Back to GetFilings.com
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, 1999
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. Yes No X
--- ---
The Registrant's revenues for its most recent fiscal year were $94,949,000.
The aggregate market value of voting stock based upon the bid and ask price held
by non-affiliates of the Registrant on April 30, 1999 was $107,458,000.
Number of shares outstanding of the Registrant's only class of common stock as
of April 30, 1999 (the latest practicable date): 8,973,339.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Form 10-K incorporates by reference certain portions of the
Registrant's proxy statement for its 1999 annual meeting of stockholders to be
filed with the Commission not later than 120 days after the end of the fiscal
year covered by this report.
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 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 leading designer, manufacturer and marketer of optical networking
products for use in intra-city (also known as "metropolitan" or "metro")
networks. Our products are used by telecommuni-cation, Internet and cable TV
service providers, and also installed in interoffice, corporate and campus
network environments to provide both transport within and access to these
networks. Other key businesses include embedded networking, which provides
system-on-silicon solutions to original equipment manufacturers, network access
and wireless access.
Understanding Our Market
(A glossary can be found on page 22 for technical terms used throughout this
document.)
When we use the word "network," we generally mean a system of computers,
computer peripherals, telephones or televisions all connected via copper wire or
fiber optic cable. The Internet and the "intranets" through which the employees
of many large companies communicate are examples of networks, as is the cable
system through which you may receive TV broadcasts at home.
Networks allow bits of information (for example, e-mail messages, video images,
text documents, audio files) to be sent and received by their users. For
illustrative purposes, a network is like a highway and the bits of information
are like the cars that travel on that highway. Each bit of information enters
the network at a particular point, travels through the network until it reaches
its destination, then exits. As we noted above, our networking products provide
"transport" and "access." Our transport products allow networks to increase
their capacity for carrying information. Following our highway example, then, we
could say that our transport products add more lanes to the highway, thereby
making it possible for more cars to travel on it, and at greater speeds.
Our network access products enable users to connect to their networks. These
products also specifically address the desire of network users to take advantage
of the greater speeds made possible by the transport products that other vendors
and we provide. Using our example of the highway, consider the possibility that
only the fastest sports cars were allowed onto that enhanced, multi-lane
surface, while slower-moving traffic were shunted to a pot hole-filled side
road. Our optical transport and network access products make it possible for the
slow-moving traffic of individual network users to access the improved,
uncongested highway and travel at its maximum speed.
We envision optical networks becoming more pervasive in metropolitan markets.
Increases in the sheer number of users as well as the average access speed of
each user is creating and will continue to create capacity shortages in many
areas. Optical networking (and specifically DWDM) is proving to be the only
technology that is able to meet the increases in demand for network capacity.
DWDM technology will also migrate to the inner core of the networking
infrastructure. Historically, optical networking has been used solely as a
transmission technology. In the near future however, first generation optical
cross connects, routers and switches will become available and will replace the
current generation of electrical systems, making it possible to have all optical
networks capable of handling networking traffic at data rates in excess of a
terabit per second. Edge routers will be supplanted by DWDM-based aggregation
devices and backbone routers will be replaced with optical
1
cross connects and optical switches. We expect this evolution to occur first in
the metropolitan markets and migrate into longer-haul networks.
Our Core Technology
Our core proprietary technologies are based around Dense Wave Division
Multiplexing ("DWDM") and are embodied in our GigaMux'TM' family of products.
When one of our GigaMux'TM' systems is attached to a network, electrical or
optical signals carrying voice, data or video information are received by the
GigaMux'TM' and converted into a narrow beam of light having a unique
wavelength, or color, and then sent via laser along a length of fiber optic
cable. When that wavelength reaches its destination, GigaMux'TM' converts it
back into its original signal. Because multiple DWDM signals can travel
simultaneously along a single fiber, our optical networking products essentially
expand the capacity of fiber optic cable to carry information. This means that
as Internet and other network traffic increases over time, network operators can
deploy GigaMux'TM' to increase their capacity rather than bear the expense of
laying more lines of fiber optic cable. Similarly, our GigaMux'TM' family of
products can be used to build new networks whose capacities for carrying
information are highly flexible and, ultimately, somewhat unconstrained by the
amount of actual fiber they contain.
According to a 1997 study by Ryan Hankin Kent, Inc., a leading
telecommunications market research and consulting firm, the cost of laying new
intra-city fiber is estimated at $330,000 per kilometer. This cost, which
involves the digging up of streets or the stringing of fiber on new or existing
telephone poles, is impacted by geology, geography, environmental concerns and
right-of-way agreements. Alternatively, installation of a "two-channel"
GigaMux'TM' system (which can convert information onto two unique wavelengths or
colors of light) can offer the network operator a 27% to 70% cost savings over
the cost of laying new intra-city fiber. Because GigaMux'TM' offers up to
thirty-two channels or wavelengths of light, additional cost savings over the
laying of new intra-city fiber may be achieved by installing our higher capacity
GigaMux'TM' systems. And because GigaMux'TM' may be installed in a matter of
days versus the laying of new fiber, which may take several months to complete,
our products generally allow network operators to achieve increases in capacity
sooner than if they were to lay new fiber.
