfy expected data
traffic requirements. The growth in demand for bandwidth is primarily driven by
the following factors:
Rapid growth in Internet usage. According to International Data
Corporation, the number of Internet users is expected to increase from
97 million in 1998 to 502 million by the end of 2003.
Increased average access speed. Communications Industry Researchers,
Inc., a communications industry research firm, predicts that the number
of households that access the Internet at speeds near or above 1.5
megabits per second will grow from approximately 1.6 million in 1999 to
31.7 million in 2003. These access speeds are at least 25 times faster
than the speeds typically used in households today.
Greater use of higher bandwidth applications. Access to higher bandwidth
applications has become more readily available and less expensive,
enabling greater use of data-intensive applications such as electronic
commerce, multimedia, video streaming, music and software downloading
and digital cable television. Ryan, Hankin & Kent estimated that at the
end of 1999, monthly North American backbone Internet traffic was seven
times greater than voice traffic.
Traditional telecommunications infrastructures were originally designed for
voice traffic and cannot effectively provide the bandwidth needed for high-speed
data traffic. Accordingly, service providers have invested heavily to upgrade
their network infrastructure to effectively meet the growth in demand for
bandwidth. Additionally, worldwide deregulation in the telecommunications
industry has led to an increase in the number of service providers seeking to
address this demand. Both U.S. and international service providers, including
competitive local exchange carriers, local and foreign telephone companies,
utilities and cable television companies, are competing to provide high-speed
data services in both the long-distance and local markets. Many of these service
providers are starting to utilize advanced optical networking technology to
differentiate their services from those offered by their competitors.
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CURRENT NETWORK INFRASTRUCTURE
Beginning in the late 1970s, telecommunications service providers began to
install fiber optic networks as an alternative to copper-based networks.
Traditional copper-based networks convert voice and data traffic into electrical
signals for transmission over copper wires. Fiber optic networks convert voice
and data traffic into light that is sent over fiber optic cables made of glass.
Fiber optic networks provide greater bandwidth capacity, reliability,
transmission distances, immunity to electrical interference and resistance to
corrosion than copper-based networks.
Long-haul backbones are high capacity networks that connect service
providers and carry voice and data across large geographic regions
typically spanning 200 to 4,000 kilometers.
Interoffice networks connect the central offices of service providers
in a metropolitan area and facilitate the transport of traffic between
access networks and the long-haul backbone as well as other interoffice
networks. Interoffice networks typically transport voice and data
traffic across distances of 50 to 200 kilometers.
Access networks are located in multiple locations throughout
metropolitan areas and connect end users to service providers' central
offices. Access networks aggregate voice and data traffic from end
users for transport across telecommunications networks.
There are currently two similar network standards that are primarily used to
transport voice and data traffic throughout fiber optic networks. In North
America, the Synchronous Optical Network standard, or SONET, is used, while in
the rest of the world, Synchronous Digital Hierarchy, or SDH, is used.
The SONET/SDH network architecture was developed primarily for the transport of
voice traffic, which has experienced relatively slow growth and is characterized
by predictable demand. Conversely, data traffic has grown rapidly and is
characterized by unpredictable demand. As a result, SONET/SDH networks are
constrained by a number of limitations.
The shortcomings associated with SONET/SDH are magnified within the interoffice
and access networks. Long-haul backbones are relatively simple networks and are
designed to satisfy service provider capacity requirements. Conversely,
interoffice and access networks are much more complex and multi-layered and are
designed to satisfy end-user data networking requirements. These networks are
characterized by a wide variety of protocols, mixed speeds of traffic and
changing traffic patterns. The cost and complexity of addressing these network
demands place a significant strain on service providers utilizing SONET/SDH
network technology.
Service providers have attempted to address the limitations of SONET/SDH and
other fiber optic network architectures by using DWDM technology. DWDM
multiplies the transmission capacity of a single fiber by transmitting multiple
wavelengths of light over a single strand of fiber. Each wavelength represents a
separate channel of optical information, which can be a combination of voice and
data traffic. DWDM technology was originally deployed in long-haul networks, but
is increasingly being utilized in interoffice and access networks to meet
growing bandwidth demands. The complexity of these networks places unique
demands on DWDM technology such as the need to accommodate a variety of
protocols and changing traffic patterns. The benefits of DWDM technology cannot
be fully realized in interoffice and access networks without effectively
addressing these demands. Service providers need an end-to-end optical solution
that cost-effectively expands network capacity, while providing the flexibility,
scalability and management tools needed to address the unique requirements of
interoffice and access networks.
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OUR SOLUTION
Our end-to-end optical networking solution offers numerous benefits including:
Scalable Architecture. The modular architecture of our solution enables service
providers to incrementally expand capacity as their bandwidth needs increase.
For example, a service provider can begin deployment with a single channel and
later expand to multiple channels providing up to 1.2 terabits per second of
transmission capacity per fiber pair without interrupting existing traffic.
Protocol and Signal Transparency. Our systems can transport a mix of protocols
and signals, including SONET/SDH, ATM, Internet Protocol, Ethernet, Fibre
Channel and Enterprise System Connection in their native formats over numerous
wavelengths in the same fiber. Our protocol and signal transparency is
particularly important in metropolitan areas where multiple protocols and data
transmission rates are used. The transparency of our systems eliminates the
additional process of optical-electrical-optical conversions that would
otherwise be required in the transport of traffic, reducing latency and network
complexity. In addition, the transparency of our systems allows our solutions to
be easily integrated into the existing infrastructures of most service
providers.
Efficient Bandwidth Utilization. Our access products continuously aggregate
end-user traffic of varied rates from the access network. The continuous
aggregation of end-user traffic allows service providers to efficiently utilize
the full capacity of each available optical channel within a network. As a
result, service providers do not have to design their networks to accommodate
peak capacity at all times and can avoid paying for excess network capacity.
Manageability. Our intelligent network management software platform provides
fault, configuration, performance and security management. Our software platform
utilizes an easy-to-use graphical user interface that allows "point and click"
network provisioning and monitoring.
Quality of Service. Our proprietary network management software classifies
incoming end-user traffic and prioritizes such traffic according to the needs of
service providers. As a result, service providers can offer their customers
network optimizing services, such as service level agreements, that enable
end-users to select their desired level of service. These services provide
additional revenue opportunities for our customers and allow them to distinguish
their services from their competitors.
PRODUCTS
We design, manufacture and sell end-to-end optical and other networking
solutions for interoffice and access networks. Our major product families have
been referred to above, and our optical networking products are described here
in greater detail:
Our intelligent optical networking products address the access, aggregation,
transport, switching and network management needs of telecommunications
carriers, as well as those of large enterprise networks in the Metropolitan or
intra-city segment of the market. They offer customers a scalable, end-to-end
solution that improves bandwidth utilization, reduces network costs and
complexity, and provides a migration path from point-to-point and ring
topologies to the mesh architectures of next-generation networks. Our products
are designed to meet all key industry standards, including the Network Equipment
Building Standards, or NEBS. Our design and manufacturing processes materially
comply with key process standards for our industry, including OSMINE
(Operations Systems Modification of Intelligent Network Elements).
Our GigaMux product line makes it possible for our customers to turn each
physical strand of fiber optic cable in their network into a medium for sending
and/or receiving 32 separate information-carrying wavelengths of light, each
with a capacity of 2.5 Gbps (OC-48). We have announced enhancements to our
GigaMux product line that will allow each strand of fiber to send and/or receive
64 wavelengths of light, each with a capacity of 10 Gbps (OC-192). The GigaMux
product line, which embodies technology for which we have three patents pending,
offers network operators data, bit rate, and protocol transparency, allowing
them to aggregate and transport the wide variety of data types and data speeds
that commonly exist in the Metropolitan segment of the market (including OC-3 to
OC-48, ESCON, Ethernet, Fiber Channel, analog video and HDTV). In 1999, our
GigaMux product family received the Market Engineering Product Innovation Award
from Frost & Sullivan, an international market research firm.
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Our products provide aggregation and access functionality through our EPC
product line, which embodies technology for which we have one patent pending. We
make EPC available in both stand-alone configurations and as a modular component
of GigaMux. EPC allows service providers to aggregate the varied and generally
lower-speed traffic of end-users onto higher-speed wavelengths, thereby
improving bandwidth utilization to the edge of the network and driving service
costs down. In 1999, our EPC product won the Data Communications Magazine, Hot
Product of the Year award, and the InfoVision Award, Public and Private Networks
category, from the International Engineering Consortium.
We plan to introduce switching products that will allow network operators to
migrate from the current generation of "fixed connection" networks to the
next-generation of "dynamic connection" networks. Using our switching products,
operators will be able to dynamically route provisioned wavelengths to create
new meshed network topologies. Such meshed topologies make possible connectivity
from any network node to any other network node, thereby facilitating a more
efficient use of available bandwidth and greater opportunities to provide fault
protection and quality of service (QoS). Our switching products will allow
network operators to create new, or to re-create previously enabled topologies
in real-time or on a scheduled basis. Optical connections between network nodes
may be continuously and proactively varied according to existing and expected
user demand, allowing the operators of such networks to better market and more
rapidly offer new communications services to customers.
Our products are managed by our TeraMan network management platform which is
designed to manage both existing and future upgrades of a network operator's
network, including its configuration, account, fault and security aspects.
TeraMan facilitates performance monitoring as well as, in conjunction with our
switching products, the dynamic provisioning of wavelengths. TeraMan offers
easy-to-use "point and click" functionality and is designed as the management
platform of choice for networks enabled by our other products.
ENTRADA NETWORKS
Our Annapolis Junction-based network access business subsidiary, formerly known
as Network Access, is engaged in the design and manufacture of point-of-presence
(POP), telecommunication carriers' central office products and customer premise
equipment (CPE). Its products provide Internet and intranet access to users, and
include CSU/DSUs, routers, local and wide area network interface cards (LAN and
WAN NICs) and remote access concentrators. The bandwidth or speed required for
these products varies from 56Kbps, 64Kbps, ISDN (128Kbps) to T-1 (1.54Mbps) and
T-3 (44.74 Mbps). Our plans include the introduction of new products to address
the rapidly growing storage area network markets, leveraging our expertise in
optical networking and the network access area. In April 2000, we entered into
an agreement to merge this subsidiary with Sync Research, Inc., a Nasdaq listed
company. We will retain a 50% interest in the merged corporation, to be known as
Entrada Networks, Inc. The closing is expected to occur prior to September 2000
and is subject to approval by Sync's shareholders.
MERET OPTICAL COMMUNICATIONS, INC.
Our other optical networking subsidiary, Meret Communications, Inc., doing
business as Meret Optical Communications, Inc., produces feature-rich products
for complex and high-performance network needs. Meret has a variety of broadband
communication products addressing the video, voice, data transmission and
distance extension market.
NETSILICON, INC.
NETsilicon, Inc. develops and markets embedded networking solutions. NETsilicon
completed an initial public offering in September 1999 in which we received net
proceeds of $15.4 million and NETsilicon received $22.2 million. We retained an
approximately 55% non-voting equity interest in that company. For additional
information about NETsilicon, please refer to its Form 10-K for the year ended
January 31, 2000 and its amended registration statement on Form S-1, Reg. No.
333-62231, which are available online at www.freeedgar.com and www.sec.gov or
from the Securities and Exchange Commission.
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FAR EAST DIVISION
Our Hong Kong-based business unit ("FED"), which we acquired for, among other
purposes, the provision of low-cost manufacturing support to our other
businesses, also has its own proprietary technologies and product designs. These
products include a line of magnetic and smart card readers integrated in
point-of-sale equipment for the Hong Kong and mainland Chinese markets, and a
line of numeric and alphanumeric financial pagers initially targeted for China.
The Data Bank product line has multilingual translating capability besides
having extensive dictionary and calculator functionality. Products are
manufactured in our 390,000-sq. ft., ISO-9001 and ISO-9002 certified facility
in China. Manufacturing capacity and services in mechanical design, PCB layout,
prototype design and OEM assembly are utilized by us, and is also contracted
to third-party OEMs.
As of January 31, 2000, we agreed to sell our Far East Division to a group led
by its Hong Kong-based management. We will receive repayment of $2.5 million in
cash of our advances to FED and a $3.0 million non-voting redeemable preferred
security at closing. This security, with a book value of $1, will be redeemed
for $3.0 million in the event of a sale, public offering, or debt or equity
financing by FED in excess of $7.5 million.
CUSTOMERS
Our target customer base includes service providers such as competitive local
exchange carriers, local and foreign telephone companies, utilities, cable
television service providers, original equipment manufacturers, system
integrators and distributors.
Our customers generally fit the following customer profiles:
SERVICE PROVIDERS - these customers provide communication services and
include telecommunication carriers, Internet Service Providers and cable
companies.
ENTERPRISE - enterprise customers are generally large organizations with
complex networking needs, usually spanning multiple locations and difficult
types of network requirements. Enterprise customers include corporations,
government agencies, utilities, and educational institutions.
SMALL AND MEDIUM BUSINESS - these customers have a need for networks as
well as connection to the Internet and/or to their business partners.
However, they generally have limited resources. Therefore, we provide
product through systems integrators or Value Added Resellers.
Our customer base is concentrated in the telecommunications and networking
industry and no single customer has accounted for ten percent or more of our net
sales during our fiscal 2000, 1999 and 1998 years.
SALES AND MARKETING
Our sales effort is currently focused on North America, Europe and Asia. As of
January 31, 2000 our sales organization included 65 employees, including
managers, sales representatives and support personnel. In North America, Europe
and Asia, we sell our products through our direct sales force as well as through
system integrators and distributors. Our international direct sales force is
located in offices in Belgium, France, Germany and the United Kingdom. We also
have sales representatives and systems engineering personnel located in offices
in Spain, Switzerland, and Singapore, sales representatives in China, South
Korea and Taiwan, and a distributor in Japan.
Our strategy to reach our customers is to train and equip our sales
professionals with knowledge of the market, product and the customers. Upon
identification of companies that are addressing our markets, our sales people,
with the help of marketing, system engineers and other of our support staff,
begin educating the people responsible for business development, evaluating,
recommending, marketing services and products. We also present our vision,
technologies,
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benefits of our products and advantages of doing business with the company that
is shaping the market. Many times we find that we are ahead of the market in
terms of knowledge, implementation and our customers have not approved the
technology in their products and or networks which makes this educational
process even more critical. We address this problem for different customer
groups by taking into account their unique characteristics by both broadcast and
pointcast type of approaches. For example, the number of companies providing
television and cable broadcast is small compared to number of OEM's addressing
the networking industry. In this example we focus on the customers by using
direct sales people, using application specific presentations on both a
one-on-one basis as well as using seminars. We have found market application
specific seminars to be useful tool to educate many customers about our mission
and products and this strategy has worked well for us so far. We plan to
continue using this strategy in the U.S. and other parts of the world to
continue to build a relationship with our current and potential customers.
Another example would be where we are building relationships with distributors
and value added resellers that recommend and sell our products to their
customers who are generally companies that are building networks. In this case
we use broadcast approach to build recognition in the end customers and
relationship approach with our direct customer who in this case is a reseller.
Our goal in all cases is to make it easy to do business with us. We believe
that ultimately, an educated customer whose business experience with us was
a positive one maybe a key factor in the decision making process.
In support of our worldwide selling efforts, our marketing team targets
potential customers through in-depth market analysis. Our marketing objectives
include building market awareness and acceptance of our products as well as
generating customer leads. Marketing personnel coordinate our participation in
trade shows and seminars, industry events and conduct media relations activities
with trade and general business publications. We participate in many industry
organizations responsible for developing standards that are used in optical
networks.
We also participate in cooperative marketing programs, including trade shows and
seminars. We place advertisements in major industry trade publications, and
include our distributors and their customers in direct mail programs. Marketing
also facilitates the publication of articles in industry journals by our chief
scientists and network architects.
CUSTOMER SERVICE AND SUPPORT
Our customer service organization is structured to assist both resellers and
major accounts. We provide a number of service plans, such as our Network
Requirements Assessment and Installation Plan, which is designed to ensure a
smooth and successful installation. The plans include pre-installation planning,
site surveys, interfacing with vendors, configuration analysis, and designing an
deployment plan. We provide complete basic customer training as related to
equipment operation and diagnostics.
Support for the customer includes product warranted against defects in material
and workmanship. Telephone technical support programs or On-Site Support
Agreements are also available to our customers. All of our products are
warranted against defects in material and workmanship. The length of product
warranties varies by product, from 12 months in some instances, to 60 months for
a broad range of products, and up to lifetime warranties for certain, selected
products. Telephone technical support programs for hardware and software
generally cover the first fifteen months from purchase. Our On Site Support
Agreement includes access to a toll-free help desk and 24 hour per day, seven
days per week telephone technical support. We also provide on-site support via
facsimile and on-line bulletin board services.
We currently provide similar service and support to our international customers
through our partners, however these services may be country and customer
specific.
RESEARCH AND DEVELOPMENT
The goal of our research and development efforts is to achieve technological
advances, which will allow us to introduce innovative products early to market.
Product introduction is driven by a combination of rapidly evolving technology
and standards, as well as changing customer requirements. Our research and
product development strategy emphasizes
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continuing evaluation of customer needs, emerging trends and technical
challenges in order to identify new market opportunities. A hallmark of our
research and development program is the combination of our various proprietary
technologies. We believe that our success in introducing new products is due in
part to our ability to maintain sophisticated technology research programs while
simultaneously focusing on practical applications to our customer strategic
requirements.
As of January 31, 2000 there were 72 people working in our engineering, research
and development departments. Our engineering, research and development expenses
were $11.7 million, $9.8 million, and $7.1 million for the years ended January
31, 2000, January 31, 1999 and January 31, 1998, respectively.
MANUFACTURING AND QUALITY
We design our products and perform system integration, quality control, final
testing and configuration at our San Diego, California and Annapolis Junction,
Maryland facilities. Our San Diego facility is ISO-9002 certified. By meeting
such standards, we assure our customers that we meet internationally recognized
standards for quality, customer care and sound management practices. We use
contract manufacturers to assemble our systems.
Our strategy of outsourcing some of our products to third party contract
manufacturers enables us to react quickly to market demand and avoid significant
capital investment required to establish and maintain full manufacturing
facilities, and to focus our manufacturing resources on final assembly, burn-in
and final testing to ensure reliability and quality assurance for products
delivered to our customers. We have a quality program in place that involves
many of our employees and we will continue to focus on both development of
procedures and our employees in improving and maintaining our quality.
AVAILABILITY OF RAW MATERIALS
Many of our products require certain components, which may not be readily
available. These include opto-electronic components, microprocessors, custom
integrated circuits, fiber optic transceivers, and networking components.
PATENT, TRADEMARKS AND LICENSES
We currently hold 19 patents and additionally have 5 patent applications
pending. Although we attempt to protect our intellectual property rights through
patents, trademarks, and copyrights, maintaining certain technology as trade
secrets and other measures, we cannot assure you that any patent, trademark,
copyright or other intellectual property rights owned by us will not be
invalidated, circumvented or challenged, that such intellectual property rights
will provide competitive advantages to us or that any of our pending or future
patent applications will be issued with the scope of the claims sought by us, if
at all. We cannot assure you that others will not develop technologies that are
similar or superior to our technology, duplicate our technology or design around
the patents that we own. In addition, effective patent, copyright and trade
secret protection may be unavailable or limited in certain foreign countries in
which we do business or intend to do business in the future.
We believe that the future success of our business will depend on our ability to
translate the technological expertise and innovation of our personnel into new
and enhanced products. We cannot assure you that the steps taken by us will
prevent misappropriation of our technology. In the future, we may take legal
action to enforce our patents and other intellectual property rights, to protect
our trade secrets, to determine the validity and scope of the proprietary rights
of others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could harm our business and operating results.
As is common in our industry, we have from time to time received notification
from other companies of intellectual property rights held by those companies
upon which our products may infringe. Any claim or litigation, with or without
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merit, could be costly, time consuming and could result in a diversion of
management's attention, which could harm our business. If we were found to be
infringing on the intellectual property rights of any third party, we could be
subject to liabilities for such infringement, which could be material, and could
be required to seek licenses from other companies or to refrain from using,
manufacturing or selling certain products or using certain processes. Although
holders of patents and other intellectual property rights often offer licenses
to their patent or other intellectual property rights, no assurance can be given
that licenses would be offered, that the terms of any offered license would be
acceptable to us or that failure to obtain a license would not cause our
operating results to suffer.
SEASONALITY
Our sales are impacted by the buying patterns of our customers, including but
not limited to cultural and religious holidays in Asia, Europe and the United
States, as well as other factors.
WORKING CAPITAL PRACTICES
We have historically maintained high levels of inventories to meet output
requirements of our customers and to ensure an uninterrupted flow of inputs from
suppliers. It is not our standard policy to grant customers the right to return
merchandise that performs according to specifications, nor is it our standard
policy to grant customers extended payment terms.
We perform ongoing credit evaluations of each customer's financial condition and
extend unsecured credit related to the sales of various products. We often
receive financial instruments such as letters of credit for payments for
international customers. At January 31, 2000 and 1999 accounts receivable from
Ingram Micro accounted for 14.7% and 14.6%, respectively, of net receivables,
all of which were within contract terms.
BACKLOG
At January 31, 2000, our backlog was approximately $6.3 million compared with an
approximate backlog of $6.6 million at January 31, 1999 exclusive of $7.8
million backlog of NETsilicon. Our backlog consists of orders confirmed with a
purchase order for products to be shipped within twelve months to customers with
approved credit status. We do not believe that backlog, as of any particular
date, should be used as an indication of sales for any future period for two
reasons. First, orders are increasingly being booked and shipped in a short
period of time and therefore are never calculated in the backlog amount at the
end of any particular quarter. Second, customers have and can change delivery
schedules or cancel orders without a significant, if any, penalty.
COMPETITION
The markets for our products and services are intensively competitive, highly
fragmented and characterized by rapid technological change, evolving industry
standards, price competition and frequent new product introductions. The
principal competitive factors in these markets include product performance,
reliability, price, breadth of product line, network management capabilities,
sales and distribution capability, technical support and service and
relationships with network operators. Certain of these factors are outside of
our control. A number of companies offer products that compete with one or more
of our products.
The market for optical networking equipment is extremely competitive and subject
to rapid technological change. We expect competition to intensify in the future.
Our primary sources of competition include vendors of optical networking and
infrastructure equipment such as Ciena Corporation, Cisco Systems, Lucent
Technologies, Nortel Networks, Sycamore Networks, Tellabs, ADVA AG Optical
Networking and ONI Systems Corporation, as well as private companies that have
been or will be focusing on our target markets. We believe each of our
competitors has optical networking products in various stages of development.
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We believe the principal competitive factors our market are:
product performance, features, functionality and reliability;
price/performance characteristics;
timeliness of new product introductions;
compliance with industry standards;
relationships with existing customers; and
service, support and financing.
We believe we compete favorably with our competitors with respect to most of
these factors.
The competitors for Entrada and Meret products include 3COM, Adaptec, Cisco
Systems, Inc., Finisar, Emulex, Intel Corporation, Interphase, and many other
companies.
We have experienced and expect to continue to experience increased competition
from current and potential competitors, many of whom have substantially greater
financial, technical, sales, marketing and other resources, as well as greater
name recognition and larger customer base. In particular, established companies
in the networking industry may seek to expand their product offerings by
designing and selling products using competitive technology that could render
our products obsolete or have a material adverse effect on our sales. The
markets in which we compete are currently subject to intense competition and we
expect additional price and product competition as other established and
emerging companies enter these markets and new products and technologies are
introduced. Increased competition may result from further price reductions,
reduced gross margins and loss of market share, any of which could materially
and adversely affect our business, operating results and financial condition.
There can be no assurance that we will be able to compete successfully against
current and future competitors, or that competitive factors will not have a
material adverse effect on our business, operating results and financial
condition.
ENVIRONMENTAL COMPLIANCE
We are required to file environmental compliance reports with the Federal Food
and Drug Administration regarding the emissions levels of our laser-based
products, which are used in fiber optics communications. All of our products
comply with required safety level standards.
EMPLOYEES
Our employees are vital to our success. As of January 31, 2000, we employed 272
full-time employees and independent contractors. Of these, 72 were in
engineering, 88 in manufacturing and quality assurance, 65 in sales and
marketing, 36 in administration, and 11 in executive positions. We also employ a
number of part-time and temporary personnel from time to time in various
departments. None of our employees are covered by a collective bargaining
agreement and we believe that our employee relations are good.
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENT
All statements other than statements of historical fact contained in this Form
10-K, in our future filings with the Securities and Exchange Commission, in our
press releases and in our oral statements made with the approval of an
authorized executive officer are forward-looking statements. Words such as
"propose," "anticipate," "believe," "estimate," "expect," "intend," "may,"
"should", "could," "will" and similar expressions are intended to identify such
forward-looking statements. These forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although we believe that our expectations reflected in these
forward-looking statements are based on reasonable assumptions, such statements
involve risk and uncertainties and no assurance
10
can be given that actual results will be consistent with these forward-looking
statements. Important factors that could cause actual results to differ
materially from those forward-looking statements include without limitation: our
ability to successfully develop, sell and market our optical networking and
other products; our expectations concerning factors affecting the markets for
our products, such as demand for increased bandwidth; market conditions relating
to our discontinued Far East Division; our ability, or lack thereof, to reach
agreement with the management of the Far East Division as to all terms and
conditions necessary to complete a definitive stock purchase agreement with
respect to the Far East Division; our ability, or failure, to complete such a
transaction with respect to the Far East Division, assuming such an agreement is
reached, for reasons either within or outside our control or the control of the
management of the Far East Division; our potential inability to enforce any
agreement in China or Hong Kong under the laws and legal system in effect in the
applicable jurisdictions; our ability, or failure to complete a transaction with
Sync Research, Inc. for reasons either within or outside our control or the
control of the management of Sync Research, Inc.; our ability, or failure, to
complete strategic alliances and strategic opportunities such as sales or
spin-offs of subsidiaries or business units on terms favorable to us for reasons
either within or outside our control; changed market conditions, new business
opportunities or other factors that might affect our decisions as to the best
interest of our shareholders; and other risks detailed from time to time in our
reports filed with the Securities and Exchange Commission.
We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. These risks and uncertainties are described in the
following section. We specifically decline any obligation to publicly release
the result of any revisions which may be made to any forward-looking statements
to reflect anticipated or unanticipated events or circumstances occurring after
the date of such statements, or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
RISK FACTORS
In connection with the safe harbor contained in the Private Securities Reform
Act of 1995 we are hereby identifying important factors that could cause actual
results to differ materially from those contained in any forward-looking
statements made by us or on our behalf. Any such statement is qualified by
reference to the following cautionary statements:
OUR INDUSTRY IS HIGHLY COMPETITIVE, AND WE MAY NOT HAVE THE RESOURCES
REQUIRED TO COMPETE SUCCESSFULLY. The market for optical networking
equipment as well as our other products is extremely competitive and we
expect competition to intensify in the future. Our primary sources of
competition include vendors of optical networking and infrastructure
equipment such as Ciena Corporation, Cisco Systems, Lucent Technologies,
Nortel Networks, Sycamore Networks, Tellabs, ADVA AG Optical Networking and
ONI Systems Corporation as well as private companies that have been or will
be focusing on our target markets. The competitors for Entrada and Meret
products include 3COM, Adaptec, Cisco Systems, Inc., Finisar, Emulex, Intel
Corporation, Interphase and many other companies. We may also face
competition from a number of other companies that have announced plans for
new products to address the same network problems that our products
address. Many of our current and potential competitors have significantly
greater sales and marketing, technical, manufacturing, financial and other
resources as well as greater name recognition and larger customer base than
us. Our competitors may have more extensive customer relationships than us,
including relationships with our potential customers. If we are unable to
compete successfully against our current and future competitors, we could
experience pricing pressures, reduced gross margins and order
cancellations, any one of which could seriously harm our business.
OUR BUSINESS WILL BE SERIOUSLY HARMED IF WE ARE NOT ABLE TO DEVELOP AND
COMMERCIALIZE NEW OR ENHANCED PRODUCTS. Our growth depends on our ability
to successfully develop new or enhanced products. The development of new or
enhanced products is a complex and uncertain process that requires the
accurate anticipation of technological and market trends. Our next
generation of transport and network management products as well as our
wavelength switching router products are currently under development. We
cannot be sure whether these or other
11
new products will be successfully developed and introduced to the market on
a timely basis or at all. We will need to complete each of the following
steps to successfully commercialize these and any other new products:
complete product development, qualify and establish component suppliers,
validate manufacturing methods, conduct extensive quality assurance and
reliability testing, complete any software validation, and demonstrate
systems interoperability.
Each of these steps presents serious risks of failure, rework or delay, any
one of which could adversely affect the rate at which we are able to
introduce and market our products. If we do not develop these products in a
timely manner, our competitive position and financial condition could be
adversely affected.
In addition, as we introduce new or enhanced products, we must also manage
the transition from older products to newer products. If we fail to do so,
we may disrupt customer ordering patterns or may not be able to ensure that
adequate supplies of new products can be delivered to meet anticipated
customer demand. Any failure to effectively manage this transition may
cause us to lose current and prospective customers.
OUR FUTURE GROWTH DEPENDS ON OUR ABILITY TO ATTRACT NEW CUSTOMERS, AND ON
OUR CUSTOMERS' ABILITY TO SELL ADDITIONAL SERVICES TO THEIR OWN CUSTOMERS.
Most of our potential customers evaluate optical networking products for
deployment in large telecommunications systems that they are installing.
There are only a relatively limited number of potential customers for our
products. If we are not selected by a potential customer for particular
system projects, our business may be seriously harmed. Similarly, our
growth depends on our customers' success in selling communications services
based on our products and complementary products from others. Our success
will depend on our ability to effectively anticipate and adapt to customer
requirements and offer products and services that meet customer demands.
Any failure of our current or prospective customers to purchase products
from us for any reason, including a downturn in their business, would
seriously harm our ability to grow our business.
THE TIME THAT OUR CUSTOMERS AND POTENTIAL CUSTOMERS REQUIRE FOR TESTING AND
QUALIFICATION BEFORE PURCHASING OUR OPTICAL NETWORKING PRODUCTS CAN BE LONG
AND VARIABLE, WHICH MAY CAUSE OUR RESULTS OF OPERATIONS TO BE
UNPREDICTABLE. Before purchasing our products, potential customers must
undertake a lengthy evaluation, testing and product qualification process.
In addition, potential customers often require time-consuming field trials
of our products. Our sales effort requires the effective demonstration of
the benefits of our products to, and significant training of, potential
customers. In addition, even after deciding to purchase our products, our
customers may take several years to deploy our products. The timing of
deployment depends on many factors, including the sophistication of a
customer and the complexity and size of a customer's networks. Our sales
cycle, which is the period from the time a sales lead is generated until
the recognition of revenue, can often be longer than one year. The length
and variability of our sales cycle is influenced by a variety of factors
beyond our control, including: our customers' buildout and deployment
schedules, our customers' access to product purchase financing, our
customers' needs for functional demonstration and field trials, and the
manufacturing lead time for our products. Because our sales cycles are long
and variable, our results of operations may be unpredictable.
OUR PRODUCTS MAY HAVE ERRORS OR DEFECTS THAT WE FIND ONLY AFTER DEPLOYMENT,
WHICH COULD SERIOUSLY HARM OUR BUSINESS. Our optical networking product can
only be fully tested after deployment in networks. Our customers may
discover errors or defects in our products, and our products may not
operate as expected. If we are unable to fix errors or other problems that
may be identified, we could experience: loss of or delay in revenues and
loss of market share, loss of customers, failure to attract new customers
or achieve market acceptance, diversion of engineering resources, increased
service and warrant costs, and legal actions by our customers. Any failure
of our current or planned products to operate as expected could delay or
prevent their adoption and seriously harm our business.
IF OUR PRODUCTS DO NOT INTEROPERATE WITH OUR CUSTOMERS' NETWORKS,
INSTALLATIONS WILL BE DELAYED OR CANCELLED OR OUR PRODUCTS COULD BE
RETURNED. Many of our customers require that our products be designed to
interoperate with their existing networks, each of whom may have different
specifications and utilize a variety of protocols. Our
12
customers' networks contain multiple generations of products that have been
added over time as these networks have grown and evolved. Our products must
interoperate with all of the products within these networks as well as
future products in order to meet our customers' requirements. If we are
required to modify our product design to be compatible with our customers'
systems to achieve a sale, it may result in a longer sales cycle, increased
research and development expense and reduced margins on our products. If
our products do not interoperate with those of our customers' networks,
installations could be delayed, orders for our products could be cancelled
or our products could be returned, any of which could seriously harm our
business.
IF WE FAIL TO COMPLETE CERTAIN STRATEGIC OPPORTUNITIES, OUR BUSINESS MAY BE
HARMED. Strategic opportunities such as the sale or spin-off of certain
business units are important to our overall business plan. We have recently
entered into an agreement to merge our Network Access business unit with
Sync Research, Inc. and agreement to sell our Far East business unit. We
cannot be certain that we will be able to complete these transactions on
terms that are favorable to us. In addition, we cannot be certain that we
will be successful in negotiating and completing future sales or spin-offs.
Our business may be harmed if we fail to successfully complete these
transactions.
IF WE FAIL TO ESTABLISH AND SUCCESSFULLY MAINTAIN STRATEGIC ALLIANCES, OUR
BUSINESS MAY BE HARMED. Strategic alliances are an important part of our
effort to expand our sales opportunities and technological capabilities. To
date, we have entered into strategic alliances with AT&T Broadband Network
Solutions and United Pan-Europe Communications. We cannot be certain that
we will be able to enter additional strategic alliances on terms that are
favorable to us. In addition, we cannot be certain that our existing and
any future strategic alliances will be successful. Our business may be
harmed if we fail to establish and maintain strategic alliances.
OUR BUSINESS MAY BE SERIOUSLY HARMED IF WE ARE UNABLE TO ESTABLISH
SUCCESSFUL RELATIONSHIPS WITH DISTRIBUTORS AND SYSTEMS INTEGRATORS. We
believe that our future success is dependent upon our ability to establish
successful relationships with a variety of distributors and systems
integrators. As we expand internationally, we will increasingly depend on
distributors and systems integrators. If we are unable to establish and
expand these relationships, we may not be able to increase market awareness
or sales of our products, which may prevent us from achieving and
maintaining profitability.
OUR BUSINESS MAY BE SERIOUSLY HARMED IF THE MARKET FOR OPTICAL NETWORKING
PRODUCTS IN METROPOLITAN AREAS DOES NOT DEVELOP AS WE EXPECT. Our current
and future product offerings are focused on the needs of providers that
service metropolitan areas. The market for optical networking products in
metropolitan areas is new, and we cannot be certain that a viable market
for our products will develop or be sustainable. If this market does not
develop, or develops more slowly than we expect, our business may be
seriously harmed. Furthermore, the optical networking industry is subject
to rapid technological change and newer technology or products developed by
others could render our products non-competitive or obsolete. In developing
our products, we have made, and will continue to make, assumptions about
the optical networking standards that our customers and competitors may
adopt. If the standards adopted are different from those which we have
chosen to support, market acceptance of our products would be significantly
reduced and our business will be seriously harmed.
WE DEPEND UPON CONTRACT MANUFACTURERS AND ANY DISRUPTION IN THESE
RELATIONSHIPS MAY CAUSE US TO FAIL TO MEET THE DEMANDS OF OUR CUSTOMERS AND
DAMAGE OUR CUSTOMER RELATIONSHIPS. We use contract manufacturers to
manufacture and assemble our products in accordance with our
specifications. We do not have long-term contracts with any of them, and
none of them are obligated to perform services for us for any specific
period or at any specified price, except as may be provided in a particular
purchase order. We may not be able to effectively manage our relationships
with these manufacturers and they may not meet our future requirements for
timely delivery or provide us with the quality of products that we and our
customers require.
Each of our contract manufacturers also builds products for other
companies. We cannot be certain that they will always have sufficient
quantities of inventory available to fill our orders, or that they will
allocate their internal
13
resources to fill these orders on a timely basis. Qualifying a new contract
manufacturer and commencing volume production is expensive and time
consuming and could result in a significant interruption in the supply of
our products. If we are required to change contract manufacturers, we may
suffer delays that could lead to the loss of revenue and damage our
customer relationships.
WE RELY ON A LIMITED NUMBER OF SUPPLIERS FOR SOME OF OUR COMPONENTS, AND
OUR BUSINESS MAY BE SERIOUSLY HARMED IF OUR SUPPLY OF ANY OF THESE
COMPONENTS IS DISRUPTED. We and our contract manufacturers currently
purchase several key components of our products from a limited number of
suppliers. We purchase each of these components on a purchase order basis
and have no long-term contracts for these components. In addition, the
availability of many of these components to us is dependent in part by our
ability to provide suppliers with accurate forecasts of our future
requirements. In the event of a disruption in supply or if we receive an
unexpectedly high level of purchase orders, we may not be able to develop
an alternate source in a timely manner or at favorable prices. Any of these
events could hurt our ability to deliver our products to our customers and
negatively affect our operating margins. In addition, our reliance on our
suppliers exposes us to potential supplier production difficulties or
quality variations. Any such disruption in supply would seriously impact
our present and future sales.
IF WE ARE UNABLE TO HIRE OR RETAIN HIGHLY SKILLED PERSONNEL, WE MAY NOT BE
ABLE TO OPERATE OUR BUSINESS SUCCESSFULLY. Our future success depends upon
the continued services of our key management, sales and marketing, and
engineering personnel, many of whom have significant industry experience
and relationships. Many of our personnel, in particular, Mr. Par Chadha,
our Chief Executive Officer, Dr. Xin Cheng, our President and Chief
Executive Officer of Sorrento Networks, would be difficult to replace. We
do not have "key person" life insurance policies covering any of our
personnel. The loss of the services of any of our key personnel could delay
the development and introduction of, and negatively impact our ability to
sell, our products. In addition, we will need to hire additional personnel
for most areas of our business, including our sales and marketing and
engineering operations. Competition for highly skilled personnel is intense
in our industry, and we may not be able to attract and retain qualified
personnel, which could seriously harm our business.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH COULD LIMIT
OUR ABILITY TO COMPETE. We rely on a combination of patent, copyright,
trademark and trade secret laws and restrictions on disclosure to protect
our intellectual property rights. We also enter into confidentiality or
license agreements with our employees, consultants and corporate partners,
and control access to, and distribution of, our software, documentation and
other proprietary information. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Monitoring unauthorized use of
our products is difficult, and we cannot be certain that the steps we have
taken will prevent unauthorized use of our technology, particularly in
foreign countries where the laws may not protect our proprietary rights as
fully as in the United States. If competitors gain access to our
technology, our ability to compete could be harmed.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD SERIOUSLY HARM OUR BUSINESS AND REQUIRE US TO INCUR
SIGNIFICANT COSTS. In recent years, there has been significant litigation
in the United States involving patents and other intellectual property
rights. We may be a party to litigation in the future to protect our
intellectual property or as a result of an allegation that we infringe
others' intellectual property. Any parties asserting that our products
infringe upon their proprietary rights would force us to defend ourselves
and possibly our customers or manufacturers against the alleged
infringement. These claims and any resulting lawsuits, if successful, could
subject us to significant liability for damages and invalidation of our
proprietary rights. Additionally, any claims and lawsuits, regardless of
their merits, would likely be time-consuming and expensive to resolve and
would divert management time and attention.
Any claims of infringement of the intellectual property of others could
also force us to do one or more of the following: stop selling,
incorporating or using our products that use the challenged intellectual
property; obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology, which may not
14
be available to us on reasonable terms, or at all; or redesign those
products that use such technology. If we are forced to take any of the
foregoing actions, our business may be seriously harmed.
IF NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY ARE NOT AVAILABLE TO US OR
ARE VERY EXPENSIVE, OUR PRODUCTS COULD BECOME OBSOLETE. We may be required
to license technology from third parties to develop new products or product
enhancements. We cannot assure you that third-party licenses will be
available to us on commercially reasonable terms, if at all. If we are
required to obtain any third-party licenses to develop new products and
product enhancements, we could be required to obtain substitute technology,
which could result in lower performance or greater cost, either of which
could seriously harm the competitiveness of our products.
THE MARKETS THAT OUR PRODUCTS ADDRESS ARE GOVERNED BY REGULATIONS AND
EVOLVING INDUSTRY STANDARDS. The market that we sell and deploy our
products into is characterized as being highly regulated and industry
standards intensive, with many standards evolving as new technologies are
deployed. In the United States, our products must comply with various
regulations defined by the Federal Communications Commission and standards
established Underwriters Laboratories. In addition, there are industry
standards established by various organizations such as Bell Communications
Research, American National Standards Institute, and Internet Engineering
Task Force. We design our products to comply with those industry standards
so that each particular product can be accepted by its intended customers
and we are not aware of any standards based product modifications currently
required. To the extent non-compliance with such standards has a
detrimental effect on customer acceptance, we must address such
non-compliance in the design of our products. Standards for new services
and network management are still evolving. We are a member of several
standards committees, which enables us to participate in the development of
standards for emerging technologies. However, as the standards evolve, we
will be required to modify our products or develop and support new versions
of ours products. The failure of our products to comply or delays in
compliance, with the various existing and evolving industry standards could
delay introduction and acceptance of our products, which could materially
and adversely affect the our business, operating results and financial
condition.
Government regulatory policies are likely to continue to have a major
impact on the pricing of existing as well as new public network services
and therefore are expected to affect demand for such services and the
telecommunications products that support such services. Tariff rates,
whether determined by network service providers or in respondent regulatory
directives, may affect the cost-effectiveness of deploying communication
services. Such policies also affect the demand for telecommunications
equipment, including our current and planned products.
In foreign countries, our products are subject to a wide variety of
governmental review and certification requirements. If we fail to conform
our products to these regulatory requirements, we could lose sales and our
business could be seriously harmed. Additionally, any failure of our
products to comply with relevant regulations could delay their introduction
and require costly and time-consuming engineering changes.
WE ARE SUBJECT TO VARIOUS RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS. We expect that international sales will continue to increase as
a percentage of our net sales for the foreseeable future. Our international
operations are subject to a number of risks, including: changes in foreign
government regulations and telecommunications standards, import and export
license requirements, tariffs, taxes and other trade barriers, fluctuations
in currency exchange rates, difficulty in collecting accounts receivable,
the burden of complying with a wide variety of foreign laws, treaties and
technical standards, difficulty in staffing and managing foreign
operations, and political and economic instability.
Almost all of our sales have been denominated in U.S. dollars. A portion of
our expenses are denominated in currencies other than the U.S. dollar, and
in the future a larger portion of our sales could also be denominated in
non-U.S. currencies. As a result, currency fluctuations between the U.S.
dollar and the currencies in which we do business could cause foreign
currency translation gains or losses that we would recognize in the period
incurred. We
15
cannot predict the effect of exchange rate fluctuations on our future
operating results because of the number of currencies involved, the
variability of currency exposure and the potential volatility of currency
exchange rates. We do not currently engage in foreign exchange hedging
transactions to manage our foreign currency exposure.
OUR FUTURE REVENUES ARE UNPREDICTABLE AND OUR FINANCIAL RESULTS MAY
FLUCTUATE. Our revenue and operating results could fluctuate substantially
from quarter to quarter and from year to year. This could result from any
one or a combination of factors such as the cancellation or postponement of
orders, the timing and amount of significant orders from our largest
customers, our success in developing, introducing and shipping product
enhancements and new products, the mix of products we sell, new product
introductions by competitors, pricing actions taken by us or our
competitors, the timing of delivery and availability of components from
suppliers, changes in material costs and general economic conditions.
OUR BACKLOG AT ANY POINT MAY NOT BE A GOOD INDICATOR OF EXPECTED REVENUES.
Our backlog at the beginning of each quarter typically is not sufficient to
achieve expected sales for the quarter. To achieve our sales objective, we
are dependent upon obtaining orders during each quarter for shipment during
that quarter. Furthermore, our agreements with our customers typically
provide that they may change delivery schedules and cancel orders within
specified time frames, typically 30 days or more prior to the scheduled
shipment date, without significant penalty. Our customers have in the past
built, and may in the future, build significant inventory in order to
facilitate more rapid deployment of anticipated major projects or for other
reasons. Decisions by such customers to reduce their inventory levels have
led and could lead to reductions in purchases from us. These reductions, in
turn, have and could cause fluctuations in our operating results and have
had and could have an adverse effect on our business, financial condition
and results of operations in periods in which the inventory is reduced.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY COMPETITIVE PRESSURES, WHICH WE
MUST REACT TO. The industry we compete in is characterized by declining
prices of existing products, therefore continual improvements of
manufacturing efficiencies and introduction of new products and
enhancements to existing products are required to maintain gross margins.
In response to customer demands or competitive pressures, or to pursue new
product or market opportunities, we may take certain pricing or marketing
actions, such as price reductions, volume discounts, or provisions of
services at below market rates. These actions could materially and
adversely affect our business, operating results and financial condition.
IF WE DO NOT EFFECTIVELY MANAGE OUR GROWTH, WE MAY NOT BE ABLE TO
SUCCESSFULLY EXPAND OUR BUSINESS. Growth of our business has placed, and
will continue to place, a significant strain on our management systems and
resources. Our ability to successfully offer our products and implement our
business plan in a rapidly evolving market requires an effective planning
and management process. We will need to continue to improve our financial,
managerial and manufacturing process and reporting systems, and will need
to continue to expand, train and manage our workforce worldwide. If we fail
to effectively manage our growth and address the above requirements, it
could affect our ability to pursue business opportunities and expand our
business.
WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH YEAR 2000 PROBLEMS THAT
COULD RESULT IN CLAIMS AGAINST US OR IMPAIR THE USE OF OUR PRODUCTS BY OUR
CUSTOMERS. Prior to January 1, 2000, there was a great deal of concern
regarding the ability of computers to adequately recognize 21st century
dates from 20th century dates due to the two-digit date fields used by many
systems. Most reports to date, however, are that computer systems are
functioning normally and the compliance and remediation work accomplished
leading up to 2000 was effective to prevent any problems. Computer experts
have warned that there may still be residual consequences of the change in
centuries and any such difficulties could result in a decrease in sales of
our products, an increase in allocation of resources to address Year 2000
problems of our customers or an increase in litigation costs relating to
losses suffered by our customers due to such Year 2000 problems.
16
WE HAVE INCURRED NET LOSSES OVER THE LAST THREE YEARS AND MAY EXPERIENCE
FUTURE LOSSES. We have incurred operating losses during the years ended
January 31, 2000, 1999 and 1998 of $10.0 million, $10.0 million and $15.2
million, respectively. We have financed these losses through a combination
of debt issuances, bank lines of credit and security placements. We believe
we have sufficient working capital to meet our planned level of operations
in the future. However, there can be no assurance that our working capital
requirements will not exceed our ability to generate sufficient cash
internally to support our requirements and the needed capital will have to
be obtained from external sources. We cannot give any assurances that
sufficient working capital, at terms acceptable to us, will be available
when needed.
A SUBSTANTIAL NUMBER OF OUR ORDINARY SHARES ARE ELIGIBLE FOR FUTURE SALE.
No prediction can be made as to the effect, if any, that future sales of
common stock that we may make, or the availability of common stock for
future sales, will have on the market price of common stock prevailing from
time to time. Sales of a substantial number of shares of common stock in
the public market could adversely affect the market price for our common
stock and reported earnings per share.
DEFINITIONS
As used in this Annual Report on Form 10-K, the following terms have the
meanings indicated:
"ATM" means Asynchronous Transfer Mode which is a type of networking technology
based on transferring data in cells or packets of a fixed size. The small,
constant cell size allows ATM equipment to transmit video, audio, and data over
the same network, and assure that no single type of data overtakes the line.