Today there are two distinct markets for DWDM products, and we believe we were
the first company to design products for the newer of those two markets. The
first market for DWDM products to develop was the so-called "long haul" market.
A typical long haul application of DWDM could be an undersea fiber optic cable
that is running out of capacity. Rather than lay additional cable across the
ocean, intercontinental network operators can deploy DWDM products to expand
their capacity as the demand for intercontinental network traffic increases.
The second of the two DWDM markets to develop was the metro market. We
envisioned that DWDM products could address this market, but only if they were
specifically designed for the requirements of intra-city networks. These
requirements include:
Data Rate and Protocol Transparency. Metropolitan networks are
characterized by the many types of languages, called protocols, which
subscribers use to communicate with one another. These include Internet
Protocol (IP), Asynchronous Transfer Mode (ATM), SONET/SDH, Fast and
Gigabit Ethernet, Fibre Channel, xDSL, HDTV and others. This contrasts with
the environment for
2
long haul DWDM systems, which generally are called on to handle only SONET
traffic. Metro users also communicate at different data transfer rates.
Some users communicate at a rate of 10 megabits of information per second
while others communicate at 155 megabits per second. We believed and
continue to believe that for a DWDM device to succeed in this environment,
it should be equally capable of taking any of these signals and
transporting them on a wavelength of DWDM light. This is called
"transparency," and it is a feature that every GigaMux'TM' system supports.
Modularity and Scalability. Unlike long haul networks, metro networks are
also characterized by varying and perhaps difficult-to-estimate rates of
growth for each type of network service. For example, cable modem usage may
be growing at one rate, analog modem usage at another, and High Definition
Television ("HDTV") at yet another. This variability and uncertainty makes
it difficult for network operators to plan the kind and quantity of
capacity they should make available to their users. We believed and
continue to believe that a DWDM product designed specifically for the metro
environment should address this variability and uncertainty in a way that
would allow network operators to add capacity in increments as they became
aware of the demands of their users. We also believed and continue to
believe that network operators in the metro environment will be constrained
with respect to the amount of capital they can invest in network capacity
at any one time. GigaMux'TM' is therefore composed of "modules" which can
be added as capacity requirements increase or rearranged within our basic
system according to the network operator's current requirements and
budgets.
Send and Receive Over a Single Fiber. Virtually every user connected to a
network wants to both send and receive information. Ideally, network
operators seek to provide this two-way service to the user with the fewest
possible strands of fiber optic cable. In the event that a DWDM device is
being used to enhance the capacity of that user's connection, the design of
the DWDM device will determine whether one strand or two strands (the first
for "send," the second for "receive") of cable will be required. In the
long haul environment, where strands of fiber may be relatively plentiful,
it may be of little consequence that a DWDM device requires two strands of
fiber per connection in order to facilitate the sending and receiving of
information. In the metro environment, however, the availability of fiber
strands is often severely limited. This implies that network operators in
the metro environment will find DWDM devices that can send and receive
information on a single strand of fiber relatively more valuable. Every
GigaMux'TM' system is designed to both send and receive information over a
single fiber.
Our technology, which makes this functionality possible, is protected by five
patents currently pending.
We believe that today, we are the only company shipping a DWDM product that was
designed specifically for the metro market. There are currently more than 85
potential customers in North America, Europe and the Far East which are in
various stages of evaluating GigaMux'TM' for deployment in their networks.
During our fiscal year ended January 31, 1999, we shipped in excess of $2.6
million of GigaMux'TM' systems to 6 different customers.
Our Strategy
Since we entered the networking business in 1993, we have pursued a three-phase
strategy for becoming a leading supplier of networking equipment to the metro
marketplace.
3
Phase I -- Acquire Needed Technologies. The first phase of our strategic
plan began in 1993 and ended in September 1996. During that time, we
acquired the various technologies which we believed would be essential to
building the transport and access products we are selling today and expect
to sell in the future. These technologies included routing software and
access protocols from the data networking environment, and optical
transport technologies from the "broadband" or video-networking
environment.
Phase II -- Combine Acquired Technologies into Products Designed for the
Metro Market. The second phase of our strategic plan began in September
1996 and is continuing. During this phase, we planned to combine our
acquired technologies into new families of access and transport products
capable of meeting the unique needs of the metro marketplace. For instance,
our DWDM transport products leverage our core data networking technologies
and offer network management software originally developed for the
data-networking environment and have been enhanced for GigaMux'TM'.
Conversely, we are developing network access products, which contain and
are built around GigaMux'TM' modules. By combining these various
technologies into single products or product families, we planned to
achieve a unique position as a supplier of optical networking products
designed specifically for the metro marketplace. Today, we believe we have
achieved a first-to-market position for metropolitan-designed optical
transport products.