Current implementations of ATM support data transfer rates of 25 to 622 Mbps as
compared to maximum 100 Mbps for Fast Ethernet.
"BACKBONE" means a spine or main segment of a network. Individual metro and
interoffice rings are attached as ribs to the backbone.
"BANDWIDTH" means the capacity to move information down a communications
channel. Bandwidth is measured by the difference between the highest and lowest
frequencies that can be transmitted by that channel and is commonly measured in
bits per second (bps). For example, Ethernet has a 10 to Mbps bandwidth and
OC192 has a 10 gigabits per second
"BRIDGE" means a device that connects two or more networks of the same access
method (Ethernet to Ethernet or Token Ring to Token Ring) by making simple
forward/don't forward decision on each packet received from any of the networks
to which it is connected.
"BROADBAND" means a set of technologies that provide several paths for
transmitting text, voice or video data so that different types of data
can be transmitted simultaneously and, depending on technology deployed at
different speeds and protocols.
"CLEC" means a Competitive Local Exchange Carrier.
"CONCENTRATOR" means the connection point, more sophisticated than a hub,
incorporating different types of cable connections, back-up power supply,
data-gathering capability for management purposes and possibly even bridge and
router features as well.
"CSU/DSU" means Channel Service Unit/Data Service Unit. The DSU is a device that
performs protective and diagnostic functions for a telecommunications line. The
CSU is a device that connects a terminal to a digital line. Typically, the two
devices are packaged as a single unit which can be viewed as a very high-powered
and expensive modem. Such a device, for example, required for both ends of T-1
or T-3 connection.
17
"DBS" means Digital Broadcasting System.
"DSL" means a type of Digital Subscriber Line which is technology that allows
more data to be sent over existing copper telephone lines (POTS) and can be
configured to allow simultaneous voice and data communications over a single
line. "x" in xDSL is used because of variety of DSL technologies. "x" in xDSL
can stand for "I" for low speed IDSL, "H" for symmetrical HDSL, "S-H" for high
growth "lower-speed" single pair version of HDSL called S-HDSL, "A" for
asymmetrical ADSL, "RA" for rate adaptive version of ADSL called RADSL, "S" for
single line version of HDSL called SDSL and "V" for high speed/short haul DSL
called VDSL. The data rates for "I" to "V" vary from 64Kbps to 52 Mbps when
receiving data (known as the downstream rate) and from 16Kbps to 2.3Mbps when
sending data (known as the upstream rate). DSL requires a special DSL modem. DSL
will be one of the more popular choices for Internet access over the next few
years.
"DWDM" means Dense Wavelength Division Multiplexing, which is a sophisticated
optoelectronics technology that uses multiple wavelengths of light very
efficiently to greatly increase the number of video, data or voice channels of
information that can be sent on a single optical fiber in a transmission system.
"ESCON" means a protocol for 200 Mbps signal transmission speed over fiber optic
cable.
"ETHERNET" means a 10 Mbps speed network that runs over thick coaxial cable
(10BASE5), thin coaxial cable (10BASE2), twisted-pair (10BASE-T), and
fiber-optic cable. It is the most widely used LAN technology and the most
popular form of Ethernet is 10BASE-T. Ethernet is network specification that was
developed at Xerox Corp's Palo Alto Research Center, and made into a network
standard by Digital, Intel, and Xerox.
"FAST ETHERNET" means a 100 Mbps speed network that runs over thick coax,
twisted-pair, and fiber-optic cable. Fast Ethernet is 10 times faster than
Ethernet.
"FDDI" means a Fiber Distributed Data Interface and is a fiber optic network
that supports transmission speeds up to 100 Mbps.
"HDTV" means high definition television, which is a new type of television that
provides much better resolution than current television. There are a number of
competing HDTV standards, which is one reason that the new technology has not
been widely implemented.
"HUB" means a central connection device to which many network tributaries are
connected.
"ISDN" means an Integrated Services Digital Network and is an all-digital
communications network that provides a wide range of services on a switched
basis. Voice, data and video can be simultaneously transmitted on one line from
a source.
"ISO" means International Standards Organization. Founded in 1946, ISO is an
international organization composed of national standards bodies from over 75
countries. ISO has defined a number of important computer standards, the most
significant of which is perhaps is OSI (Open Systems Interconnection), a
standardized architecture for designing networks.
"ISP" means an Internet Service Provider.
"ITU" means International Telecommunications Union, which is an
intergovernmental organization through which
18
private and public organizations develop telecommunications. The ITU was founded
in 1865 and became a United Nations agency in 1947 and it is responsible for
adopting international tax treaties, regulations and standards governing
telecommunications.
"LAN" means a Local Area Network and is a high-speed communications system
designed to link computers for the purpose of sharing files, programs and
various devices such as printers and high-speed modems within a small geographic
area such as a workgroup, department or single floor of a multi-story building.
LANs may include dedicated computers or file servers that provide a centralized
source of shared files and programs.
"MULTIPLEXING" means a process that combines a number of lower speed data
transmissions into one high-speed data transmission by splitting that total
available bandwidth into narrower bands (frequency division) or by allotting a
common channel to several different transmitting devices one at a time in
sequence (time division).
"OC-1, OC-3, OC-12, OC-48, OC-192" means 51.85Mbps, 155 Mbps, 622 Mbps, 2.5 Gbps
and 10Gbps transmission speeds for signals over fiber optic cables.
"OEMS" means original equipment manufacturers.
"PACKET" means the "envelope" in which the network software places a message
being sent from one station to another station in a network. One of the key
features of a packet is that it contains the destination address in addition to
the data.
"POTS" means "plain old telephone service" which refers to the standard
telephone service over copper lines that most homes use. In contrast, telephone
services based on high-speed, digital communications lines, such as ISDN and
FDDI, are not POTS. The main distinction between POTS and non-POTS services are
speed and bandwidth, POTS is generally restricted to about 52Kbps.
"PROTOCOL" means a standard developed by international standards bodies,
individual equipment vendors, and ad hoc groups of interested parties to define
how to implement a group of services in one or more layers of the OSI model. The
Open Systems Interconnect ("OSI") reference model was developed by the ISO to
define all the services a LAN should provide. Ethernet and Token Ring, for
example, are both protocols that define different ways to provide the services
called for in the Physical and Data Link Layers of the OSI model.
"RBOC" means a Regional Bell Operating Company.
"REPEATER" means a device that is used to extend the length a signal can travel
on a cable by regenerating and retiming the signal. Its main function is to
receive and retransmit all data packets after amplifying signals that make up
the data packet.
"ROM" means Read-Only Memory, which is non-volatile memory whose contents are
determined during manufacturing, and can't be modified only read.
"ROUTER" means a network translator that reads network-addressing information
within packets to provide greater selectivity in directing traffic over multiple
network segments. A more complex inter-networking device.
"SDH" means Synchronous Digital Hierarchy which is transmission protocol for
high speed transmission over fiber optic cable published in 1988 by the
Consultative Committee for International Telegraph and Telephony.
"SONET" means a transmission protocol for high speed transmission over fiber
optic cable which was introduced by Bell Communications in 1984 and quickly
accepted by American National Standards Institute.
19
"SWITCH" means a device that allows the network operator to vary and select
connections between network nodes at very high speeds.
"T-1" means a dedicated phone connection supporting data rates of 1.544 Mbps. A
T-1 line actually consists of 24 individual channels, each of which supports
64Kbps each of which can be configured to carry voice or data traffic. T-1 lines
are sometimes referred to as DS-1 lines.
"TCP/IP" means Transmission Control Protocol/Internet Protocol, which is a suite
of protocols used for communications between two or more devices.
"TDM" means time division multiplexing which is a multiplexing process that
combines a number of lower speed data transmissions into one high-speed data
transmission by allotting a common channel to several different transmitting
devices one at a time in sequence.
"TOKEN RING" means a 4 Mbps or 16 Mbps speed network that uses different
technology than Ethernet to co-ordinate the transmission of data among nodes.
"TRANSCEIVER" means an ethernet device for transmitting and receiving data that
provides packet collision (an occurrence when two stations try to send packets
at the same time) detection as well. It can be either an internal or external
feature of a network device such as network interface card, repeater, hub or
concentrator. A transceiver is also known as a media access unit or MAU.
"WAN" means a Wide Area Network and is a communications network that connects
geographically dispersed users. Typically, a WAN consists of two or more LANs.
The largest WAN in existence is the Internet.
20
ITEM 2. PROPERTIES.
We occupy 114,000 square feet of office, manufacturing and distribution as
detailed below.
We own a 36,000 square foot office and manufacturing facility in San Diego,
California and our facilities under lease include:
Location Square Footage Facility Type Expiration Date
- -------- -------------- ------------- ---------------
Annapolis Junction, Maryland 35,000 Office/Manufacturing October 31, 2004
Fremont, California 18,000 Office/Manufacturing July 31, 2000
Santa Monica, California 6,000 Office April 30, 2001
Westborough, Massachusetts 4,000 Office August 31, 2004
We have six sales offices located around the United States and four sales
offices located in Europe (Belgium, France, Germany and the United Kingdom)
totaling 15,000 square feet. All such offices are leased for varying terms.
See Note E to the Consolidated Financial Statements contained in Part II herein
for terms and amounts of mortgages on the facility we own.
We believe that our existing and planned facilities are and will remain adequate
for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
On August 20, 1999, a consolidated class action lawsuit entitled In re Osicom
Technologies, Inc. Securities Litigation, Master File No. CV-99-4321-R, was
filed in the United States District Court for the Central District of California
against us, our Chief Executive Officer, our President and our former Chief
Financial Officer. The consolidated complaint generally alleges that, during the
purported class action period, the defendants made false and misleading public
statements related to a contract entered into by our Far East business unit with
a Japanese customer. The consolidated complaint asserts that the defendants'
conduct violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and SEC Rule 10b-6 promulgated thereunder, as well as state common law.
The consolidated complaint does not specify an amount of damages. During January
2000 the court issued an order denying our motion to dismiss the case. In
February, 2000, answers were filed on behalf of all defendants denying liability
for all claims. We are defending the class action vigorously. An unfavorable
outcome in such litigation could have a material adverse affect on our financial
condition and results of operations.
From time to time, we are involved in various other legal proceedings and claims
incidental to the conduct of our business. Although it is impossible to predict
the outcome of any outstanding legal proceedings, we believe that such legal
proceedings and claims, individually and in the aggregate, are not likely to
have a material effect on our financial position or results of operations or
cash flows.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting on January 5, 2000 to vote upon the
following matters:
1. Election of the Board of Directors
2. Approve an amendments to the Company's 1997 Incentive and
Non-Qualified Stock Option Plan including an increase the amount of
shares reserved thereunder to 1,500,000
3. Approve the appointment of BDO Seidman, LLP as the Company's
independent auditors
The following table summarizes the results of the voting at the meeting:
Votes For Votes Against Abstentions Broker
Non-Votes
Director nominees:
Par Chadha 10,495,595 360,149 0 0
Xin Cheng 10,591,929 263,815 0 0
Leonard N. Hecht 10,544,432 311,312 0 0
Renn Zaphiropoulos 10,550,493 305,251 0 0
1997 Plan amendment 9,717,185 923,225 17,920 197,414
Auditor appointment 16,155,892 200,927 13,548 0
22
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock traded on the Nasdaq Small Cap Market under the symbol FIBR
since 1994. On December 16, 1998, we commenced trading on the Nasdaq National
Market System under the same symbol.
The following table sets forth the high and low closing bid prices for our
common stock in the over-the-counter market from February 1, 1998 to January 31,
2000, based upon information obtained from Nasdaq and taking into account the
1-for-3 reverse split on July 24, 1998. Quotations represent inter-dealer
prices; they do not include retail markups, markdowns, or commissions; and, they
may not represent actual transactions.
Fiscal 1998-1999 High Low
---------------- ------ -------
Quarter from February 1, 1998 to April 30, 1998 $18.09 $10.31
Quarter from May 1, 1998 to July 31, 1998 $12.75 $4.63
Quarter from August 1, 1998 to October 31, 1998 $8.38 $1.81
Quarter from November 1, 1998 to January 31, 1999 $18.25 $6.38
Fiscal 1999-2000
----------------
Quarter from February 1, 1999 to April 30, 1999 $28.50 $5.00
Quarter from May 1, 1999 to July 31, 1999 $15.38 $7.50
Quarter from August 1, 1999 to October 31, 1999 $12.88 $7.13
Quarter from November 1, 1999 to January 31, 2000 $59.00 $7.75
On April 26, 1999, the average of the high and low bid quotation for our common
stock was $47.28 per share. There is no assurance that a market in our common
stock will continue.
As of April 26, 1999 (the latest practicable date) there were 794 shareholders
of record, including brokerage firms and nominees, of our common stock.
We have never paid any cash dividends on our common stock. The present policy of
the Board of Directors is to retain all available funds to finance the planned
level of operations. In light of the anticipated cash needs of our business, it
is not anticipated that any cash dividends will be paid to the holders of our
common or preferred stock in the foreseeable future.
23
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data with respect
to our five most recent fiscal years ended January 31. The selected consolidated
statement of operations data set forth below for each of our three most recent
fiscal years, and the selected consolidated balance sheet data set forth at
January 31, 2000 and 1999, are derived from our consolidated financial
statements which have been audited by BDO Seidman, LLP, independent certified
public accountants, as indicated in their report which is included elsewhere in
this annual report. The selected consolidated statement of operations data set
forth below for each of the two fiscal years ended January 31, 1997 and 1996,
and the consolidated balance sheet data set forth below at January 31, 1998,
1997 and 1996 are derived from our audited consolidated financial statements not
included in this annual report. The selected consolidated financial data should
be read in conjunction with our consolidated financial statements, and the notes
thereto including Note A which discusses our significant acquisitions,
dispositions and discontinued operations, included elsewhere in this annual
report, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7.
FISCAL YEAR ENDED JANUARY 31,
-----------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net sales $ 68,372 $ 58,362 $ 65,811 $ 65,219 $ 34,473
Net income (loss) from
continuing operations $ 2,410 $(11,069) $(16,377) $(18,705) $ (1,317)
Net income (loss) per share
from continuing operations:
Basic $ 0.17 $ (1.69) $(3.32) $ (7.06) $ (1.09)
Diluted $ 0.15 $ (1.69) $(3.32) $ (7.06) $ (1.09)
BALANCE SHEET DATA:
Cash and cash equivalents $ 13,511 $ 3,480 $ 1,422 $ 2,881 $ 910
Working capital 189,486 11,399 8,986 9,709 4,894
Total assets 223,265 66,796 69,589 61,521 29,860
Total debt (including short-term debt) 20,727 27,938 26,872 28,651 25,183
Stockholders' equity 202,538 38,858 42,717 32,870 4,677
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes", "anticipates",
"estimates", "expects", and words of similar import constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Readers are referred to the "Other Risk Factors" section of this Annual
Report on Form 10-K, as well as the "Financial Risk Management" and "Future
Growth Subject to Risks" sections contained herein, which identify important
risk factors that could cause actual results to differ from those contained in
the forward-looking statements.
The results of operations reflect our activities and our wholly-owned
subsidiaries; this consolidated group is referred to individually and
collectively as "We" and "Our".
RESULTS OF OPERATIONS: COMPARISON OF THE YEARS ENDED JANUARY 31, 2000 AND
JANUARY 31, 1999
In connection with the initial public offering by NETsilicon, Inc. ("NSI"), our
remaining 55.4% interest became non-voting shares. Accordingly, our financial
statements for fiscal 2000 include the results of operations of NETsilicon
only through September 14, 1999 at which time our remaining interest is
accounted for as an "available for sale" security which is marked-to-market at
the end of each period. The amounts included in our fiscal 2000 year are not
comparable to our fiscal 1999 year due to the inclusion of NETsilicon for less
than a full year. Readers should refer to NETsilicon's annual report on Form
10-K for information concerning NETsilicon.
Net sales. Our consolidated net sales from continuing operations increased to
$68.4 million, or by 17.2%, for fiscal 2000 from $58.4 million for fiscal 1999.
Net sales for our Optical Networking segment increased by $5.3 million for
fiscal 2000 from fiscal 1999. Net sales for Entrada Networks decreased by
$2.0 million for fiscal 2000 from fiscal 1999. The remaining change was
primarily related to NSI.
Gross profit. Cost of sales consists principally of the costs of components,
subcontract assembly from outside manufacturers, and in-house system
integration, quality control, final testing and configuration costs. Gross
profit increased to $31.8 million, or by 22.8%, for fiscal 2000 from $25.9
million for fiscal 1999. Gross profit for our Optical Networking segment
increased by $3.8 million and Entrada's gross profit declined by $2.3 million.
The remaining change was primarily related to NSI. Gross margin increased to
46.5% for fiscal 2000 from 44.4% for fiscal 1999.
Selling and marketing. Selling and marketing expenses consist primarily of
employee compensation and related costs, commissions to sales representatives,
tradeshow expenses and travel expenses. We intend to increase expenditures for
sales and marketing including the recruitment of additional sales and marketing
personnel, the expansion of our domestic and international distribution channels
and the establishment of strategic relationships. In addition, we expect sales
commissions to increase as we increase our sales volume. Our consolidated
selling and marketing expenses increased to $16.9 million, or 24.7% of net
sales, for fiscal 2000 from $15.5 million, or 26.5% of net sales for fiscal
1999.
Engineering, research and development. Engineering, research and development
expenses consist primarily of compensation related costs for engineering
personnel, facilities costs, and materials used in the design, development and
support of our technologies. All research and development costs are expensed as
incurred. We expect research and development costs to increase substantially as
we continue to develop our technologies and future products. Our consolidated
engineering, research and development expenses increased to $11.7 million, or
17.1% of net sales, for fiscal 2000 from $9.8 million, or 16.8% of net sales,
for fiscal 1999.
General and administrative. General and administrative expenses consist
primarily of employee compensation and related costs, legal and accounting fees,
public company costs, and allocable occupancy costs. Increases in general and
25
administrative expenses are planned as we strengthen our infrastructure to
provide sufficient administrative support for the growth of our businesses.
Consolidated general and administrative expenses increased to $12.8 million, or
18.7% of net sales, for fiscal 2000 from $10.3 million, or 17.7% of net sales,
for fiscal 1999.
Other operating expenses. Other operating expenses consist of amortization of
purchased technology related to acquisitions included in our Optical Networking
segment and remained unchanged at approximately $400,000 for fiscal 2000 and
1999.
Other income (charges). Other net income (charges) from continuing operations
increased to $12.4 million income for fiscal 2000 from $(1.0) million expense
for fiscal 1999. The increase included a recognized gain of $14.0 million
related to the sale of a portion of our investment in NETsilicon in connection
with its initial public offering completed on September 15, 1999. The gain was
offset by increases in interest expense incurred on increased borrowings on
our lines of credit, short term borrowing facilities and long term debt.
Income taxes. There was no provision for income taxes for fiscal years 2000 and
1999. We have carry forwards of domestic federal net operating losses, which may
be available, in part, to reduce future taxable income in the United States.
However, due to potential adjustments to the net operating loss carry forwards
as provided by the Internal Revenue Code with respect to future ownership
changes, future availability of the tax benefits is not assured. In addition, we
provided a valuation allowance in full for our deferred tax assets as it is our
opinion that it is more likely than not that some portion or all of the assets
will not be realized.
Discontinued operations. The loss from our discontinued Far East business unit's
operating activities increased to $12.4 million for fiscal 2000 from $2.3
million for fiscal 1999. The increased loss is the result, in part, of a 47.4%
decline in net sales and a $6.3 million reduction in the remaining book value of
excess cost over net assets acquired.
As of January 31, 2000, we agreed to sell the Far East business unit to a group
led by its Hong Kong-based management for $2.5 million in cash in repayment of
our advances and a $3.0 million non-voting redeemable preferred security at
closing. This security is redeemable for $3.0 million in the event of a sale,
public offering, or debt or equity financing by the Far East business unit in
excess of $7.5 million. Net assets to be disposed of, at their expected
realizable values, have been separately classified in the accompanying balance
sheet at January 31, 2000 and the January 31, 1999 balance sheet has been
restated to conform with the current year's presentation.
OPTICAL NETWORKING
Net sales. Net sales for our Optical Networking segment increased to $19.5
million, or 37.2%, for fiscal 2000 from $14.2 million for fiscal 1999. The
increase in net sales was primarily due to an increase in the deployments of our
systems by new and existing customers.
Gross profit. Gross profit increased to $9.9 million, or 62.7%, for fiscal 2000
from $6.1 million for fiscal 1999. Gross margin for our Optical Networking
segment increased to 51.1% for fiscal 2000 from 43.1% for fiscal 1999. The gross
margin percentage increases was primarily due to a lower margin on sales to a
single customer in fiscal 1999.
Selling and marketing. Sales and marketing expenses increased to $7.1 million,
or 36.3% of net sales, for fiscal 2000 from $3.4 million, or 23.7% of net sales
for fiscal 1999. The increase in sales and marketing expenses was the result of
increased sales volume, personnel, travel expenses, trade show participation,
advertising, depreciation on demonstration equipment, customer education and
marketing materials. The number of sales and marketing personnel of our Optical
Networking segment increased to 37 at January 31, 2000 from 18 at January 31,
1999.
Engineering, research and development. Engineering, research and development
expenses increased to $3.4 million, or 17.6% of net sales, for fiscal 2000 from
$2.0 million, or 13.9% of net sales, for fiscal 1999. The increase in
engineering,
26
research and development expenses was the result of increased expenditures
associated with the continuing development of our existing products as well as
future technologies. The number of engineering personnel of our Optical
Networking segment increased to 40 at January 31, 2000 from 17 at January 31,
1999.
General and administrative. General and administrative expenses increased to
$4.4 million, or 22.7% of net sales, for fiscal 2000 from $2.0 million, or 13.8%
of net sales, for fiscal 1999. The increase in general and administrative
expenses reflects the hiring of additional general and administrative personnel
and higher expenses necessary to support and scale our operations.
ENTRADA NETWORKS
Net sales. Net sales for Entrada Networks, formerly known as our Network Access
business unit, decreased to $28.8 million for fiscal 2000 from $30.7 million
for fiscal 1999. While the sales to OEM's of our LAN-adapter product lines
increased, this increase was offset by the decrease in the Remote Access and
Print Server product lines during fiscal 2000 reflecting our shift towards our
new generation of products and the planned phase out of our legacy products.
Gross profit. Gross profit decreased to $11.3 million, or 17.0%, for fiscal 2000
from $13.6 million for fiscal 1999. Gross margin decreased to 39.2.% for fiscal
2000 from 44.2% for fiscal 1999. The gross margin percentage decrease was the
result of higher raw material costs associated with shipments of our LAN-adapter
products and lower margins on legacy products.
Selling and marketing. Sales and marketing expenses decreased to $5.6 million,
or 19.6% of net sales, for fiscal 2000 from $8.7 million, or 28.4% of net sales
for fiscal 1999. During the past fiscal year we completed a realignment of our
sales organization which resulted in a reduction in these expenses as well as
reduced advertising and promotional expenses for legacy products.
Engineering, research and development. Engineering, research and development
expenses increased to $6.3 million, or 22.1% of net sales, for fiscal 2000 from
$5.7 million, or 18.6% of net sales, for fiscal 1999. The increase in
engineering, research and development expenses was the result of a $1.7 million
reduction to the net book value of capitalized software development costs caused
by changing market conditions partially offset by cost savings achieved through
the consolidation of our facilities.
General and administrative. General and administrative expenses decreased to
$2.4 million, or 8.3% of net sales, for fiscal 2000 from $3.3 million, or 10.9%
of net sales, for fiscal 1999. This decrease is the result of cost savings
achieved through the consolidation of our various facilities as well as
eliminating the 37,000 square feet of unused space leased at our Annapolis
Junction, Maryland facility.
RESULTS OF OPERATIONS: COMPARISON OF THE YEARS ENDED JANUARY 31, 1999 AND
JANUARY 31 1998
Net sales. Our consolidated net sales from continuing operations decreased to
$58.4 million, or by 11.3%, for fiscal 1999 from $65.8 million for fiscal 1998.
Net sales for our Optical Networking segment increased by $2.0 million for
fiscal 1999 from fiscal 1998. Net sales for Entrada Networks declined by $14.9
million in fiscal 1999 from fiscal 1998. The remaining change was primarily
related to NSI.
Gross profit. Gross profit decreased to $25.9 million, or by 9.9%, for fiscal
1999 from $28.7 million for fiscal 1998. Gross profit for our Optical Networking
segment increased by $1.6 million and Entrada's gross profit declined by $6.8
million. The remaining change was primarily related to NSI. Gross margin
increased slightly to 44.4% for fiscal 1999 from 43.7% for fiscal 1998.
27
Selling and marketing. Our consolidated selling and marketing expenses decreased
to $15.5 million, or 26.5% of net sales, for fiscal 1999 from $16.8 million, or
25.5% of net sales for fiscal 1998.
Engineering, research and development. Our consolidated engineering, research
and development expenses increased to $9.8 million, or 16.8% of net sales, for
fiscal 1999 from $7.1 million, or 10.8% of net sales, for fiscal 1998.
General and administrative. Consolidated general and administrative expenses
increased to $10.3 million, or 17.7% of net sales, for fiscal 1999 from $8.6
million, or 13.1% of net sales, for fiscal 1998.
Other operating expenses. Other operating expenses for fiscal 1999 were
approximately $400,000 compared to $11.5 million for fiscal 1998. Other
operating expenses during fiscal 1998 included acquisition-related charges of
$6.5 million, capitalized software cost valuation adjustments of $2.7 million
and $2.3 million related to the horizontal and vertical integration of our
acquisitions made during fiscal 1997. Capitalized software costs represent
software development costs we incurred subsequent to acquisition in connection
with network access, optical networking and embedded networking products. At
January 31, 1998 the remaining net book value of capitalized software
development was $4.1 million. Acquisition-related charges included amortization
of purchased technology ($647,000) as well as valuation allowances recorded
against purchased intangible assets including purchased technology ($4.6 million
including $3.7 million related to Network Access and $893,000 related to RNS),
customer lists ($812,000), excess cost over net book value of assets acquired
($233,000) and other intangible assets ($82,000). (See Notes A and B to the
Financial Statements contained in Part II herein). Certain of our products,
primarily LAN related items, were not competitive in the market for such
products as the technology desired by customers could not be cost-effectively
added to such products. We re-aligned our resources to focus on providing
products that address both the convergence of enterprise data networks and
access networks on a cost-effective basis, and the flexibility desired by
customers. Accordingly, we recorded a valuation allowance against purchased
technology and capitalized software that had no future alternative use.
Purchased technology related to Sciteq with a net book value of $2.1 million at
January 31, 1998 and is estimated to be recoverable through undiscounted cash
flows from the acquired operation. Integration costs included the physical
relocation of the Santa Barbara, California operations ($324,000), consolidation
of the San Diego, California operations ($537,000), and personnel relocation and
reduction costs ($1.4 million).
Other income (charges). Other net charges from continuing operations decreased
slightly to $1.0 million expense for fiscal 1999 from $1.2 million expense
for fiscal 1998.
Income taxes. There was no provision for income taxes for fiscal years 1999 and
1998. We have carry forwards of domestic federal net operating losses, which may
be available, in part, to reduce future taxable income in the United States.
However, due to potential adjustments to the net operating loss carry forwards
as provided by the Internal Revenue Code with respect to future ownership
changes, future availability of the tax benefits is not assured. In addition, we
provided a valuation allowance in full for our deferred tax assets as it is our
opinion that it is more likely than not that some portion or all of the assets
will not be realized.
Discontinued operations. The loss from our discontinued Far East business unit
operating activities, increased to $2.3 million for fiscal 1999 from income of
approximately $300,000 for fiscal 1998. The increased loss is primarily the
result of a 27.8% decrease in net sales without a corresponding reduction in
operating expenses.
OPTICAL NETWORKING
Net sales. Net sales for our Optical Networking segment increased to $14.2
million, or 15.9%, for fiscal 1999 from $12.2 million for fiscal 1998. The
increase in net sales was primarily due to an increase in the deployments of our
systems by new and existing customers.
28
Gross profit. Gross profit increased to $6.1 million, or 36.5%, for fiscal 1999
from $4.5 million for fiscal 1998. Gross margin for our Optical Networking
segment increased to 43.1% for fiscal 1999 from 36.6% for fiscal 1998. The gross
margin percentage increase reflects the absorption of production overhead over
greater volume of product during fiscal 1999.
Selling and marketing. Sales and marketing expenses increased to $3.4 million,
or 23.7% of net sales, for fiscal 1999 from $2.0 million, or 16.2% of net sales
for fiscal 1998. The increase in sales and marketing expenses was the result of
increased sales volume, personnel, travel expenses, trade show participation,
advertising, depreciation on demonstration equipment, customer education and
marketing materials.
Engineering, research and development. Engineering, research and development
expenses increased to $2.0 million, or 13.9% of net sales, for fiscal 1999 from
$1.4 million, or 11.4% of net sales, for fiscal 1998. The increase in
engineering, research and development expenses was the result of increased
expenditures associated with the continuing development of our existing products
as well as future technologies.
General and administrative. General and administrative expenses increased to
$2.0 million, or 13.8% of net sales, for fiscal 1999 from $1.1 million, or 8.8%
of net sales, for fiscal 1998. The increase in general and administrative
expenses reflects the hiring of additional general and administrative personnel
and higher expenses necessary to support and scale our operations.
ENTRADA NETWORKS
Net sales. Net sales for Entrada Networks decreased to $30.7 million, or 32.7%,
for fiscal 1999 from $45.7 million for fiscal 1998. This decrease was primarily
the result of a decline in the sales of our legacy products.
Gross profit. Gross profit decreased to $13.6 million, or 33.4%, for fiscal 1999
from $20.4 million for fiscal 1998. Gross margin remained relatively unchanged
at 44.2% for fiscal 1999 and 44.7% for fiscal 1998.
Selling and marketing. Sales and marketing expenses decreased to $8.7 million,
or 28.4% of net sales, for fiscal 1999 from $12.9 million, or 28.3% of net sales
for fiscal 1998. This decrease was primarily the result of the mid-fiscal year
1998 closure of our Santa Barbara, California facility.
Engineering, research and development. Engineering, research and development
expenses increased to $5.7 million, or 18.6% of net sales, for fiscal 1999 from
$4.1 million, or 9.1% of net sales, for fiscal 1998. The increase in
engineering, research and development expenses was the result of increased
expenditures associated with continuing development of Entrada's existing
products and future technologies.
General and administrative. General and administrative expenses decreased to
$3.3 million, or 10.9% of net sales, for fiscal 1999 from $4.2 million, or 9.2%
of net sales, for fiscal 1998. This decrease is the result of cost savings
achieved through the consolidation of our various facilities as well as other
cost reduction programs implemented mid-fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations through a combination of debt and equity financing. At
January 31, 2000, our working capital was $189.5 million including $168.8
million of investments in marketable securities and $13.5 million in cash and
cash equivalents.
The amounts included in our statement of cash flows for fiscal 2000 is not
comparable to our fiscal 1999 amounts due to the inclusion of NETsilicon for
less than a full year. Readers should refer to NETsilicon's annual report on
Form 10-K for information concerning NETsilicon.
Our continuing operations used cash flows of $2.7 million and discontinued
operating activities provided cash of $1.0 million during fiscal 2000. During
fiscal 1999 we incurred a cash flow deficit of $10.8 million from continuing
activities and discontinued operations provided cash of $7.4 million. The
decrease in cash flows used by operations reflects a substantial decline in
our net loss as well as increases in accounts payable and accrued liabilities,
partially offset by increases in accounts receivable, inventories and other
current assets.
To support our anticipated growth, we expect our selling and marketing, research
and development and general and administrative expenses will increase in future
periods. There can be no assurance that our available cash will be sufficient to
fund such additional expenses.
Our standard payment terms range from net 30 to net 90 days. Receivables from
international customers have frequently taken longer to collect.
29
We provided long-term equipment financing to an optical networking customer
during fiscal 2000 and the purchase agreement with this customer provides for
invoiced installation and other deployment expenses not to exceed 10% of the
equipment cost. The terms of this financing provide that the customer may
convert any balances outstanding longer than 90 days into a level payment
35-month term note at 11% per annum interest. We financed $3.3 million of
receivables, including deployment expenses, during fiscal 2000 for this
customer. During the fourth quarter of fiscal 2000 we exchanged $3.0 million of
the then unpaid balance shares of the customer's 8% convertible preferred stock,
an approximately 6% interest on a fully diluted basis. The remaining balance of
the note and accrued interest of $344,000 was paid in cash. During fiscal 2000
we made sales of $5.5 million and reimbursed deployment expenses of $120,000 to
this customer.
The investing activities of continuing operations during fiscal 2000 provided
cash flows of $4.3 million. We received gross proceeds of $15.4 million from the
sale of shares in NETsilicon in September 1999 which was offset by NETsilicon's
cash at the time of sale. Our other investing activities during fiscal 2000
included $2.1 million for the purchases of capital equipment, $886,000 for
software development, $3.6 million for investments in other assets and advances
to our discontinued operations net of repayments received from NETsilicon of
$3.4 million. During fiscal 1999 the investing activities of our continuing
operations used cash flows of $2.8 million which consisted primarily of
purchases of capital equipment and software development costs.
We expect our investments in property and equipment will increase to support the
anticipated growth of our operations and infrastructure.
The financing activities of continuing operations during fiscal 2000 provided
cash flows of $14.3 million which consisted primarily of $6.9 million in net
proceeds from a private placement of our common stock and $8.2 million in
proceeds from option and warrant exercises offset by preferred stock dividends
paid in cash and treasury stock purchases. During fiscal 1999 the financing
activities of continuing operations provided cash flows of $10.0 million which
consisted primarily of $9.6 million in net proceeds from the sale of common and
preferred stock.
Our continuing operations had various lines of credit totaling $15.0 million at
January 31, 2000 compared to $13.0 at January 31, 1999 excluding NETsilicon's
line of credit. Outstanding borrowings against these lines of credit were $6.0
million at January 31, 2000. Our various credit lines are collateralized by
accounts receivable, inventory and equipment.
During fiscal 2000 we completed one sale of our common stock receiving net
proceeds of $6.9 million and issued 1,048,440 shares of our common stock in
conversions of preferred stock issued in prior years. At January 31, 2000 the
liquidation preference of the outstanding preferred stock is $6.5 million and
none of the shares are currently convertible. (See Notes I and J to the
Consolidated Financial Statements contained in Part II herein.)
During fiscal 1999 we completed several private placements of our common and
convertible preferred stock receiving net proceeds of $9.4 million, and issued
1,911,717 shares of our common stock in these placements and in conversions of
these and other previously issued securities. (See Note I and J to the
Consolidated Financial Statements contained in Part II herein.)
During fiscal 1998 we completed several private placements of our common and
convertible preferred stock receiving net proceeds of $14.4 million, and issued
2,414,736 shares of our common stock in these placements and in conversions of
these and other previously issued securities. (See Note I and J to the
Consolidated Financial Statements contained in Part II herein.)
On March 3, 2000, our optical networking subsidiary, Sorrento Networks, Inc.
completed a private placement of 8,596,333 shares of its Series A Convertible
Preferred Stock to a group of investors receiving net proceeds of approximately
$46.6 million.
We have previously announced our plans, through an 8-K filing, to divest all or
several of our operating subsidiaries. During fiscal 2000, NETsilicon completed
its initial public offering and we agreed to sell our Far East business unit. We
have recently entered into an agreement to merge Entrada Networks, formerly
known as our Network Access business unit, with Sync Research, Inc., a public
company. While we have no definitive plans at this time with respect to our
other business units, we will continue to explore opportunities. We continue to
operate and invest in all of our businesses pending any transactions.
We anticipate that our available cash resources, together with the proceeds of
Sorrento's private placement, will be sufficient to meet our presently
anticipated capital requirements for the next year. Nonetheless, our future
capital requirements may vary materially from those now planned including the
need for additional working capital to accommodate planned growth, hiring and
infrastructure needs. There can be no assurances that our working capital
requirements will not exceed our ability to generate sufficient cash internally
to support our requirements and that external financing will be available or
that, if available, such financing can be obtained on terms favorable to us and
our shareholders.
Year 2000 Compliance
We have not experienced any year 2000 compliance problems to date and we believe
our products are year 2000 compliant. We are not aware that any of our
customers, vendors or contract manufacturers have experienced any such problems
to date. It is possible that yet undiscovered problems could severely disrupt
our operations and would adversely affect our business if not properly
addressed.
EFFECTS OF INFLATION AND CURRENCY EXCHANGE RATES
We believe that the relatively moderate rate of inflation in the United States
over the past few years has not had a significant impact on our sales or
operating results or on the prices of raw materials. There can be no assurance,
however, that inflation will not have a material adverse effect on our operating
results in the future.
The majority of our sales and expenses are currently denominated in U.S. dollars
and to date our business has not been significantly affected by currency
fluctuations. However, we conduct business in several different countries and
thus fluctuations in currency exchange rates could cause our products to become
relatively more expensive in particular countries, leading to a reduction in
sales in that country. In addition, inflation in such countries could increase
our expenses. In the future, we may engage in foreign currency denominated sales
or pay material amounts of expenses in foreign currencies and, in such event,
may experience gains and losses due to currency fluctuations. Our operating
results could be adversely affected by such fluctuations.
30
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is effective for financial
statements with fiscal quarters of all fiscal years beginning after June 15,
2000. The Accounting Standards Executive Committee issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-up
Activities," effective in the current or future periods. The adoption or future
adoption of these standards has had or will have no material effects, if any, on
our financial position or results of operations.
OTHER MATTERS
See Item 3. "Legal Proceedings" contained herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates
and foreign currency rates. Our exposure to interest rate risk is the result of
our need for periodic additional financing for our large operating losses and
capital expenditures associated with establishing and expanding our operations.
The interest rate that we will be able to obtain on debt financing will depend
on market conditions at that time, and may differ from the rates we have secured
on our current debt. Additionally, the interest rates charged by our present
lenders adjust on the basis of the lenders' prime rate.
Almost all of our sales have been denominated in U.S. dollars. A portion of our
expenses are denominated in currencies other than the U.S. dollar and in the
future a larger portion of our sales could also be denominated in non-U.S.
currencies. As a result, currency fluctuations between the U.S. dollar and the
currencies in which we do business could cause foreign currency translation
gains or losses that we would recognize in the period incurred. We cannot
predict the effect of exchange rate fluctuations on our future operating results
because of the number of currencies involved, the variability of currency
exposure and the potential volatility of currency exchange rates. We attempt to
minimize our currency exposure risk through working capital management and do
not hedge our exposure to translation gains and losses related to foreign
currency net asset exposures.
We do not hold or issue derivative, derivative commodity instruments or other
financial instruments for trading purposes. Investments held for other than
trading purposes do not impose a material market risk.
We believe that the relatively moderate rate of inflation in the United States
over the past few years and the relatively stable interest rates incurred on
short-term financing have not had a significant impact on our sales, operating
results or prices of raw materials. There can be no assurance, however, that
inflation or an upward trend in short-term interest rates will not have a
material adverse effect on our operating results in the future should we require
debt financing in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is set forth in Item 13 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
On April 30, 2000, the Company's directors and executive officers were:
Name Age Position
---- --- --------
Par Chadha 45 Chief Executive Officer, Chairman, Director
Xin Cheng, Ph.D. 44 President, Director
Leonard Hecht 63 Director (i)
Rohit Phansalkar 55 Director
Renn Zaphiropoulos 73 Director (i)
Christopher E. Sue 37 Vice-President of Finance
John K. Lines 40 General Counsel, Secretary
Arthur Trakas 47 Executive Vice-President Worldwide Sales
Gilbert G. Goldbeck 40 Chief Operating Officer, Entrada Networks
(i) member of Audit Committee and Compensation Committee
The Company's By-Laws provide that the members of the Board of Directors be
elected annually by the Shareholders of the Company for one-year terms. Each
director who is not an employee of the Company or its subsidiaries receives
$1,000 for each Board of Directors or committee meeting attended. Directors who
serve as the chairman of a committee receive an additional $500 for each
committee meeting attended. The Board of Directors has two committees: Audit and
Compensation. There are no family relationships between any directors and
officers.
None of our officers, except for Dr. Cheng whose employment agreement is
described below, is employed for a specified term.
Par Chadha has been our Chief Executive Officer since November 1996. Mr. Chadha
founded the Company in 1981 and has been a director since that time. He served
as our President and Chief Executive Officer from July 1981 through May 1993,
and as Chairman from July 1981 through June 1996. Mr. Chadha was a director and
Chairman of Builders' Warehouse Association, Inc. from March 1995 through
September 1996. He was Chairman, President and Chief Executive Officer of Oxford
Acquisitions Group, Inc. from 1994 to 1998. Mr. Chadha is also a director of
several privately held companies.
Xin Cheng, Ph.D., has been President and director of the Company since September
1995, and was Secretary from June 1993 to February, 1997. In January, 2000
Dr. Cheng became Chief Executive Officer and Chairman of the Board of Directors
of Sorrento Networks, Inc., our optical networking subsidiary. In 1995,
Dr. Cheng founded our optical networking division. From 1988 to 1990, Dr. Cheng
served as Senior Staff Scientist and from 1990 to 1993 as a Director of Advanced
Technology for Amoco Technology Company, a photonics technology development
company and a subsidiary of Amoco Oil Corporation. While at Amoco, Dr. Cheng led
their development of a WDM-based fiber optic high-resolution computer graphics
link, a high-dynamic range microwave fiber optic system, a fiber optic HDTV
transmission system, multiple fiber optic serial digital video transmission
systems as well as other technologies. Dr. Cheng holds a Ph.D. and M.S. in
Electrical Engineering from the University of California, Irvine, and a B.S.
degree in Physics from Nanjing University, China.
Leonard N. Hecht has served as one of our directors since June 1996 and a
director of Sorrento Networks since February 2000. Since 1994, he has been
President of Chrysalis Capital Group, an investment banking company specializing
in mergers, acquisitions and financing that he founded. From 1987 to 1993, Mr.
Hecht was Managing Director of the Investment Banking Group and head of the
Technology
32
Assessment Group of Houlihan Lokey Howard & Zukin, a financial advisory firm.
From 1984 to 1987, Mr. Hecht was the Vice Chairman of the Board and Chief
Executive Officer of Quantech Electronics Corp., a diversified publicly held
electronics company. Prior to joining Quantech, Mr. Hecht was a founding
principal of Xerox Development Corporation, a wholly owned subsidiary of the
Xerox Corporation. Xerox Development Corporation was active in strategic
planning, mergers and acquisition, divestitures, licensing, joint ventures and
venture investing for the Xerox Corporation.
Rohit Phansalkar has served as one of our directors since January 2000. Mr.
Phansalkar is a partner of Andersen Weinroth & Co. LP. Prior to joining Andersen
Weinroth, Mr. Phansalkar was the co-founder, Vice Chairman and CEO of Newbridge
Capital, a firm dedicated to making private equity investments in India. From
1993 to 1996 Mr. Phansalkar was a Managing Director of Oppenheimer & Co., where
he was the head of the Energy Finance Group. Mr. Phansalkar was the founder of
the The India Fund, a $510 mm closed-end fund listed on the NYSE. Prior to
joining Oppenheimer, Mr. Phansalkar was a Managing Director of Bear Stearns &
Co. He is a director of Zip Global Networks. Mr. Phansalkar received a BS in
engineering from Michigan Technological University and an MBA from Harvard
Graduate School of Business.
Renn Zaphiropoulos has served as one of our directors since March, 1998. Mr.
Zaphiropoulos also serves as a director of Optical Coating Laboratories, Inc.
and a director and consultant to a number of private, development stage
high-tech firms. Mr. Zaphiropoulos is presently an Adjunct Professor of Business
at Southern Utah University and is a frequent lecturer on a variety of
management subjects at the University of California at Santa Clara, Harvard
Business School, Columbia University and Stanford University. Mr. Zaphiropoulos
is a pioneer in the development of the electrostatic writing techniques for the
production of hard copy. In 1969 he co-founded Versatec which was merged into
Xerox Corporation in December 1975. He holds a B.S. in Engineering Physics and
M.S. in Physics, both from Lehigh University, a Doctor of Science from Rose
Hurlman Institute of Technology and a Doctor of Humanities from Southern
University.
Christopher E. Sue has been our Vice President of Finance since September, 1997.
From January 1996 to September 1997, he served as our Chief Financial Officer
and from February, 1997 to September, 1997 and from November 1998 to March 2000
as our Secretary. In December 1995 Mr. Sue became Chief Financial Officer of
Meret Communications, Inc. From 1993 to 1995, he was Accounting Manager at
Haskel International, Inc., and from 1990 to 1993 he was Assistant Controller at
Sun Computers, Inc. From 1986 to 1990, Mr. Sue was employed by KPMG Peat Marwick
in both its audit and management consulting practices. Mr. Sue is a certified
public accountant.
John K. Lines has served as our General Counsel since February 2000 and
Secretary since April 2000. From March 1998 to February 2000 Mr. Lines was
Senior Vice President, General Counsel and Secretary of ResortQuest
International, Inc., a publicly traded resort property management company. He
was General Counsel and Secretary of Insignia Financial Group, Inc., a publicly
traded fully integrated real estate services company from 1994 until March 1998.
He also served as Vice President and Secretary of Insignia Properties Trust from
1996 until March 1998. From May 1993 until June 1994, Mr. Lines was employed as
Assistant General Counsel and Vice President of Ocwen Financial Corporation, a
unitary thrift holding company. From October 1991 until April 1993, Mr. Lines
was employed as Senior Attorney of Banc One Corporation in Columbus, Ohio. Prior
to that Mr. Lines was in private practice with Squire Sanders & Dempsey in
Columbus, Ohio.
Arthur Trakas has been our Executive Vice President of Worldwide Sales since
September, 1997 and is responsible for the Company's sales efforts directed to
the OEM, carrier, VAR and government segments of the networking market. Mr.
Trakas joined us upon our acquisition of Rockwell Network Systems ("RNS"), which
he joined in 1991 as a regional sales manager. Mr. Trakas was named Director of
Sales for RNS in August, 1995. Mr. Trakas has over fifteen years of sales and
management experience, focused primarily on government customers through direct
sales, government systems integrators, resellers and distributors. Prior to
joining RNS, Mr. Trakas was a regional sales manager at Wang Federal. Mr. Trakas
holds a Bachelor of Science degree from Wheeling College.
33
Gilbert G. Goldbeck was appointed Chief Operating Officer, Network Access
products in September 1999 and was Vice President of Finance and Operations,
Network Access products since August 1998. He was the Controller for Cray
Communications from 1992 to 1998 and held various financial management positions
with Cray from 1986 to 1992. From 1985 to 1986 he was a financial analyst with
Kiplinger Editors. From 1983 to 1985 he was an internal auditor with Dyn Corp.
He is a Certified Public Accountant and holds a B.S. degree in Accounting from
the University of Maryland.
Our other key employees include:
Name Position
---- ---------
Oren Shaffer President and Chief Operating Officer, Sorrento Networks
Georges Wanet, Ph.D. Executive Vice President, Sorrento Networks
President, Sorrento Networks - Europe
Oren Shaffer has served as the President and Chief Operating Officer of Sorrento
Networks since March 2000 and as one of its directors since February 2000. Mr.
Shaffer has served as a consultant to SBC Corporation, a U.S.-based
multinational communications company, since January 2000. From 1994 to 2000, Mr.
Shaffer served in various executive roles including Executive Vice President and
Chief Financial Officer of Ameritech, the telecommunications company recently
merged with SBC Corporation. From 1984 to 1985, Mr. Shaffer was a Sloan Fellow
at the Graduate School of Business Administration at the Massachusetts Institute
of Technology. Mr. Shaffer is a director of Singapore Fund, an investment fund,
Sunshine Mining and Refining Company, a precious metals mining company, Taiwan
Equity Fund, an investment fund, and a trustee of the Lyric Opera of Chicago.
Georges Wanet, Ph.D. has served as the Executive Vice President of Sorrento
Networks, President of Sorrento Networks - Europe, and as one of its directors
since February 2000. From 1991 to January 2000, Dr. Wanet was a senior manager
and a member of the Group Leadership Committee of Belgacom, Belgium's national
telecommunications carrier, and a director of various companies within the
Belgacom Group. Dr. Wanet holds a Ph.D. in Applied Sciences and a M.S. in
Telecommunications and Electronic Engineering from Brussels University. Since
1992, he has served as a professor in business strategy at the Solvay Business
School of Brussels University.
34
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth the annual compensation for both individuals
who served as the Company's Chief Executive Officer ("CEO") for the fiscal
year ended January 31, 2000, and for the four most highly compensated
executive officers of the Company, other than the CEO, who were serving as
executive officers at the end of our fiscal year and whose salary and bonus
exceeded $100,000.
- --------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------
All Other
Name and Principal Year Annual Compensation Long-Term Compensation Compen-
Position sation
($)
----------------------------------------------------------------------
Salary Bonus Other Restricted Securities Long-
($) ($) Annual Stock Under- Term
Compen- Award(s) lying Incen-
sation ($) Awards tive
($) (#) Payouts
- -----------------------------------------------------------------------------------------------------------------------
Par Chadha, Chairman, 2000 230,000 0 0 0 70,000 0 0
Chief Executive 1999 147,500 0 0 0 349,164 0 0
Officer 1998 60,000 0 0 0 16,667 0 0
- -----------------------------------------------------------------------------------------------------------------------
Xin Cheng, 2000 180,000 8,365 0 0 100,000 0 0
President, Director 1999 125,031 51,066 0 0 196,183 0 0
1998 90,248 0 0 0 16,667 0 0
- -----------------------------------------------------------------------------------------------------------------------
Christopher E. Sue, 2000 134,904 27,947 0 0 15,000 0 0
VP Finance 1999 103,077 0 0 0 66,665 0 0
1998 95,000 0 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------
Arthur Trakas, 2000 181,546 0 0 0 26,402 0 0
Executive VP 1999 152,420 0 0 0 51,666 0 0
Worldwide Sales 1998 154,146 0 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------
Gilbert Goldbeck,
Chief Operating 2000 121,771 0 0 0 10,000 0 0
Officer, Network
Access
- -----------------------------------------------------------------------------------------------------------------------
LONG-TERM INCENTIVE PLANS
The Company has no long-term incentive plans other than the 1988 and
1997 Stock Option Plans and the 1997 Directors Stock Option Plan.
35
- -------------------------------------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------------------------------------------------
Individual Grants
- ---------------------------------------------------------------------------------------
Name Number of % of Total Exercise Market Expiration Potential Realizable Value at
Securities Options or Base Price on Date Assumed Rates of Stock Price
Underlying Granted to Price Date Appreciation for Option Term (A)
Options Employees ($/Sh) Granted
Granted (#) in Fiscal ($/Sh)
Year
---------------------------------
0% 5% ($) 10% ($)
($)
- -------------------------------------------------------------------------------------------------------------------------
Par Chadha 70,000 7.01% $ 7.11 $ 7.11 8-24-2009 0 313,001 793,206
- -------------------------------------------------------------------------------------------------------------------------
Xin Cheng 100,000 10.02% $ 7.11 $ 7.11 8-24-2009 0 447,144 1,133,151
- -------------------------------------------------------------------------------------------------------------------------
Christopher E. Sue 15,000 1.50% $11.00 $11.00 5-3-2009 0 103,768 262,968
- -------------------------------------------------------------------------------------------------------------------------
Arthur Trakas 25,002 2.50% $11.00 $11.00 5-3-2009 0 172,960 438,314
1,400 0.14% $15.56 $ 8.84 11-1-2009 0 0 10,328
- -------------------------------------------------------------------------------------------------------------------------
Gilbert Goldbeck 10,000 1.00% $ 7.11 $ 7.11 8-24-2009 0 44,714 113.315
- -------------------------------------------------------------------------------------------------------------------------
A) In accordance with Securities and Exchange Commission rules, these
columns show gains that might exist for the respective options,
assuming that the market price of the Company's common stock
appreciates from the date of the grant over the term of the option
at rates of 5% and 10%, respectively.
36
- -------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN 2000 AND
JANUARY 31, 2000 OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------------
Name Shares Value Number of Securities Underlying Value of Unexercised
Acquired Realized ($) Unexercised Options at Fiscal In-the-Money Options at FY-End
on Year-End (#) ($)(A)
Exercise
(#)
--------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
Par Chadha 74,834 210,037 528,499 0 21,505,471 0
- -----------------------------------------------------------------------------------------------------------------------
Xin Cheng 47,000 124,846 303,001 0 12,432.018 0
- -------------------------------------------------------------------------------------------------------------------------
Christopher E. Sue 3,000 92,531 31,167 40,832 1,212,281 1,682,730
- -------------------------------------------------------------------------------------------------------------------------
Arthur Trakas -- -- 37,017 39,384 1,274,809 1,576,243
- -------------------------------------------------------------------------------------------------------------------------
Gilbert Goldbeck 13,139 364,024 20,744 16,116 881,481 685,433
- -------------------------------------------------------------------------------------------------------------------------
A) Options are "in-the-money" if, on January 31, 2000, the market price of
the Common Stock ($49.5625) exceeded the exercise price of such
options. The value of such options is calculated by determining the
difference between the aggregate market price of the Common Stock
covered by such options on January 31, 2000, and the aggregate exercise
price of such options.
EMPLOYMENT AGREEMENTS
None of our officers, except for Dr. Cheng whose employment agreement
is described below, is employed for a specified term.
We had a four year employment agreement with Dr. Cheng ending November
23, 2003 which was subsequently superceded by a four year employment agreement
with Sorrento Networks ending March 3, 2004. The agreement provides for a salary
of $250,000 per year and a bonus equal to two year's base salary payable upon
the fourth anniversary of his employment with Sorrento Networks. This contract
may be terminated for cause and should his employment be terminated without
cause Dr. Cheng is entitled to receive two years' base salary.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The Securities Exchange Act of 1934 requires our directors and
executive officers and persons who own more than ten percent of a registered
class of our equity securities to file reports of beneficial ownership and
changes in beneficial ownership with the Securities and Exchange Commission. To
our knowledge, all filing requirements by our officers and directors were
complied with during the year ended January 31, 2000, except for one late filing
of a form 4 by Dr. Cheng with respect to the exercise of 47,000 options.
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 30,
2000, regarding the ownership of the Common Stock by (i) each Director of the
Company; (ii) each of the executive officers named in the Summary Compensation
Table, above; (iii) each person known to the Company to beneficially own 5% or
more of Common Stock; and (iv) all Directors and executive officers of the
Company as a group. Except as indicated, all persons named as beneficial owners
of Common Stock have sole voting and investment power with respect to the shares
indicated as beneficially owned by them.
-------------------------------------------------------------------------------
Common Stock
---------------------------
Name of Beneficial Owner (A) Number of Percentage of
Shares Outstanding
(1)
-------------------------------------------------------------------------------
Par Chadha 563,535 (B) 4.8%
-------------------------------------------------------------------------------
Xin Cheng 350,735 (C) 3.0%
-------------------------------------------------------------------------------
Leonard Hecht 120,417 (D) 1.0%
-------------------------------------------------------------------------------
Rohit Phansalkar 171,343 (E) 1.5%
-------------------------------------------------------------------------------
Renn Zaphiropoulos 56,251 (F) *
-------------------------------------------------------------------------------
Christopher E. Sue 31,546 (G) *
-------------------------------------------------------------------------------
Arthur Trakas 41,779 (H) *
-------------------------------------------------------------------------------
Gilbert Goldbeck 20,744 (I) *
-------------------------------------------------------------------------------
White Rock Capital Management, LP
3131 Turtle Creek Blvd., Suite 800 647,500 (J) 5.6%
Dallas, Texas 75219
-------------------------------------------------------------------------------
All Directors and executive officers as a
group 1,356,350 11.0%
-------------------------------------------------------------------------------
* Less than 1%
A) All information with respect to beneficial ownership of the shares is
based upon filings made by the respective beneficial owners with the
Securities and Exchange Commission or information provided by such
beneficial owners to the Company. Except as noted the addresses for
each beneficial owner is 2800 28th Street, Suite 100, Santa Monica, CA
90405.
B) Includes shares and options held in the name of R II Partners, Inc. and
Rand Research Corporation and exercisable options to acquire 228,499
shares of common stock. Mr. Chadha owns, directly and indirectly, 100%
of the outstanding capital stock of R II Partners, Inc. Does not
include 101,137 shares and exercisable options to acquire 350,001
shares held by his wife, their two children and RT Investments, Inc.,
in which shares and options Mr. Chadha disclaims beneficial ownership.
Mr. Chadha has neither investment nor voting power with respect to such
shares and options.
C) Includes exercisable options held by Dr. Cheng to acquire 251,508
shares of common and exercisable options to acquire 51,493 shares of
common stock held as custodian or trustee for minor children, as to
which beneficial ownership is disclaimed.
D) Includes shares and options held in the name of Chrysalis Capital Group
and exercisable options to acquire 92,086 shares of common stock. Mr.
Hecht owns, directly and indirectly, 100% of the outstanding capital
stock of Chrysalis Capital Group.
E) Includes 142,692 shares held in the name of FIBR Holdings, LLC and
exercisable options to acquire 14,583 shares of common stock. Mr.
Phansalkar is a manager of FIBR Holdings, LLC and has shared power to
vote and
38
dispose of such shares. Mr. Phansalkar disclaims beneficial ownership
of the shares held by FIBR Holdings, LLC except to the extent of his
beneficial ownership of the entity.
F) Includes exercisable options held by Mr. Zaphiropoulos to acquire
43,751 shares of common stock.
G) Includes exercisable options held by Mr. Sue to acquire 31,167 shares
of common stock.
H) Includes exercisable options held by Mr. Trakas to acquire 37,017
shares of common stock.
I) Includes exercisable options held by Mr. Goldbeck to acquire 20,744
shares of common stock.
J) White Rock Capital Management, LP, White Rock Capital, Inc. Thomas U.
Barton, and Joseph U. Barton are deemed to be the beneficial owner of
647,500 shares. This number consists of 397,000 shares held for certain
institutional clients of White Rock, 59,500 shares held for the account
of White Rock Partners, 185,000 shares held by SP White Rock LLC and
6,000 shares held for the account of White Rock management.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During fiscal 2000 we paid $40,000 to Renn Zaphiropoulos, director, for
management consulting services rendered to us and our Optical Networking
business unit.
During fiscal 1998, we made 8% demand loans totaling $165,000 to Chrysalis
Capital Group which were fully repaid with interest thereon during April, 1999;
the loans were collateralized by 20,408 shares of our common stock. There was no
accrued and unpaid interest due us as of January 31, 1999. During fiscal 2000
and 1999, we paid $190,070 and $25,000, respectively, in fees to Chrysalis
Capital Group for services rendered in connection with various amended loan and
security agreements. Leonard Hecht, director, owns directly and indirectly 100%
of the outstanding capital stock of Chrysalis Capital Group.
During fiscal 2000 FIBR Holdings, LLC purchased 679,483 unregistered shares of
our common stock for $7,500,000. In connection with this placement Humbert B.
Powell, III, a then director, received a finder's fee of $300,000. Andersen
Weinroth Capital Corp. ("AW") received a placement fee of $300,000 in connection
with this placement and Rohit Phansalkar, who subsequently became one of our
directors, is an officer of AW. FIBR Holdings, LLC has the right to nominate one
member of the Board of Directors to serve until the next annual shareholders'
meeting and has the right to participate in any stock offering by our optical
networking subsidiary, Sorrento Networks, Inc., to the extent of $7,500,000
subject to certain limitations. Mr. Phansalkar was nominated and joined our
Board of Directors on January 6, 2000.
On March 3, 2000, our Sorrento Networks, Inc. subsidiary completed a sale of
8,596,333 shares of its Series A Convertible Preferred Stock to a group of
investors receiving net proceeds of approximately $46.6 million. 1,467,891
shares were purchased for $8,000,000 pursuant to the previously contracted right
of participation by entities in which Mr. Phansalkar is partner or member. In
addition, AW received a placement fee of $1,950,000 paid through the issuance by
Sorrento of 357,799 shares of its Series A Convertible Preferred Stock. Mr.
Phansalkar disclaims beneficial ownership of these shares except to the extent
of his beneficial ownership of each entity. 2,697,248 shares of this placement
were purchased by Telcom-SNI Investors, LLC in which Rajendra Singh, who became
a director of Sorrento after the purchase, is Chairman of the Board and Chief
Executive Officer of Telcom-SNI Investors, LLC. In addition, Mr. Zaphiropoulos
purchased 45,872 of these shares for $250,000. Oren Shaffer, President, Chief
Operating Officer and director of Sorrento purchased 91,744 of these shares for
$500,000.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits and Consolidated Financial Statement Schedules
1. Financial Statements: (see index to financial statements at page F-1)
Independent Certified Public Accountants' Reports
Consolidated Balance Sheets at January 31, 2000 and 1999
Consolidated Statements of Operations for the Years Ended
January 31, 2000, 1999 and 1998
Consolidated Statements Comprehensive Income for the Years Ended
January 31, 2000, 1999 and 1998
Consolidated Statement of Stockholders' Equity for the Years Ended
January 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
January 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. Exhibits:
2. Stock Purchase Agreement dated as of June 1, 1996 between Osicom and BWA (A)
3.1 Restated Certificate of Incorporation dated June 14, 1988 (B)
3.2 Amended and Restated By-Laws of Registrant (C)
3.3 Series A Preferred Stock Certificate of Designation (D)
3.4 Series B Preferred Stock Certificate of Designation (A)
3.5 Series C Preferred Stock Certificate of Designation (A)
3.6 Series D Preferred Stock Certificate of Designation (E)
3.7 Series E Preferred Stock Certificate of Designation - (F)
3.8 Series B Preferred Stock Certificate of Designation - (F)
3.9 Certificate of Amendment to the Certificate of Incorporation dated January 16, 1998 - (O)
3.10 Certificate of Amendment to the By-Laws dated January 30, 1998 - (O)
4.1 Stock Option Agreement by and between the Registrant and United Jersey Bank dated as of
February 28, 1991-(D)
4.2 Incentive Stock Option Plan, as amended - (G)
4.3 1988 Stock Option Plan - (G)
4.4 Amended and Restated 1997 Incentive and Non-Qualified Stock Option Plan -(O)
4.5 1997 Directors Stock Option Plan - (H)
10.1 Line of Credit Agreement with Coast Business Credit dated May 28, 1995 and Modification
dated January 31, 1996 (I)
10.2 Acquisition Agreement of Dynair Electronics, Inc. dated May 31, 1995 (J)
10.3 Acquisition Agreement of Rockwell Network Systems, Inc. dated January 31, 1996 (K)
10.4 Acquisition Agreement of Digital Products, Inc. dated as of July 1, 1996 (L)
10.5 Acquisition Agreement of Cray Communications, Inc. dated as of July 1, 1996 (M)
40
10.7 Share Purchase Agreement of Asia Broadcasting and Communications Network, Ltd. dated as of
March 20, 1996 (N)
10.8 Cooperation and Supply Agreement with Asia Broadcasting and Communications Network, Ltd.
dated as of March 21, 1997 (N)
21 Subsidiaries of the Registrant - filed herewith
23.1 Consent of BDO Seidman LLP - filed herewith
23.2 Consent of Arthur Andersen & Co., L.L.P. - filed herewith
27 Financial data schedule - filed herewith
----------------
The foregoing are incorporated by reference from the Registrant's
filings as indicated:
A Form S-4 dated September 6, 1996
B Form 10-QSB for the quarter ended July 31, 1996
C Form 10-K for the year ended January 31, 1988
D Form 10-K for the year ended January 31, 1993
E Form S-3 dated February 25, 1997
F Form 10-KSB for the year ended January 31, 1997
G Proxy Statement dated May 13, 1988
H Proxy Statement dated November 21, 1997
I Form 10-KSB for year ended January 31, 1996
J Form 8-K dated June 8, 1995
K Form 8-K dated February 2, 1996
L Form 8-K dated September 12, 1996
M Form 8-K dated September 23, 1996
N Form 8-K dated April 10, 1997
O Proxy Statement dated December 1, 1999
------------------
NOTE: Certain previously filed exhibits are no longer being
incorporated by reference (and therefore not
numerically listed) as the underlying documents have
either expired or are no longer material or relevant.
(b) Reports on Form 8-K
--------------------
December 15, 2000 Private Placement of Common Shares
February 23, 2000 Private Placement by Sorrento Networks, Inc.
(a subsidiary of the Registrant) of its Series A
Convertible Preferred Stock
41
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
---------------
Independent Certified Public Accountants' Reports F-2 to F-3
Consolidated Balance Sheets as of January 31, 2000 and 1999 F-4
Consolidated Statements of Operations for the years ended
January 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Comprehensive Income for the years ended
January 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Shareholders' Equity for the years ended
January 31, 2000, 1999 and 1998 F-7 to F-9
Consolidated Statements of Cash Flows for the years ended
January 31, 2000, 1999 and 1998 F-10
Notes to Consolidated Financial Statements F-11 to F-35
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Shareholders of
Osicom Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Osicom
Technologies, Inc. (a New Jersey corporation) and subsidiaries (the "Company")
as of January 31, 2000 and 1999 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years ended
January 31, 2000, 1999 and 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the financial statements of a foreign subsidiary which statements
reflect net assets of $1,632,000 and $5,726,000 as of January 31, 2000 and 1999,
respectively, and total revenues of $20,819,000, $39,039,000 and $54,850,000 for
the years ended January 31, 2000, 1999 and 1998, respectively. These amounts are
included in the net investment in and results of discontinued operations in the
accompanying financial statements. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to the amounts included for such subsidiary, is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits, and reports of the other auditors, provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and
subsidiaries as of January 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years ended January 31, 2000,
1999 and 1998 in conformity with generally accepted accounting principles.
/s/ BDO Seidman LLP
- ------------------------
BDO Seidman LLP
Los Angeles, California
March 23, 2000
F-2
ARTHUR ANDERSEN
Arthur Andersen & Co.
21st Floor Edinburgh Tower
The Landmark
15 Queen's Road Central
Hong Kong
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
To: Uni Precision Industrial Limited and Subsidiaries
We have audited the accompanying balance sheets of Uni Precision Industrial
Limited and Subsidiaries (the "Group), incorporated in Hong Kong, as of January
31, 1999 and 2000 and the related statements of income, cash flows, and changes
in shareholders' equity for the years ended January 31, 1998, 1999 and 2000,
expressed in Hong Kong dollars. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Group as of January 31,
1999 and 2000, and the results of its operations and cash flows for the years
ended January 31, 1998, 1999 and 2000 in conformity with generally accepted
accounting principles in the United States of America.
/s/ Arthur Andersen & Co.
- -------------------------
Hong Kong,
March 3, 2000
F-3
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
- -------------------------------------------------------------------------------------------------------------------------
January 31, 2000 January 31, 1999
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 13,511 $ 3,480
Accounts receivable, net (Notes D and S) 11,639 17,164
Inventory, net (Notes B, D and S) 13,004 14,465
Prepaid expenses and other current assets (Note N) 1,503 2,480
Investment in marketable securities (Note B) 168,750 -
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 208,407 37,589
- --------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET (Notes C, D and E) 5,520 6,715
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Purchased technology, net (Notes A and B) 1,395 1,766
Capitalized software, net (Note B) 1,773 5,105
Other assets (Note B) 3,337 803
Net investment in discontinued operations (Note A) 2,833 14,818
- --------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 9,338 22,492
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 223,265 $ 66,796
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt (Note D) $ 5,407 $ 10,678
Current maturities of long term debt (Note E) 721 284
Accounts payable 6,417 9,022
Due to affiliates - 724
Accrued liabilities 5,882 4,551
Other current liabilities 494 931
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 18,921 26,190
- --------------------------------------------------------------------------------------------------------------------------
Long-term debt and capital lease obligations (Notes E and G) 1,806 1,748
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 20,727 27,938
- --------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes G and H)
STOCKHOLDERS' EQUITY (Note I)
Preferred stock, $.01 par value; cumulative dividends; liquidation
preference $6,466 including accumulated dividends 1 1
Common stock, $.30 par value; 16,667 shares authorized; 11,483 shares issued
11,474 shares outstanding at January 31, 2000; 8,924 shares issued and
8,844 shares outstanding at January 31, 1999 3,445 2,677
Additional paid-in capital 102,418 85,183
Accumulated deficit (67,771) (48,479)
Accumulated unrealized gain on marketable securities (Note B) 164,514 -
Treasury stock, at cost; 9 shares and 80 shares at January 31, 2000 and
January 31, 1999, respectively (69) (524)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 202,538 38,858
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 223,265 $ 66,796
==========================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------
Twelve Months Ended
January 31
----------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
NET SALES $ 68,372 $ 58,362 $ 65,811
COST OF SALES 36,590 32,477 37,078
- ----------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 31,782 25,885 28,733
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling and marketing 16,914 15,480 16,753
Engineering, research and development 11,695 9,778 7,075
General and administrative 12,753 10,315 8,597
Other operating expenses (Note A) 371 372 11,489
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 41,733 35,945 43,914
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (9,951) (10,060) (15,181)
- ----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (CHARGES)
Investment income 236 242 351
Interest expense (1,864) (1,325) (1,423)
Other income (charges) 19 74 (124)
Gain on sale of marketable securities (Note A) 13,970 - -
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (CHARGES) 12,361 (1,009) (1,196)
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX 2,410 (11,069) (16,377)
PROVISION FOR INCOME TAXES (Note L) - - -
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 2,410 (11,069) (16,377)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (Note A)
(NET OF INCOME TAX BENEFIT (PROVISION) OF $246, -0- AND $(246)) (12,419) (2,319) 343
ESTIMATED LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS
(NET OF INCOME TAX PROVISION OF -0-, -0-, AND -0-) (Note A) (11,644) - -
NET INCOME (LOSS) $ (21,653) $(13,388) $(16,034)
============================================================================================================================
INCOME (LOSS) PER COMMON SHARE (Note M):
BASIC
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 9,631 7,673 4,987
NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations 0.17 (1.69) (3.32)
Discontinued operations (2.50) (0.30) 0.07
- ----------------------------------------------------------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER COMMON SHARE $ (2.33) $ (1.99) $ (3.25)
============================================================================================================================
DILUTED
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (RESTATED, IN THOUSANDS) 10,605 7,673 4,987
NET INCOME (LOSS) PER COMMON SHARE:
Continuing operations 0.15 (1.69) (3.32)
Discontinued operations (2.27) (0.30) 0.07
- ----------------------------------------------------------------------------------------------------------------------------
DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (2.12) $ (1.99) $ (3.25)
============================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------
Twelve Months Ended
January 31
--------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME AND ITS COMPONENTS CONSIST
OF THE FOLLOWING:
Net income (loss) $ (21,653) $ (13,388) $ (16,034)
Change in unrealized gains on marketable securities 164,514 - -
- ----------------------------------------------------------------------------------------------------------------------------
NET COMPREHENSIVE INCOME (LOSS) $ 142,861 $ (13,388) $ (16,034)
============================================================================================================================
See accompanying notes to consolidated financial statements.
F-6
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
For the Year Ended January 31, 2000
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON PREFERRED ADDITIONAL TREASURY ACCUMULATED TOTAL
STOCK STOCK PAID IN ACCUMULATED STOCK UNREALIZED STOCKHOLDERS'
Shares Amount Shares Amount CAPITAL DEFICIT Shares Amount GAIN EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
January 31, 1999 8,924 $2,677 12 $ 1 $ 85,183 $(48,479) 80 $(524) $ - $ 38,858
Common stock placements,
net (Note J) 679 204 6,658 6,862
Preferred stock conversions
(Note I) 1,048 314 (7) - (314) -
Stock option and
warrant exercises
(Notes J and K) 820 246 8,298 (16) 119 8,663
Expenses paid with stock
issuances 3 1 58 (75) 489 548
Costs attributed to
stock issuances (81) (81)
Treasury stock purchases 20 (153) (153)
Unrealized gains on
available for sale
securities (Note B) 164,514 164,514
Pre-acquisition deficit and
additional paid in capital
related to former subsidiary
(Note A) 2,433 3,028 5,461
Deemed dividend
(Note I) 103 (103) -
Dividends paid 9 3 80 (564) (481)
Net loss (21,653) (21,653)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2000 11,483 $3,445 5 $ 1 $102,418 $(67,771) 9 $ (69) $164,514 $202,538
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-7
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
For the Year Ended January 31, 1999
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON PREFERRED ADDITIONAL TREASURY TOTAL
STOCK STOCK PAID IN ACCUMULATED STOCK STOCKHOLDERS'
Shares Amount Shares Amount CAPITAL DEFICIT Shares Amount EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at
January 31, 1998 6,896 $2,069 6 $ 1 $74,003 $(33,331) 3 $ (22) $ 42,720
Common stock placements,
net (Note J) 636 191 1,798 1,989
Preferred stock placements,
net (Note I) 8 1 7,419 7,420
Preferred stock conversions
(Note I) 1,133 340 (2) (1) (339) -
Debenture conversions
(Note F) 143 43 367 410
Stock option exercises 20 6 142 148
Stock issued in connection
with acquisitions
(Note A) 50 15 (15) -
Expenses paid with stock
issuances (Note J) 46 13 399 (8) 67 479
Costs attributed to
stock issuances (86) (86)
Cashless option exercises (265) (265)
Treasury stock purchases 85 (569) (569)
Deemed dividend
(Note I) 1,760 (1,760) -
Net loss (13,388) (13,388)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 1999 8,924 $2,677 12 $ 1 $85,183 $(48,479) 80 $(524) $ 38,858
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-8
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
For the Year Ended January 31, 1998
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON PREFERRED ADDITIONAL TREASURY TOTAL
STOCK STOCK PAID IN ACCUMULATED STOCK STOCKHOLDERS'
Shares Amount Shares Amount CAPITAL DEFICIT Shares Amount EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at
January 31, 1997 3,659 $1,098 42 $ 1 $49,246 $(17,297) 1 $(178) $ 32,870
Common stock placements,
net (Note J) 952 286 6,694 6,980
Preferred stock placements,
net (Note I) 8 1 6,174 6,175
Preferred stock conversions
and assigned calls, net
(Note I) 1,462 439 (44) (1) (438) -
Stock option exercises 23 7 72 79
Stock issued in connection
with acquisitions
(Note A) 373 112 4,678 4,790
Stock issued in connection
with investments
(Note J) 272 82 7,358 7,440
Expenses paid with stock
issuances (Note J) 108 31 572 603
Stock issued for debt 46 14 355 369
Costs attributed to
stock issuances (199) (199)
Cashless warrant exercises
(Note J) 2 1 (2,326) (2,325)
Common shares subject to
cash put by holders at
January 31, 1997 (Note A) 1,994 1,994
Treasury stock purchases 3 (22) (22)
Treasury stock
cancelation (1) (1) (177) (1) 178 -
Net loss (16,034) (16,034)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 1998 6,896 $2,069 6 $ 1 $74,003 $(33,331) 3 $ (22) $ 42,720
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-9
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
- --------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
---------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) from continuing operations $ 2,410 $(11,069) $(16,377)
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Intangible assets valuation allowances (Notes A and B) 1,742 - 8,530
Depreciation and amortization 4,624 3,274 2,383
Accounts receivable and inventory reserves 2,674 2,364 2,589
Account and note receivable recoveries - - 157
Expenses paid through issuances of securities 548 479 214
Gain on sale of marketable securities (13,970) - -
Changes in assets and liabilities net of effects of business entity
acquisitions and divestiture:
(Increase) decrease in accounts receivable (839) (5,592) 1,218
(Increase) decrease in inventories (3,963) (869) (1,834)
(Increase) decrease in other current assets (1,196) 300 (905)
Increase (decrease) in accounts payable 1,942 199 609
Increase in accrued expenses 3,729 18 758
Increase (decrease) in other current liabilities (437) 129 111
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN CONTINUING OPERATING ACTIVITIES (2,736) (10,767) (2,547)
NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 953 7,398 (484)
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,783) (3,369) (3,031)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (2,133) (1,614) (3,351)
Software development costs (Note B) (886) (2,048) (4,131)
Purchase of other assets (Note B) (3,597) (656) 50
Other receivables (Note J) 557 1,443 (2,000)
Cash received for sale subsidiary in excess of cash disposed (Note A) 13,717 - -
Advances to affiliates, net of repayments (Note A) (3,371) 97 627
Investing activities of discontinued operations (5,519) (952) (1,791)
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,232) (3,730) (10,596)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock (Note J) 6,862 1,989 8,259
Proceeds from issuance of convertible preferred stock (Note I) - 7,420 6,175
Proceeds from stock option and warrant exercises (Notes J and K) 8,165 148 51
Proceeds from issuance of short-term debt, net of repayments (Note D) (690) 873 1,306
Proceeds from long-term debt (Note E) 988 362 126
Repayment of long-term debt (Note E) (266) (89) (765)
Debt issued in acquisitions net of payments - - (3,279)
Repayment of liability due on cashless warrant exercise (Note J) - - (1,567)
Dividends paid (481) - -
Treasury stock purchases (153) (569) (22)
Other (81) (86) (183)
Financing activities of discontinued operations (1,298) (891) 2,067
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,046 9,157 12,168
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,031 2,058 (1,459)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 3,480 1,422 2,881
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 13,511 $ 3,480 $ 1,422
====================================================================================================================================
See accompanying notes to consolidated financial statements.
F-10
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
Osicom Technologies, Inc. (the "Company," "We," "Our," or "Us") through
its subsidiaries designs, manufactures and markets integrated networking and
bandwidth aggregation products for enhancing the performance of data and
telecommunications networks. Our products are deployed in telephone companies,
Internet Service Providers, governmental bodies and the corporate/campus
networks that make up the "enterprise" segment of the networking marketplace. We
have facilities in Annapolis Junction, Maryland, San Diego, California and Santa
Monica, California. In addition, we have various sales offices located in the
United States and Europe. Our former discontinued Far East operation has
facilities in China. Our former subsidiary, NETsilicon, Inc., is located in
Waltham, Massachusetts. We market and sell our products and services through a
broad array of channels including worldwide distributors, value added resellers,
original equipment manufacturers ("OEM's"), local and long distance carriers and
governmental agencies.
The accompanying consolidated financial statements are the
responsibility of the management of the Company.
A. THE COMPANY, BASIS OF PRESENTATION AND DISCONTINUED OPERATIONS
The Company, incorporated in New Jersey on July 7, 1981, operates as a
holding company for its various subsidiaries and their divisions, more fully
described below. The companies and assets acquired have been integrated in
accordance with product lines: Optical Networking products (which includes
Sorrento Networks), Network Access products (doing business as Entrada
Networks), and NETsilicon, Inc. (formerly Embedded Networking Solution
products). For reference purposes acquired businesses have been identified by
legal entity, which is not indicative of the organizational integration of the
operations of the Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates that affect the
reported amounts of assets, liabilities, revenues and expenses, the disclosure
of contingent assets and liabilities and the values of purchased assets and
assumed liabilities in acquisitions. Actual results could differ from these
estimates.
OPTICAL NETWORKING - This segment consists of Sorrento Networks
("Sorrento"), Meret Communications, Inc. ("Meret" doing business as Meret
Optical Communications), and Sciteq Communications, Inc. ("Sciteq"). Sorrento
develops and markets metropolitan optical networking systems that are used in
both interoffice and access networks. Meret designs, manufactures, and markets
distance extension networking equipment. Sciteq designs and markets products
based on radio frequency synthesis technologies.
NETWORK ACCESS - This segment is currently doing business as Entrada
Networks and consists of Osicom Technologies, a Delaware corporation (formerly
known as Cray Communications, Inc., "Cray"), Rockwell Network Systems ("RNS", a
division of Cray), and Distributed Systems International, Inc. ("DSI"). Entrada
Networks develops, manufactures and markets an extensive range of communications
products and systems for remote access and internetworking markets.
To reflect the decline in net realizable value of purchased assets as
the result of changing market conditions Entrada Networks recorded, as other
operating expense, a reduction to the net book value of purchased technology of
$4,643 during the quarter ended July 31, 1997.
NETSILICON - This segment consists of NETsilicon, Inc. ("NSI"). On
September 15, 1999 NSI completed an initial public offering in which 6,037,500
shares of its common stock were sold (3,537,500 shares by NSI and 2,500,000
shares by us). NSI received net proceeds of $22,249 and we received net proceeds
of $15,382. In
F-11
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
addition, NSI repaid advances due us of $5,884. In connection with this
offering, our remaining 55.4% interest became non-voting shares. Accordingly,
the accompany financial statements reflect the results of NSI through September
14, 1999 at which time our remaining interest is accounted for as an "available
for sale" security. Under this accounting, the 7.5 million shares of NSI held by
us are marked-to-market at the end of each reporting period with the difference
between our basis and the fair market value as reported on Nasdaq reported as a
separate element of stockholders' equity and is included in the computation of
comprehensive income. Balances due from and to NSI are included in "due from
affiliates" and "due to affiliates" in the accompanying balance sheets.
DISCONTINUED OPERATIONS - Our Far East business unit, which includes
Uni Precision Industrial Limited ("FED"), has been accounted for as a
discontinued operation pursuant to our formal adoption on May 15, 1999 of a plan
to sell this division. As of January 31, 2000, we agreed to sell FED to a group
led by its Hong Kong-based management for $2,500 in cash in repayment of our
advances to FED and a $3,000 non-voting redeemable preferred security to be
issued at closing. This security is redeemable for $3,000 in the event of a
sale, public offering, or debt or equity financing by FED in excess of $7,500
and has not been considered in the estimated proceeds from disposal due to the
uncertainty of future collection. Net assets to be disposed of, at their
expected realizable values, have been separately classified in the accompanying
balance sheet at January 31, 2000, and the January 31, 1999 balance sheet has
been restated to conform with the current year's presentation.
During the year ended January 31, 2000, we recorded a reduction to the
estimated realizable value of the net assets of this discontinued operation of
$11,644 which has been separately presented as the estimated loss on the
disposal of discontinued operations in the accompanying income statement. Net
assets of discontinued operations at January 31, 2000 and 1999 consist of:
2000 1999
-------- --------
Cash $ 398 $ 2,315
Accounts receivable, net 2,862 5,316
Inventory, net 2,135 3,228
Other current assets 367 361
Property, plant and equipment, net 7,962 9,309
Excess cost over net assets acquired - 6,261
Other non-current assets 342 8,832
------- -------
Total assets 14,066 35,622
------- -------
Accounts payable and other current liabilities 4,444 14,355
Short-term debt 791 4,537
Long-term debt, current portion 448 392
Long-term debt, non-current portion 918 1,142
Deferred income taxes - 378
Intercompany payable 5,833 -
------- -------
Total liabilities 12,434 20,804
------- -------
Net assets to be disposed of 1,632 14,818
Less: valuation adjustment (1,632) -
------- -------
- 14,818
Recoverable receivable 2,833 -
------- -------
Net investment in discontinued operations $ 2,833 $14,818
======= =======
F-12
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
Operating results of this discontinued operation for the year ended
January 31, 2000 are shown separately in the accompanying income statement. The
income statements for the years ended January 31, 1999 and 1998 have been
restated to conform to the current year's presentation. The operating results of
this discontinued operation for the years ended January 31, 2000, 1999 and 1998
consist of:
2000 1999 1998
-------- -------- -------
Net sales $ 20,819 $39,039 $54,850
Gross profit 5,022 9,156 8,410
Income (loss) from operations (11,948) (1,876) 639
Net income (loss) (12,419) (2,319) 343
Cash flows of this discontinued operation for the year ended January
31, 2000 are shown separately in the accompanying statement of cash flows. The
cash flow statements for the years ended January 31, 1999 and 1998 have been
restated to conform to the current year's presentation. The cash flows provided
by (used in) this discontinued operation for the years ended January 31, 2000,
1999 and 1998 consist of:
2000 1999 1998
-------- -------- --------
Operating activities $ 953 $7,398 $ (484)
Investing activities (5,519) (952) (1,791)
Financing activities (1,298) (891) 2,067
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The balance sheets and the consolidated
statement of operations for the years ended January 31, 2000 and 1999 and the
consolidated statement of operations for the year ended January 31, 1998 reflect
the accounts of Osicom and all subsidiaries controlled by Osicom after the
elimination of significant intercompany transactions and balances. The
consolidated statement of operations for the year ended January 31, 2000
includes the results of NSI through September 15, 1999 after which date Osicom
no longer controlled NSI. (See Note A). The consolidated group is referred to
individually and collectively as the "Company," "We," "Our," or "Us".
USE OF ESTIMATES - The financial statements are prepared in conformity
with generally accepted accounting principles which requires management to make
estimates that affect the reported amounts of assets, liabilities, revenues and
expenses, the disclosure of contingent assets and liabilities and the values of
purchased assets and assumed liabilities in acquisitions. Actual results could
differ from these estimates.
CASH AND CASH EQUIVALENTS - All cash on hand and in banks, certificates
of deposit and other highly-liquid investments with original maturities of three
months or less, when purchased.
ACCOUNTS AND NOTES RECEIVABLE - In the normal course of business, we
extend unsecured credit to our customers related to the sales of various
products. Typically credit terms require payment within thirty days from the
date of shipment. We evaluate and monitor the creditworthiness of each customer
on a case-by-case basis.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - We provide an allowance for doubtful
accounts based on our continuing evaluation of our customers' credit risk. We
generally do not require collateral from our customers.
F-13
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
INVENTORY - Inventory, comprised of raw materials, work in process,
finished goods and spare parts, are stated at the lower of cost (first-in,
first-out method) or market. Inventories at January 31, 2000 and 1999 consist
of:
2000 1999
-------- --------
Raw material $ 9,024 $ 9,547
Work in process 3,677 5,430
Spare parts 141 190
Finished goods 4,232 2,787
-------- -------
17,074 17,954
Less: Valuation reserve (4,070) (3,489)
-------- --------
$13,004 $ 14,465
======== ========
MARKETABLE SECURITIES - Marketable securities, which consist of equity
securities that have a readily determinable fair value and do not have sale
restrictions lasting beyond one year from the balance sheet date, are classified
into categories based on our intent. Investments not classified as held to
maturity, those for which we have the intent and ability to hold, are classified
as available for sale. Our investment in NETsilicon is classified as available
for sale and is carried at fair value, based upon quoted market prices, with net
unrealized gains reported as a separate component of stockholders' equity until
realized. Unrealized losses are charged against income when a decline in fair
value is determined to be other than temporary. At January 31, 2000 marketable
securities were as follows:
Unamortized cost $ 4,236
Unrealized gain 164,514
--------
Fair value $168,750
========
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques as appropriate. We believe that there are no material
differences between the recorded book values of our financial instruments and
their estimated fair value
PROPERTY AND EQUIPMENT - Property and equipment are recorded at
historical cost. Depreciation and amortization are provided over the estimated
useful lives of the individual assets or the terms of the leases if shorter
using accelerated and straight-line methods. Useful lives for property and
equipment range from 3 to 15 years. Depreciation of land improvements and
buildings is computed using the straight-line method over 39 years.
Capitalized leases are initially recorded at the present value of the
minimum payments at the inception of the contracts, with an equivalent liability
categorized as appropriate under current or non-current liabilities. Such assets
are depreciated on the same basis as described above. Interest expense, which
represents the difference between the minimum payments and the present value of
the minimum payments at the inception of the lease, is allocated to accounting
periods using a constant rate of interest over the lease.
Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the asset's undiscounted expected cash flows are not
sufficient to recover its carrying amount. We measure impairment loss by
comparing the fair market value, calculated as the present value of expected
future cash flows, to its net book value. Impairment losses, if any, are
recorded currently.
SOFTWARE DEVELOPMENT - Software development costs where technological
feasibility has not been established are expensed in the period in which they
occurred, otherwise, development costs that will become an integral part of our
products are deferred in accordance with Statement of Financial Accounting
Standards Nos. 2 and 86. The deferred costs are amortized using the
straight-line method over the remaining estimated economic life of the product
or the ratio
F-14
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
that current revenues for the product bear to the total of current and
anticipated future revenues for that product. Amortization expense for the years
ended January 31, 2000, 1999 and 1998 was $1,841, $865 and $454, respectively,
over 3 to 5 years. Accumulated amortization was $1,125 and $1,085 as of January
31, 2000 and 1999, respectively.
The recoverability of capitalized software costs are reviewed on an
ongoing basis primarily based upon projections of discounted future operating
cash flows from each software product line. The excess amount, if any, of the
remaining net book value over the calculated amount is fully reserved. During
the quarter ended January 31, 2000 we recorded a reduction to the net book value
of our capitalized software development costs of $1,742, recorded as engineering
expense, to reflect the decline in the net realizable value of these assets as a
result of changing market conditions. During the quarter ended July 31, 1997,
the Company recorded a reduction to the net book value of its capitalized
software development costs of $2,719, recorded as other operating expense, to
reflect the decline in the net realizable value of these assets as the result of
changing market conditions.
PURCHASED TECHNOLOGY - Technology assets were acquired in connection
with the acquisitions of Cray, its RNS division and Sciteq. These assets were
analyzed during and after the close of the related acquisition. The discounted
projected future cash flow from proven technology and software are capitalized
and amortized over their remaining estimated economic life (7 years) using the
straight-line method. Accumulated amortization was $1,251 and $880 at January
31, 2000 and 1999, respectively.
We assess the recoverability of purchased technology primarily by
determining whether the amortization of the net book value of purchased
technology over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of the impairment, if
any, of the net book value of the excess cost over net assets acquired is
measured by determining the fair value of these assets primarily based on
projected discounted future operating cash flows from the purchased technologies
using a discount rate commensurate with our cost of capital. During the quarter
ended July 31, 1997, Cray and RNS recorded reductions to the net book value of
purchased technology of $4,643 to reflect the decline in the fair value of these
assets as the result of changing market conditions. This reduction has been
recorded as other operating expense.
RESEARCH AND DEVELOPMENT - We expense research and development costs as
incurred in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 2, "Accounting for Research and Development Costs". Research and development
costs are costs associated with products or processes for which technological
feasibility has not been proven and future benefits are uncertain. In-process
research and development purchased by us includes the value of products and
processes in the development stage and have not reached technological
feasibility; this amount is expensed at the date of purchase.
OTHER INTANGIBLE ASSETS (LOAN COSTS AND CUSTOMER LISTS) - Loan costs
represent legal and other costs associated with loans and are amortized on a
straight-line basis over the life of the loan. Customer lists were amortized on
a straight-line basis over their estimated economic life (5 years); as a result
of changing market conditions we recorded a reduction to the net book value of
our customer list of $812 to reflect the decline in the net realizable value of
this asset and there is no remaining cost after this reduction. This reduction
has been recorded as an other operating expense during fiscal 1998.
OTHER INVESTMENTS - Other investments, included in other assets,
include non-marketable securities held in other companies including a privately
held competitive local exchange carrier. During the fourth quarter of fiscal
2000 we exchanged $3,000 of trade receivables due us from this customer for
333,334 shares of its convertible preferred stock, a 5.9% equity interest on a
fully diluted basis. These shares are entitled to a cumulative preferred
dividend of $240 per year, are entitled to nominate one member to the customer's
board of directors, vote as part of single class for
F-15
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
one member of its board of directors and are convertible into 333,334 shares of
its common stock.
During fiscal year 2000 we made sales of $5,496 to this customer of our
optical networking business unit under a long-term equipment financing
agreement. The purchase agreement with this customer provides for invoiced
installation and other deployment expenses not to exceed 10% of the equipment
cost. The terms of the financing agreement provide that the customer may convert
any balances outstanding longer than 90 days into a level 35-month term note at
11% per annum interest. We financed $3,328 of receivables, including deployment
expenses of $120, during fiscal 2000 for this customer and $3,000 of the then
unpaid note was exchanged for our equity interest in the customer. The remaining
balance of the note and accrued interest of $344,000 was paid in cash.
REVENUE RECOGNITION - We generally recognize product revenue when the
products are shipped, all substantial contractual obligations, if any, have been
satisfied, and the collection of the resulting receivable is reasonably assured.
Revenue from installation is recognized as the services are performed to the
extent of the direct costs incurred. To date, installation revenue has not been
material. Revenue from service obligations, if any, is deferred and recognized
over the life of the contract. Inventory or demonstration equipment shipped to
potential customers for field trials is not recorded as revenue. We accrue for
warranty costs, sales returns and other allowances at the time of shipment.
Although our products contain a software component, the software is not sold
separately and we are not contractually obligated to provide software upgrades
to our customers.
WARRANTY AND CUSTOMER SUPPORT - We typically warrant our products
against defects in materials and workmanship for a period of one to five years
from the date of sale and a provision for estimated future warranty and customer
support costs is recorded when revenue is recognized. To date, warranty and
customer support costs have not been material.
INCOME TAXES - Income taxes are accounted for in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes." The statement employs an asset and liability approach for financial
accounting and reporting of deferred income taxes generally allowing for
recognition of deferred tax assets in the current period for future benefit of
net operating loss and research credit carryforwards as well as items for which
expenses have been recognized for financial statement purposes but will be
deductible in future periods. A valuation allowance is recognized, if on the
weight of available evidence it is more likely than not that some portion or all
of the deferred tax assets will not be realized. (See Note L).
ADVERTISING - We expense advertising expenditures as incurred.
Advertising expenses consist of allowances given to customers as well as direct
expenditures.
INCOME AND LOSS PER COMMON SHARE - In 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings Per Share" effective for
financial statements issued for period ending after December 15, 1997, including
interim periods. SFAS 128 requires dual presentation of basic and diluted
earnings per share ("EPS") on the face of the income statement. It also requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. (See Note M).
This statement also requires restatement of all prior-period EPS data presented.
The adoption had no effect on the calculation of EPS. Basic income and loss per
common share is computed by dividing net income or loss available to common
shareholders by the weighted average number of common shares outstanding during
each period presented. Diluted EPS is based on the weighted average number of
common shares outstanding as well as dilutive potential common shares, which in
our case consist of convertible securities outstanding, shares issuable pursuant
to contracts that may be settled in stock, shares issuable under stock benefit
plans, and shares issuable pursuant to warrants. In computing diluted EPS, net
income or loss available to common shareholders is adjusted for the after-tax
amount of interest expense recognized in the period associated with convertible
debt. Potential common shares are not included in the diluted loss per share
computation for the years ended January 31, 1999 and 1998 as they would be
anti-dilutive. All references in the financial statements of common shares and
per share data give effect to the 1-for-3 stock split effective July 24, 1998.
FOREIGN CURRENCY TRANSLATION - Our foreign operations have been
translated into U.S. dollars in accordance with the principles prescribed in
SFAS No. 52, "Foreign Currency Translation". For the periods presented the
current rate method was used whereby all assets and liabilities are translated
at period end exchange rates, and the resultant translation adjustments would
have been included as a separate component of stockholders' equity had such
F-16
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
adjustments been material. Revenues and expenses are translated at the average
rates of exchange prevailing throughout the period, and the resultant gains and
losses are included in net earnings.
STOCK-BASED COMPENSATION - We account for stock-based compensation
utilizing the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
compensation cost for stock options issued to employees is measured as the
excess, if any, of the fair market price of our common stock at the date of
grant over the amount an employee must pay to acquire the stock. (See Note K).
DERIVATIVE INSTRUMENTS - SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," is effective for financial statements with
fiscal quarters of all fiscal years beginning after June 15, 2000. The statement
establishes standards for accounting for derivatives and hedging instruments of
which we currently have none. We do not expect the adoption of SFAS No. 133 to
have a material effect, if any, on our financial position or results of
operations.
COMPUTER SOFTWARE FOR INTERNAL USE - The Accounting Standards Executive
Committee issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," is effective for
financial statements with fiscal years beginning after December 15, 1998. The
SOP provides guidance on accounting for the costs of computer software developed
or obtained for internal use. The SOP requires that we continue to capitalize
certain costs of software developed for internal use once certain criteria are
met. The adoption of SOP 98-1 had no effect on our financial position or results
of operations.
START-UP COSTS - Statement of Opinion 98-5, "Reporting on the Costs of
Start-up Activities," is effective for financial statements for fiscal years
beginning after December 31, 1998. The SOP provides guidance and examples of the
types of expenses associated with one-time (start-up) activities which under
this SOP must be expensed as incurred. The adoption of SOP 98-5 had no effect on
our financial position or results of operations.
C. PROPERTY AND EQUIPMENT
Property and equipment of the Company consisted of the following
components as of January 31, 2000 and 1999:
2000 1999
------ -----
Manufacturing, engineering and plant equipment and software $ 20,397 $ 23,109
Office furniture and fixtures 1,936 2,048
Land and building 1,779 1,779
Leasehold and building improvements 919 1,015
-------- --------
Total property and equipment 25,031 27,951
Less: Accumulated depreciation (19,511) (21,236)
-------- --------
Net book value $ 5,520 $ 6,715
======== ========
Depreciation expense for fiscal 2000, 1999 and 1998 was $2,413, $2,038
and $1,301, respectively.
F-17
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
D. SHORT TERM DEBT
Short term debt at January 31, 2000 and 1999 consisted of the
following:
2000 1999
-------- --------
Floating interest rate loan (2.5% over Coast's prime rate)
secured by all the tangible assets of Meret; weighted
average interest rate for the year ended January 31, 2000 was 13.2% $3,143 $ 2,898
Floating interest rate loan (2.5% over Coast's prime rate)
secured by all the tangible assets of Cray; weighted average
interest rate for the year ended January 31, 2000 was 13.4% 2,264 4,550
Floating interest rate loan (2.5% over Coast's prime rate)
secured by all the tangible assets of NSI; weighted average
interest rate for the period ended September, 2000 was 12.9% - 3,192
Floating interest rate loan (1% over bank's base lending rate)
secured by accounts receivable and a director's personal
guarantee; weighted average interest rate for the year ended
January 31, 2000 was 10.1% 38
---------- --------
$5,407 $10,678
========== ========
Meret has a line of credit of $8,000 from Coast Business Credit
("Coast"); the line of credit is collateralized by substantially all the assets
of Meret including accounts receivable, inventory and property and equipment.
Osicom has guaranteed this line to the extent of $1,000. This line of credit
provides for interest at 2.5% over the bank's prime rate but not less than 8%
(11.0% at January 31, 2000). In addition, we issued to Coast warrants to
purchase shares of our common stock at the then market prices at funding: 3,334
shares of our common stock at $10.02 per share expiring June 11, 2000 and 13,334
shares of our common stock at $15.94 per share expiring June 1, 2001 ( See Note
J). Advances are limited to 80% of eligible accounts receivable and 40% of
eligible inventory not to exceed $2,000; this line also provides for a $500
letter of credit sub-line. The agreement automatically renews for successive one
year terms on a continuous basis at February 1st of each year unless terminated
by written notice of either party or by default. Additionally, the agreement
provides for term loans more fully described in Note E. The highest amount
outstanding was $4,838 and $6,346 during fiscal years 2000 and 1999,
respectively. The average amount outstanding was $3,274 and $2,938 during fiscal
years 2000 and 1999, respectively.
Entrada Networks has a line of credit of $7,000 from Coast; the line of
credit is collateralized by substantially all the assets of Cray and a guarantee
by Osicom. Advances are limited to 80% of eligible receivables and 30% of
eligible inventory. The loan bears interest at 2.5% over the bank's prime rate
but not less than 8%; the interest rate on the line of credit was 11.0% at
January 31, 2000. The agreement automatically renews for successive one year
terms on a continuous basis at February 1st of each year unless terminated by
written notice of either party or by default. The highest amount outstanding was
$5,283 and $4,730 during fiscal years 2000 and 1999, respectively. The average
amount outstanding was $4,156 and $4,059 during fiscal years 2000 and 1999,
respectively.
NSI has a line of credit of $5,000 from Coast; the line of credit is
collateralized by substantially all the assets of NSI. Advances are limited to
80% of eligible receivables and 45% of eligible inventory. The loan bears
interest at 2.5% over the bank's prime rate but not less than 8%; the interest
rate on the line of credit was 10.75% at September 15, 1999. The agreement
expires February 1, 2001. NSI reduced its borrowings under this line of credit
to $1,000 with a portion of the proceeds of its initial public offering. The
highest and average amounts outstanding were $4,021 and $3,314 during the period
ended September 15, 1999. The highest amount and average amounts outstanding
were $3,478 and $2,615 during the year ended January 31, 1999.
F-18
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
Osicom had a revolving demand loan agreement with Banca di Roma which
provided for interest at 1% above the bank's base lending rate, which was 8.75%,
at April 30, 1999 when the loan was paid in full. The line of credit was
collateralized by accounts receivable and personally guaranteed by one of our
directors. The highest amount outstanding was $38 and $219 during fiscal 2000
and 1999, respectively. The average amount outstanding was $9 and $153 during
fiscal 2000 and 1999, respectively.
Osicom had a $2,500 short term loan from a group of private investors
with interest at 1.25% per month and a loan fee of $250 which was due August 31,
1999 and September 30, 1999. Principal of $1,400 and the loan fee was repaid
during August and September, 1999. The remaining balance of $1,100 was converted
into 125,000 shares of common stock on September 30, 1999 through the exercise
of a warrant. Weighted average interest rate on this loan was 34.8%.
The Company is in compliance with its debt covenants at January 31,
2000.
E. LONG TERM DEBT
Long term debt at January 31, 2000 and 1999 consisted of the following:
2000 1999
-------- --------
Variable rate 30 year mortgage note payable (5.5% over
LIBOR rate); interest rate at January 31, 2000 was 11.6% $ 1,303 $ 1,312
Floating interest rate term loans (2.5% over Coast's prime
rate) secured by machinery and equipment of Meret;
interest rate for year ended January 31, 2000 was 11.0% 225 -
Floating interest rate term loans (2.5% over Coast's prime
rate) secured by machinery and equipment of Cray;
interest rate for year ended January 31, 2000 was 11.0% 345
Obligations under finance leases (See Note G) 654 720
------- -------
2,527 2,032
Less: Current portion 721 284
------- -------
$ 1,806 $ 1,748
======= =======
On March 25, 1996, Meret purchased land and building in San Diego,
California for $1,779 in cash. On April 24, 1996, Meret entered into a mortgage
agreement with a lender in the amount of $1,331 amortized over 30 years with an
adjustable interest rate of 5.5% over the LIBOR rate, adjusted bi-annually.
Monthly principal and interest payments are $13. The interest rate at January
31, 2000 was 11.6%. Net book value of the property securing this mortgage was
$1,653 and $1,683 at January 31, 2000 and 1999, respectively.
Long term debt including capitalized leases at January 31, 2000 is
payable by year as follows:
2002 $ 721
2003 369
2004 119
2005 51
2006 12
2007 and later 1,255
------
$2,527
======
F-19
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
F. DEBENTURES PAYABLE
At January 31, 2000, no debentures remained outstanding. We have issued
873,121 shares of our common stock in conversions of these securities and
accrued interest thereon including 143,115 during the year ended January 31,
1999. We had the right to call the debentures prior to conversion at 90% of face
value and had the right to assign this call option. The debentures bore interest
at 8% beginning specified periods after date of issue payable in our common
shares. The debentures were convertible at the average closing price as reported
by Nasdaq for the five preceding business days not to exceed $18.00 per share.
Including the 2.5% commission imputed on these placements the effective
annualized interest rate on these securities for the period they were
outstanding was approximately 13%.
G. LEASES AND OTHER COMMITMENTS
Rental expense under operating leases was $1,533, $1,733 and $1,729 for
the years ended January 31, 2000, 1999 and 1998, respectively. The table below
sets forth minimum payments under capital and operating leases with remaining
terms in excess of one year, at January 31, 2000:
Capital Operating
Leases Leases
------ ---------
2001 $ 385 $ 741
2002 222 504
2003 92 480
2004 42 840
2005 - -
------ -------
741 $2,565
=======
Less: Amount representing interest (87)
-----
Present value of minimum annual rentals $ 654
=====
The net book value of equipment under capital leases was $734 and $739
at January 31, 2000 and 1999, respectively.
In November, 1999, we entered into a four year employment agreement
with our President which was subsequently superceded by a four year employment
agreement with Sorrento in March, 2000. The agreement provides for a salary of
$250,000 per year and a bonus equal to two year's base salary payable upon the
fourth anniversary of his employment with Sorrento Networks. This contract may
be terminated for cause, and should his employment be terminated without cause,
Dr. Cheng is entitled to receive two years' base salary.
Under the terms of a purchase agreement as of May 31, 1995, we are
obligated to pay the seller additional cash consideration equal to a percentage
of net revenues in excess of $5,000 within a post-closing year derived from the
sales of the acquired product line, for each of the five years subsequent to the
acquisition date or through May 31, 2000. As of January 31, 2000, no liability
related to this additional consideration has been incurred as the target net
revenues have not been met.
H. LITIGATION
In August, 1999, a consolidated class action complaint was filed in the
United District Court for the Central District of California against the Company
and certain present and former officers and directors. The consolidated
F-20
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ---------------------------------------------------------------
complaint generally alleges that, during the purported class action period, the
defendants made false and misleading public statements related to a contract
entered into by our former discontinued Far East business unit with a Japanese
customer. The consolidated complaint asserts that the defendants' conduct
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and
SEC Rule 10b-6 promulgated thereunder, as well as state common law. The
consolidated complaint does not specify an amount of damages. We are defending
the class action vigorously. An unfavorable outcome in such litigation could
have a material adverse affect on our financial condition and results of
operations.
We and our subsidiaries are involved in various other legal proceedings
and claims incidental to the normal conduct of our business. Although it is
impossible to predict the outcome of any outstanding legal proceedings, we
believe that such legal proceedings and claims, individually and in the
aggregate, are not likely to have a material effect on our financial position,
the results of operations or cash flows.
I. STOCKHOLDERS' EQUITY
The Company is authorized to issue the following shares of stock:
16,666,667 shares of Common Stock ($.30 par value)
2,000,000 shares of Preferred Stock ($.01 par value) of which
the following series have been designated:
2,500 shares of Preferred Stock, Series A
1,000 shares of Preferred Stock, Series B
10,000 shares of Preferred Stock, Series C
3,000 shares of Preferred Stock, Series D
1,000,000 shares of Preferred Stock, Series E
The Company has outstanding the following shares of preferred stock:
Shares Par Liquidation
Outstanding Value Preference
----------- ----- -----------
Series A 2,500 $1 $2,500
Accrued, unpaid dividends 1,113
Series D 2,853 - 2,853
----- --- ------
5,353 $1 $6,466
===== === ======
The Series A Convertible Preferred stock was issued in August, 1992 in
exchange for $2,500 of trade debt. The preferred stock was ascribed a value of
$250 based on the estimated market value of our common stock. The preferred
stock accrues cumulative dividends at 6% and is convertible into common stock
(i) at the option of the holder at the market price of our common stock provided
the market price is equal to or exceeds $202.50, and (ii) at the option of the
Company at 110% of the market price our common stock. In no event shall a
conversion result in the holder having more than 49% of our outstanding common
stock. The shares of preferred stock are redeemable at our option at $1,000 per
share. At January 31, 2000, there was $1,113 of cumulative preferred stock
dividends accrued and unpaid.
In January 1997, we issued 1,000 shares of Series B preferred stock,
valued at $1,656, with a $2 liquidation value in full satisfaction of the then
outstanding loan. Holders of Series B preferred stock were not entitled to vote
nor receive dividends. The Series B preferred stock was convertible into common
shares of the Company at the
F-21
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ---------------------------------------------------------------
average closing price as reported by Nasdaq for the five preceding trading days
("market value"). We issued 274,888 shares of its common stock in complete
conversion of the Series B preferred stock in June, 1998.
In May 1998, we issued 8,000 shares of Series C preferred stock with a
$1 liquidation value receiving net proceeds of $7,420. The Series C preferred
stock, as revised, did not bear dividends and the holders were not entitled to
vote. Each share of Series C preferred stock was convertible into common shares
beginning 90 days from issuance. The conversion price was the lesser of (i) 86%
of the average of the three lowest closing bid prices for our common stock
during the 22 trading days immediately prior to conversion, (ii) $23.97, and for
conversions after November 10, 1998, (iii) $5.81 (the average closing bid price
for our common stock for the 22 trading days immediately prior to November 10,
1998). In no event shall a conversion result in a holder owning, to deemed to
beneficially own, at the date of the conversion more than 4.99% of our then
issued and outstanding common stock. We had the right to redeem any outstanding
Series C preferred shares at 116.28% of face value if the average closing bid
price for the common stock is less than $10.50 during any consecutive ten
trading days. The Company issued 857,766 shares of its common stock in
conversions of 1,945 shares of the Series C preferred stock during the year
ended January 31, 1999.
We recorded a deemed dividend of $1,459 during the quarters ended
July 31 and October 31, 1998 with respect to the Series C preferred stock. This
amount represents the difference between the liquidation value of the Series C
preferred stock and the estimated market value of the common shares issuable
upon conversion as of the issue date of the Series C preferred shares assuming
that all such shares were convertible beginning 90 days from issuance. We also
paid dividends in cash of $481 during the year ended January 31, 2000 with
respect to the Series C preferred stock.
In November, 1998, we assigned to an unrelated party the right to
redeem 2,000 shares of the Series C preferred stock. The assignee redeemed the
shares for $2,500. In consideration for the assignee's acceptance of new terms
with respect to conversion and other features of the Series C preferred stock,
we issued an additional 500 shares of Series C preferred stock to the assignee
and three year warrants exercisable at $10.66 to acquire 70,000 shares of common
stock. The modified Series C stock is convertible at the lesser of (i) 86% of
the average closing bid price for the common stock for the five days prior to
conversion, and (ii) $8.528. After registration of the underlying common stock
the Series C preferred stock is convertible at multiple intervals over 150 days.
The remaining 355 shares of Series C preferred stock held by the
redeemed shareholder were modified to provide for a fixed conversion price of
$5.81 and received a three year warrant exercisable at $10.66 to acquire 20,000
shares of common stock. The warrant was exercised during January, 2000 and we
received net proceeds of $213.
We recorded a deemed dividend of $301 during the quarter ended January
31, 1999 with respect to the assigned redemption and modification of terms of
the Series C preferred stock and an additional $103 was recorded during the
quarters ended April 30 and July 31, 1999. The total amount of $404 represents
the estimated value of the warrants issued, the estimated market value of the
common shares issuable upon conversion of the 500 shares of Series C issued to
the assignee in excess of the face value, and the excess of the redemption
payment received by the original holder and the original face value plus the
previously recognized deemed dividend. We also paid a dividend of $83 through
the issuance of 9,402 shares of our common stock.
All of these revised Series C preferred shares were converted prior to
January 31, 2000; an aggregate of 1,906,206 shares of our common stock have been
issued in conversions of these Series C preferred shares of which 1,048,440
shares were issued during the year ended January 31, 2000.
F-22
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ---------------------------------------------------------------
In July 1996, we issued 10,000 shares of a prior Series C preferred
stock with a $1 liquidation value; we had the right to call the shares prior to
conversion at 90% of conversion value and had the right to assign the call
option. Holders of Series C preferred stock are not entitled to vote. During the
fourth quarter of fiscal 1997 we issued 6,738 shares of Series C preferred stock
in exchange for convertible securities previously outstanding. The Series C
preferred stock bore a cumulative 8% annual dividend payable quarterly; such
dividend is payable at the Company's option in either cash or common stock at
then market value. Each share of Series C preferred stock was convertible into
common shares at the lesser of $18.00 or the then market value at (i) the option
of the holder beginning 40 days from issuance or (ii) at the option of the
Company beginning after June 30, 1997. In no event shall a conversion result in
a holder owning, or deemed to beneficially own, more than 4.99% of the then
issued and outstanding common stock of the Company. All of these Series C
preferred shares were converted prior to January 31, 1998; an aggregate of
673,948 shares of our common stock have been issued in conversions of these
Series C preferred shares of which 442,887 shares were issued during the year
ended January 31, 1998.
In June 1996, we issued 2,853 shares of Series D preferred stock with a
$1 liquidation value in connection with our acquisition of Cray; we have the
right to redeem the shares prior to conversion at 100% of conversion value.
Holders of the Series D preferred stock are not entitled to vote and the shares
bear no dividends. Each share of Series D preferred stock is convertible into
common stock at the then market value. The shares are being held in escrow
pending resolution of acquisition contingencies including any income tax
liabilities resulting from corresponding federal and state income tax
liabilities which result from the resolution of an Internal Revenue Service
audit of the years ended April 30, 1993 and 1994, any federal or state taxes for
periods ended prior to our acquisition of Cray and all liabilities including
funding deficits related to a terminated defined benefit pension plan of Cray.
Payments by the seller towards these liabilities will have no effect on the
Company's financial results and payments, if any, by us will reduce the face
value of the preferred stock.
During the year ended January 31, 1997, we issued 9,248 shares of
Series E preferred stock with a $.01 par value and a $1 liquidation value.
During the quarter ended April 1997 we issued 8,053 shares of Series E preferred
stock receiving net proceeds of $6,175 including $1,216 from the sale of an
assigned call of previously outstanding Series C preferred stock. In connection
with this placement a then director of the company received a finder's fee of
$254. The Series E preferred stock did not bear dividends, had voting rights on
an "as converted into common share basis", and was not convertible for 180 days
from issuance, was subject to mandatory conversion no later than December 31,
2000, and the market value for purposes of conversion into common shares is
limited to a maximum of the stated conversion price (varying from $27.75 to
$33.75 per common share) and a minimum of $12.00 per common share. We had the
right to call these shares at 90% of the then outstanding face amount if the
market value at which the shares would convert into common stock was less than
or equal to $30.00 per common share. An aggregate of 1,156,899 shares of our
common stock were issued in conversions of these securities of which 977,012
were issued during the year ended January 31, 1998.
In July 1996, we issued 215,060 shares of a prior Series B preferred
stock with a $0.01 par value and a fifty dollar liquidation value. The rights of
this Series B preferred stock were identical to that of Series C except as
regards to: the period from issuance prior to which the holder may not convert
the shares, which varied from 40 to 90 days. An aggregate of 317,390 shares of
our common stock have been issued in conversions of the Series B preferred stock
during the years ended January 31, 1999, 1998 and 1997.
J. OTHER CAPITAL STOCK TRANSACTIONS AND BUSINESS ACQUISITIONS
STOCK SPLIT - In July, 1998, approval was granted for a one for three
reverse stock split effective July 24, 1998. The effect this stock split was
reflected in the financial statements retroactively as if the stock split
occurred at the beginning of the earliest period reported.
F-23
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ---------------------------------------------------------------
PRIVATE PLACEMENTS - In December, 1999 we issued 679,483 unregistered
shares of common stock receiving net proceeds of $6,862. In connection with this
placement one of our then outside directors received a finder's fee of $300. In
addition, we paid a $300 finders fee to an entity in which one of our present
directors, who was not a director at the time, is an officer. The holder may
request us to register their shares upon the earlier of December 1, 2000 or the
disposition of substantially all of our NSI shares. The holder has the right to
nominate one member of the Board of Directors to serve until the next annual
shareholders' meeting and has the right to participate in any stock offering by
Sorrento to the extent of $7,500 subject to certain limitations.
In April 1998, we issued 203,998 common shares receiving net proceeds
of $1,989. The holders had the right to request additional shares to be issued
by the Company to the extent that 86% of the ten day average trading price of
the originally issued shares is below $9.80 per share at the time of the
request; such request may be made only once with respect to each original share
which had been continuously held by the original holder from the original issue
date. The Company issued 431,950 common shares during the year ended January 31,
1999 pursuant to such requests and no original shares remain for which
additional shares may be requested.
During the year ended January 31, 1998, the we issued 274,698 common
shares and warrants to acquire 260,963 common shares at $22.50 per share
expiring three years from issue receiving net proceeds of $5,528. The holders
have the right to request additional shares to be issued by the Company to the
extent that the five day average trading price of the originally issued shares
is below $22.50 per share at the time of the request; such request may be made
only once with respect to the original shares which have been held continuously
by the holder from the original issue date. In the event a price adjustment is
requested the related warrant exercise price is adjusted to the lesser of $22.50
or 125% of the market value used for purposes of calculating the price
adjustment shares. Holders of all shares requested reset shares and an
additional 304,814 shares were issued. The exercise price of warrants to acquire
260,963 common shares were reduced to a range of $9.27 to $14.64 per share all
of which were exercised during December 1997 and January 1998 receiving net
proceeds of $1,707. In addition, the Company issued 145,877 common shares
receiving net proceeds of $1,024 during October 1997.
LITIGATION SETTLEMENT - In October and November 1997, the Company
issued 78,049 common shares valued at $528 and a cash payment of $72 in
settlement of a lawsuit. The agreement allowed us to assert the claims brought
by the plaintiff against the original defendants in the action. During the year
ended January 31, 1999 we received $315 from the original defendants in the
action.
ABCN INVESTMENT - In March, 1997, we established a strategic alliance
with Asia Broadcasting Communications Network, Ltd. ("ABCN"). ABCN, a
privately-held media and communications company based in Bangkok, Thailand, was
established to create the first Asia-wide broadband distribution platform for
direct broadcasting services, multi-media and high speed Internet access and
online services. Under the terms of the alliance, ABCN agreed that we shall be
the designated supplier of ABCN's network equipment and technology and of its
customers' terminal devices subject to the satisfaction of certain conditions.
As part of the strategic alliance we acquired 5,000,000 common shares (1.7%) of
ABCN, at a purchase price of $1.45 per share, and an option to acquire an
additional 5,000,000 shares at $1.45 per share,in exchange for 224,806 shares of
the our common stock valued at $7,250. We issued 40,534 additional common shares
to ABCN during August 1997 as the market value of the 224,806 shares on the date
the shares were registered was less than $5,000. We incurred $6 costs, paid in
cash, in connection with this investment. Pursuant to a separate loan agreement
we advanced $2,000 to ABCN at 3% over prime rate due upon demand of which $1,443
was repaid during the year ended January 31, 1999 and the remaining amount was
repaid during the year ended January 31, 2000. The ABCN investment is included
in the net assets of the our discontinued Far East business unit.
F-24
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ---------------------------------------------------------------
SCITEQ ACQUISITION - The earn-out contingency in connection with the
Sciteq acquisition required the Company to issue 45,894 additional shares and
16,320 additional options valued at $2,000 to the former shareholders of Sciteq.
This liability was satisfied in cash and the additional shares and options were
issued in connection with the private placements of common stock described
above.
The former shareholders of Sciteq and option holders who have exercised
their options had the right to have us redeem their shares for cash during a
period of 12 days beginning May 31, 1997. 34,045 shares of the 53,049 shares
issued at closing were put to us during the notice period; the $1,994 value
assigned to the 53,049 shares issued at closing was reclassified as redeemable
common stock at January 31, 1997. The aggregate repayment to the former
shareholders and option holders of Sciteq of $3,279 is included in financing
activities for the year ended January 31, 1998.
FED ACQUISITION - An additional payment of $5,150 was made 12 months
from closing based upon the FED having achieved net income after tax of $3,500
during the 12-month period ending March 31, 1997. In lieu of cash the former
shareholders of Uni received 332,028 shares of the Company's common stock with
protection against declines in value of these shares through September 1997; the
Company was required to issue 49,569 shares in satisfaction of the price
protection guarantee.
WARRANTS - During the year ended January 31, 2000, 125,000 of the
265,340 warrants held by ABCN were exercised by an assignee. The remaining
warrants expired unexercised.
We issued independently exercisable warrants to purchase 85,000 shares
at prices ranging from $8.80 to $10.66 which expire at various dates through
August 26, 2002 in connection with various stock and debt placements. 10,000 of
these warrants were exercised subsequent to January 31, 2000 and we received net
proceeds of $132.
We issued independently exercisable warrants to purchase 32,019 shares
at prices ranging from $24.38 to $43.08 which expire at various dates through
May 30, 1998 to an independent placement agent, all of which expired unexercised
during the years ended January 31, 1999 and 1998.
The Company issued independently exercisable warrants to purchase
122,665 shares at prices ranging from $24.00 to $54.00 which expire at various
dates through July 15, 1998 to an independent placement agent, all of which
expired unexercised during the years ended January 31, 1999 and 1998, and 25,000
shares at $24.00 which expired March 5, 1999 to an independent placement agent.
The value of these warrants is included in the placement fee recorded as a
reduction to the proceeds received in the placement thereby reducing the
increase to additional paid in capital during the years ended January 31, 1998
and 1997.
In addition, warrants to purchase 50,002 shares at prices ranging from
$10.02 to $15.93 are outstanding from bank loan financing agreements and
business acquisitions consummated during the years ended January 31, 1993
through 1997. 33,334 warrants, exercisable at $12.00 per share through December
31, 2002, may be redeemed by the Company for $1,000. 186,138 warrants
exercisable at $16.914 held by entities controlled by an officer and a former
director, 9,324 warrants exercisable at $16.914 and 16,667 warrants exercisable
at $12.375 were exercised during May, 1997 in "cashless" transactions in
accordance with Company practices as regards net share settlement. Of the $2,315
liability which represented the difference between the closing price of the
Company's common shares at exercise ($27.00 per share) and the exercise price
($16.914 per share) $1,567 was paid in cash with the remaining balances applied
to amounts due the Company under indemnification agreements and an outstanding
receivable due the Company.
F-25
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ---------------------------------------------------------------
K. STOCK OPTION PLANS AND STOCK AWARD PLAN
The Company has four stock options plans in effect: The 1987 Stock
Option Plan, the 1988 Stock Option Plan, the 1997 Incentive and Non-Qualified
Stock Option Plan and the 1997 Director Stock Option Plan. The stock options
have been made available to certain employees and consultants. At the date of
acquisition BW had in effect two stock option plans, the 1994 Stock Option Plan
("94 SOP") and the 1995 Stock Option Plan ("95 SOP") and a Stock Award Plan
("SAP"). All options were granted at not less than fair value at the date of
grant and have terms varying from 3 to 10 years. The purpose of these plans is
to attract, retain, motivate and reward officers, directors, employees and
consultants of the Company to maximize their contribution towards the Company's
success.
The following table summarizes the activity in the plans:
Weighted Average
Number of Shares Exercise Price
---------------- -----------------
Shares under option at February 1, 1997 926,253 $ 18.21
Granted 378,190 $ 19.17
Exercised (42,167) $ 23.40
Canceled (55,505) $ 25.56
-----------
Shares under option at January 31, 1998 1,206,771 $ 18.57
Granted 1,466,684 $ 9.27
Exercised (29,053) $ 15.76
Canceled (220,227) $ 17.13
-----------
Shares under option at January 31, 1999 2,424,175 $ 11.83
Granted 998,213 $ 13.36
Exercised (717,373) $ 12.47
Canceled (516,960) $ 16.71
-----------
Shares under option at January 31, 2000 2,188,055 $ 11.17
==========
Additional information relating to stock options outstanding and
exercisable at January 31, 2000 summarized by exercise price are as follows:
Outstanding Exercisable
---------------------------------------- --------------------------
Weighted Average Exercisable
Exercise Price ----------------------------- Weighted Average
Per Share Shares Life (Years) Exercise Price Shares Exercise Price
-------------- ------ ------------ -------------- ------ ----------------
$3.00 - $9.99 1,346,110 8.94 $7.09 1,036,291 $7.00
$10.00 - $19.99 613,868 7.61 $13.27 396,597 $13.47
$20.00 - $45.00 228,077 7.85 $29.55 150,157 $24.91
--------- ---------
$3.00 - $45.00 2,188,055 8.45 $11.17 1,583,045 $10.32
========= =========
As of April 30, 1998 employees were allowed to elect to re-price their
most recent grant only to an exercise price of $15.9375, the then market price,
upon the condition that such re-priced options will not be exercisable unless
the closing price as reported by Nasdaq for the Company's common stock is $30.00
per share or greater. Employees holding 199,698 options with exercise prices
varying from $19.32 to $45.00 elected to have their options re-priced.
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's common stock on the date of grant,
and in accordance with the accounting for such options utilizing the intrinsic
value method there is no related compensation expense recorded in the Company's
financial statements. Had compensation cost for stock-based compensation been
determined based on the fair value at the grant dates in accordance with the
method delineated in Statement of Accounting Standards No. 123, the Company's
net loss and
F-26
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ---------------------------------------------------------------
loss per share for the years ended January 31, 2000, 1999 and 1998, would have
been increased to the pro forma amounts presented below:
2000 1999 1998
---- ---- ----
Net loss:
As reported $(21,653) $ (13,388) $ (16,034)
Pro forma (25,146) (14,500) (18,480)
Loss per share:
Basic EPS as reported $ (2.33) $ (1.99) $ (3.25)
Pro forma basic EPS (2.70) (2.14) (3.74)
Diluted EPS as reported (2.12) (1.99) (3.25)
Pro forma diluted EPS (2.45) (2.14) (3.74)
The fair value of option grants is estimated on the date of grant
utilizing the Black-Scholes option-pricing model with the following weighted
average assumptions for grants during the year ended January 31, 2000: expected
life of option 3 to 4 years, expected volatility of 85%, risk free interest rate
of 5.56% and a 0% dividend yield. The fair value, at date of grant, using these
assumptions range from $2.73 to $22.15 and the weighted average was $7.68. The
assumptions for the year ended January 31, 1999 were expected life of option 3
years, expected volatility of 45%, risk free interest rate of 4.25% and a 0%
dividend yield. The fair value, at date of grant, using these assumptions range
from $0.01 to $4.24 and the weighted average was $2.22. The assumptions for the
year ended January 31, 1998 were: expected life of option of 3 years, expected
volatility of 45%, risk free interest rate of 5.35% and a 0% dividend yield. The
fair value, at date of grant, using these assumptions range from $0.10 to $4.24
per option and the weighted average was $1.67.
A portion of the Company's stock option grants vest over two years,
additional awards are made each year and awards expire or are canceled,
accordingly the above proforma loss and per share amounts are not indicative of
the financial impact had the disclosure provisions of Statement of Financial
Accounting Standards No. 123 been applicable to all previous years in which
option grants were made.
F-27
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- ---------------------------------------------------------------
L. INCOME TAXES
The Company's provision for taxes on income for the years ended January
31, 2000, 1999 and 1998 consists of:
U.S. Non-U.S.
---- -------
Continuing Discontinued
Operations Operations Total
---------- ------------ -----
Year ended January 31, 2000:
Current $ - $ - $ -
Deferred - (246) (246)
-------- ------- ------
Total $ - $ (246) $ (246)
======== ======= ======
Year ended January 31, 1999:
Current $ - $ - $ -
Deferred - - -
-------- ------- ------
Total $ - $ - $ -
======== ======= ======
Year ended January 31, 1998:
Current $ - $ - $ -
Deferred - 246 246
-------- ------- ------
Total $ - $ 246 $ 246
======== ======= ======
The Company's domestic operations generate permanent and temporary
differences for depreciation, amortization, valuation allowances and tax
attributes arising from acquisitions. The Company has recorded a 100% valuation
allowance against its deferred tax assets, including net operating loss and
research credit carryforwards, in accordance with the provisions of Statement of
Financial Accounting Standards No. 109. Such allowance is recognized if, based
on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
2000 1999
---- ----
Deferred tax assets:
Valuation allowances $ 2,109 $ 1,960
Research and development credits 106 329
Tax loss carryforwards 28,286 18,924
Purchase accounting 2,047 2,231
Other 717 792
--------- --------
Gross deferred tax assets 33,265 24,236
Less: valuation allowance (32,556) (22,194)
--------- --------
Deferred tax asset 709 2,042
--------- --------
Deferred tax liabilities:
Software development costs 709 2,042
--------- --------
Deferred tax liabilities 709 2,042
--------- --------
Net deferred tax liability $ - $ -
========= ========
At January 31, 2000, the Company has federal net operating losses which
may be available to reduce future taxable income. Among potential adjustments
which may reduce available loss carryforwards, the Internal Revenue Code of
1986, as amended, (IRC), reduces the extent to which net operating loss
carryforwards may be utilized in the event there has been an "ownership change"
of a company as defined by applicable IRC provisions. The Company believes that
the issuances of its equity securities and transfers of ownership of outstanding
equity securities may have
F-28
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
resulted in one or more such ownership changes and intends to analyze the impact
of such transfers on the continued availability, for tax purposes, of the
Company's net operating losses incurred through January 31, 2000. Further
ownership changes in the future, as defined by the IRC, may reduce the extent to
which any net operating losses may be utilized. These NOL carryforwards expire
as follows:
2001 $ 266
2007 5,140
2008 3,097
2009 2,794
2010 4,086
2011 2,863
2012 4,678
2018 14,257
2019 11,243
2020 32,394
--------
$ 80,818
========
The reconciliation between income tax expense and a theoretical United
States tax computed by applying a rate of 35% for the years ended January 31,
2000, 1999 and 1998, is as follows:
2000 1999 1998
-------- -------- --------
Income (loss) from continuing operations
before U.S. and non-U.S. income taxes:
United States $ 2,410 $ (11,069) $ (16,377)
Foreign - - -
-------- --------- ---------
Loss before income taxes $ 2,410 $ (11,069) $ (16,377)
======== ========= =========
Theoretical tax (benefit) at 35% $ 844 $ (3,874) $ (5,732)
Impact of purchase accounting (8,197) 51 1,584
Impact of non-qualified stock options (4,905) (47) (467)
Change in valuation allowance 12,258 3,870 4,615
Other individually immaterial items - - -
-------- --------- ---------
$ - $ - $ -
======== ========= =========
M. EARNINGS PER SHARE CALCULATION
The following data show the amounts used in computing basic earnings
per share. The number of shares used in the calculations for the years ended
January 31, 2000, 1999 and 1998 reflect a 1-for-3 stock split effective July 24,
1998.
2000 1999 1998
-------- -------- --------
Net loss $ (21,653) $ (13,388) $ (16,034)
Less: deemed dividend (103) (1,760) -
Less: preferred dividends paid (564) - -
Less: accrued, unpaid preferred dividends (150) (150) (150)
---------- ---------- ----------
Net loss available to common shareholders
used in basic EPS $ (22,470) $ (15,298) $ (16,184)
========== ========== ==========
Average number of common shares used in basic EPS 9,630,713 7,673,431 4,987,347
========== ========== ==========
F-29
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
For the year ended January 31, 2000 our convertible preferred stock was
antidilutive. Accordingly, the weighted average number of dilutive potential
common stock of 463,401 and the dividends paid on these preferred shares of $564
are excluded from the calculation of diluted EPS. We incurred a net loss from
continuing operations for the years ending January 31, 1999 and 1998.
Accordingly, the effect of dilutive securities including convertible debentures,
convertible preferred stock, vested and nonvested stock options and warrants to
acquire common stock are not included in the calculation of EPS because their
effect would be antidilutive. The following data shows the effect on income and
the weighted average number of shares of dilutive potential common stock.
2000 1999 1998
--------- -------- --------
Net loss available to common shareholders used
in basic EPS $ (22,470) $ (15,298) $ (16,184)
Preferred stock dividends - - -
Interest on convertible debt (net of tax) - 31 44
---------- ---------- ----------
Net loss available to common shareholders after assumed
conversions of dilutive securities $ (22,470) $ (15,267) $ (16,140)
========== ========== ==========
Average number of common shares used in basic EPS 9,630,713 7,673,431 4,987,347
Effect of dilutive securities:
Shares issuable pursuant to contracts that may be
settled in stock - 43,010 24,210
Convertible preferred stock - 809,409 395,743
Convertible debentures - 59,330 35,785
Stock benefit plans 861,077 192,682 196,277
Warrant exercises 112,741 30,428 48,630
---------- --------- ---------
Average number of common shares and dilutive
potential common stock used in diluted EPS 10,604,531 8,808,290 5,687,992
========== ========= =========
The shares issuable upon exercise of options and warrants represents
the quarterly average of the shares issuable at exercise net of the shares
assumed to have been purchased, at the average market price for the period, with
the assumed exercise proceeds. Accordingly, options and warrants with exercise
prices in excess of the average market price for the period are excluded because
their effect would be antidilutive.
N. OTHER RELATED PARTY TRANSACTIONS
Summarized below are all material related party transactions entered
into by us and our subsidiaries during the periods presented not otherwise
disclosed in these notes.
During the year ended January 31, 2000 we paid $40 to an outside
director for management consulting services rendered to us and our Optical
Networking business unit.
During the years ended January 31, 2000 and 1999 we paid $190 and $25,
respectively, in fees for assistance in obtaining the amended loan and security
agreements to an entity controlled by an outside director.
During the year ended January 31, 1998 we made 8% demand loans in the
amount of $165 to an entity controlled by an outside director which was fully
repaid, including interest thereon, during April 1999. The loan was
collateralized by 20,408 shares of the Company's common stock.
F-30
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
O. SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest expense and taxes paid approximated the related expenses for
the years ended January 31, 2000, 1999 and 1998.
Common shares issued upon a cashless warrant exercise applied to an
outstanding short term note during the year ended January 31, 2000 neither
provided nor used cash. Accordingly, the $1,100 value assigned to such stock has
been excluded from the statement of cash flows.
Cashless option exercises applied to other receivables including
interest thereon valued at $265 during the year ended January 31, 1999 neither
provided nor used cash. The stock issued to effect, in part, the FED acquisition
valued at $5,150, the ABCN investment valued at $7,250, and cashless option and
warrant exercises applied to other receivables including interest thereon valued
at $758 during the year ended January 31, 1998 neither provided nor used cash.
Accordingly, the values assigned to such stock have been excluded from the
statements of cash flows.
Common shares issued on conversion of convertible debentures during the
years ended January 31, 1999 and 1997 neither provided nor used cash.
Accordingly, the $410 and $16,435 value assigned to such stock for the years
ended January 31, 1999 and 1997, respectively, have been excluded from the
statement of cash flows.
P. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of temporary cash investments
and trade receivables. As regards the former, the Company places its temporary
cash investments with high credit financial institutions and limits, by policy,
the amount of credit exposure to any one institution. No accounts at a single
bank accounted for more than 10% of current assets.
Concentrations of credit risk with respect to trade receivables are
limited because there is a large number of customers in the Company's customer
base spread across many industries and geographic areas. No one customer
accounted for more than 10.0% of the total consolidated net sales for the year
ended January 31, 2000, 1999, and 1998 respectively. At January 31, 2000 one
customer accounted for 14.7% of net receivables. At January 31, 1999 one
customer accounted for 14.6% of net receivables.
Q. SUBSEQUENT EVENTS
On March 3, 2000, our optical networking subsidiary, Sorrento Networks,
Inc. completed a sale of 8,596,333 shares of its Series A Convertible Preferred
Stock receiving net proceeds of $46,638. These shares were sold to a group of
investors. 1,467,891 shares were purchased by entities in which one of our
outside directors is a partner or member pursuant to a previously contracted
right of participation. In addition, Sorrento paid a finders fee of $1,950
through the issuance by Sorrento of 357,799 shares of its Series A Convertible
Preferred Stock to an entity in which one of our outside directors is a partner.
Subsequent to the purchase of 2,697,248 of these shares an officer and director
of the purchaser joined the Board of Directors of Sorrento. One of our outside
directors purchased 45,872 shares and a director of Sorrento, who subsequently
became an officer of Sorrento, purchased 91,744 in this placement.
On April 10, 2000 we entered into an agreement to merge Entrada with Sync
Research, Inc. ("Sync"), a Nasdaq listed company. We will retain a 50% interest
in the merged corporation to be known as Entrada
F-31
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Networks, Inc. The closing is subject to approval by Sync's shareholders and is
expected to occur prior to September 2000.
R. SEGMENT INFORMATION
Information for the years ended January 31, 2000, 1999 and 1999 in the
table below is presented on the same basis utilized by the Company to manage its
business. The segments according to product lines are as follows; Entrada
Networks, NETsilicon, and Optical Networking. Export sales and certain income
and expense items are reported in the geographic area where the final sale to
customers is made, rather than where the transaction originates.
Entrada Optical
Networks NETsilicon Networking Other Consolidated
As of January 31, 2000 except
for NETsilicon which is as of
September 14, 2000:
Revenues from external customers $ 28,771 $ 20,137 $ 19,464 - $ 68,372
Intersegment revenues - - - - -
------------------------------------------------------------
Total revenues 28,771 20,137 19,464 - 68,372
Operating income/(loss) from
continuing operations (3,124) 2,540 (5,339) (4,028) (9,951)
Depreciation and amortization
expense 2,118 660 1,846 - 4,624
Valuation allowance additions:
Receivables and inventory 911 733 1,030 - 2,674
Other 1,742 - - - 1,742
Capital asset additions, net 140 721 1,263 9 2,133
Total assets $ 16,135 - $ 15,898 $ 191,232 $ 223,265
Entrada Optical
Networks NETsilicon Networking Other Consolidated
As of January 31, 1999:
Revenues from external customers $30,717 $13,373 $14,186 $ 86 $58,362
Intersegment revenues - - - - -
------------------------------------------------------------
Total revenues 30,717 13,373 14,186 86 58,362
Operating income/(loss) from
continuing operations (4,201) (1,581) (1,538) (2,740) (10,060)
Depreciation and amortization
expense 2,035 522 716 1 3,274
Valuation allowance additons:
Receivables and inventory 1,073 444 847 - 2,364
Other - - - - -
Capital asset additions,net 817 797 - - 1,614
Total assets $12,179 $ 5,430 $13,624 $35,563 $66,796
F-32
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Entrada Optical
Networks NETsilicon Networking Other Consolidated
As of January 31, 1998:
Revenues from external customers $45,653 $7,920 $12,238 - $65,811
Intersegment revenues - - - - -
-----------------------------------------------------------
Total revenues 45,653 7,920 12,238 - 65,811
Operating income/(loss) from
continuing operations (8,714) (1,227) (391) (4,849) (15,181)
Depreciation and amortization
expense 1,084 580 651 68 2,383
Valuation allowance additons:
Receivables and inventory 1,154 708 727 - 2,589
Other 7,357 238 - 935 8,530
Capital asset additions, net 839 509 1,017 986 3,351
Total assets $12,813 $2,933 $ 9,006 $40,771 $65,523
2000 1999 1998
-------- -------- --------
Net sales:
United States $ 53,158 $ 47,465 $ 60,598
Asia 12,982 5,735 1,931
Europe 1,656 4,455 2,539
Other 576 707 743
Inter-area eliminations - - -
-------- -------- --------
Total net sales $ 68,372 $ 58,362 $ 65,811
======== ======== ========
S. VALUATION AND QUALIFYING ACCOUNTS
Changes in the inventory valuation reserve were as follows:
Balance at February 1, 1997 $ 6,057
Additions charged to costs and expenses 1,993
Amounts used during year (3,657)
-------
Balance at January 31, 1998 4,393
Additions charged to costs and expenses 1,624
Amounts used during year (2,528)
-------
Balance at January 31, 1999 3,489
Additions charged to costs and expenses 1,600
Amounts used during year (589)
Balance of NSI at September 15, 1999 (430)
-------
Balance at January 31, 2000 $ 4,070
=======
F-33
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Changes in the accounts receivable valuation reserve were as follows:
Balance at February 1, 1997 $ 1,141
Additions charged to costs and expenses 596
Amounts used during year (1,033)
-------
Balance at January 31, 1998 704
Additions charged to costs and expenses 740
Amounts used during year (308)
-------
Balance at January 31, 1999 1,136
Additions charged to costs and expenses 1,074
Amounts used during year (279)
Balance of NSI at September 15, 1999 (728)
-------
Balance at January 31, 2000 $ 1,203
=======
F-34
OSICOM TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
U. UNAUDITED QUARTERLY FINANCIAL DATA (UNAUDITED)
Amounts in thousands, except per share amounts.
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
Year ended January 31, 2000:
Net sales $ 19,129 $ 17,206 $ 18,948 $ 13,089 $ 68,372
Gross profit 8,878 8,120 9,328 5,456 31,782
Income (loss) from
continuing operations (1,043) (2,493) 14,246 (8,300) 2,410
Provision for income taxes - - (3,406) 3,406 -
Loss from discontinued operations (1,229) (120) (9,307) (13,407) (24,063)
Net income (loss) (2,272) (2,613) 1,533 (18,301) (21,653)
Net income (loss) per share:
Basic (0.29) (0.30) 0.13 (1.66) (2.33)
Diluted (0.29) (0.30) 0.14 (1.66) (2.12)
Year ended January 31, 1999:
Net sales $ 14,788 $ 15,101 $ 14,094 $ 14,379 $ 58,362
Gross profit 7,232 6,741 5,916 5,996 25,885
Loss from continuing operations (2,336) (3,323) (2,791) (2,619) (11,069)
Provision for income taxes - - - - -
Loss from discontinued operations (342) (1,142) (797) (38) (2,319)
Net income (loss) (2,678) (4,465) (3,588) (2,657) (13,388)
Net income (loss) per share:
Basic (0.39) (0.80) (0.50) (0.34) (1.99)
Diluted (0.39) (0.80) (0.50) (0.34) (1.99)
Year ended January 31, 1998:
Net sales $ 16,604 $ 17,271 $ 14,344 $ 17,592 $ 65,811
Gross profit 7,511 7,741 5,994 7,487 28,733
Earnings (loss) from
continuing operations (6) (13,104) (3,945) 678 (16,377)
Provision for income taxes - - - - -
Income (loss) from
discontinued operations 924 351 (662) (270) 343
Net income (loss) 918 (12,753) (4,607) 408 (16,034)
Net income (loss) per share:
Basic 0.23 (3.04) (0.85) 0.06 (3.25)
Diluted 0.19 (3.04) (0.85) 0.06 (3.25)
F-35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
OSICOM TECHNOLOGIES, INC.
By: /s/ Christopher E. Sue Date: May 4, 2000
-----------------------------------------------
Christopher E. Sue
Vice President Finance
Principal Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
By: /s/ Par Chadha Date: May 4, 2000
-----------------------------------------------
Par Chadha
Chairman and Director
Chief Executive Officer
By: /s/ Xin Cheng Date: May 4, 2000
-----------------------------------------------
Xin Cheng
Director
President
By: /s/ Rohit Phansalkar Date: May 4, 2000
-----------------------------------------------
Rohit Phansalkar
Director
By: /s/ Leonard Hecht Date: May 4, 2000
-----------------------------------------------
Leonard Hecht
Director
By: /s/ Renn Zaphiropoulos Date: May 4, 2000
-----------------------------------------------
Renn Zaphiropoulos
Director