Phase III -- The All Optical Network. In today's current-generation
networks, packets of information generally travel as electronic signals. We
expect, however, that in the next generation of networks--the All Optical
Network--packets of information will travel exclusively or predominantly as
optical signals. In other words, they will travel on beams of light. Our
goal in the third phase of our strategic plan is to become the leading
supplier of products to the All Optical Network for the metropolitan
market. To the extent that the evolution toward all optical networking is
widespread, we believe that the market potential for products, which build
the All Optical Network, is very large. We further believe that the
technological expertise and customer experience we are developing in Phase
II of our strategic plan will allow us to become a leading supplier of the
All Optical Network during Phase III of our strategic plan.
We previously announced our plans, through an 8-K filing, to divest all or
several of our operating subsidiaries. We have disclosed elsewhere in this
document our current plans regarding NETsilicon and Wireless Products. Although
we have no definitive plans at this time with respect to our network access and
optical networking business units, we continue to explore opportunities for
those two business units. We continue to operate and invest in all of our
businesses pending any transactions.
The Market for Our Products
According to KMI Corp., an internationally recognized leader in fiber optics
market research, the capacity of fiber networks to carry information, known as
"bandwidth," is expected to grow approximately 25 percent per year for the
foreseeable future, constrained primarily by the factors listed above as well as
the time and expense necessary to lay new fiber and the difficulties associated
with securing rights-of-way to undertake fiber plant build-outs. Conversely, the
demand for new bandwidth is growing rapidly. According to the July 1998 edition
of Internet Computing Magazine as well as
4
PricewaterhouseCoopers' "Technology Forecast: 1999," Internet traffic is
doubling in volume every 100 days. Speaking at NetWorld 98, industry analyst
Nicholas Lippis estimated that Internet traffic will consume 90 percent of the
available bandwidth by 2003. Furthermore, the advent of Internet appliances and
HDTV service offerings is expected to require even more bandwidth. The market
for our transport products is, to a significant extent, created by the surplus
of rapidly growing demand for new bandwidth over the slowly-growing supply of
new bandwidth. The market for our products also relies upon the cost savings
they afford over laying additional fiber, as described above. The market for our
access products is generated by the growing needs of users to gain access to the
Internet and corporate and campus networks.
Ryan Hankin Kent estimated the North American market for all DWDM products at
approximately $2 billion in 1998, with growth to $3.2 billion by the year 2002.
Communications Industry Researchers has estimated worldwide demand for all DWDM
products in the year 2002 at approximately $7 billion. Both research studies
projected that sales of metro DWDM products would grow more rapidly than sales
of long haul DWDM products.
Our Technology Approach
Our technology approach is based on several basic assumptions about the
direction in which the networking environment is evolving, as well as the
specific competitive advantages that we bring to this environment.
DWDM is the fiber capacity solution of choice. We believe that DWDM is the
solution of choice among network operators for addressing the rapidly
increasing demand for bandwidth. We see no economically viable
technological solution that is likely to displace DWDM for the foreseeable
future. Hence, we plan to continue expanding the GigaMux'TM' family of
products to meet the transport needs of our current and potential
customers. We also plan to embed optical technologies, which may include
DWDM into new access products. We will also make our proprietary optical
technology available to strategic partners, so that they may embed our
solution into their products. One such example would be a router or switch
company adopting our optical technologies, especially DWDN (Dense
Wavelength Division Networking) into their products. Another example would
be when partners share a common goal, cooperate with each other to have a
competitive advantage. An example of such cooperation is FORE Systems,
Inc., a leading provider of Asynchronous Transfer Mode switching products,
who has coordinated their ForeRunner'r' ASX'TM'-4000 ATM switch wavelengths
with our GigaMux'TM' so that together we can offer significant cost savings
when building optical networks. We believe our optical transport and access
products, and those of our strategic partners will be the first generation
of building blocks for the All Optical Network.
DWDM is a more efficient method of sending Internet Protocol (IP)
information. Because of the wide use of the Internet in recent years,
Internet Protocol (IP) has become the most popular, mature, and defacto
standard of transporting Internet information. We believe that DWDM and
related optical networking technology is the most efficient way to
transport IP information. IP information that is sent over DWDM does not
require certain translations, which would be required, if that same
information were sent in one of the currently dominant formats, such as
SONET or ATM. The fact that these translations are not required means that
networks which send information as IP packets over DWDM, called "flat"
networks, need not include the intermediate
5
and often expensive devices required to effect those translations. The All
Optical Network by nature is flexible and can be a flat network, though
even networks that are not "all optical" may still have portions that are
flat. Because flat networks offer advantages to operators in terms of
faster transmission speed and lower capital cost, we believe they will
become increasingly attractive as compared to current generation,
hierarchical networks. Hence, we will continue to develop the products that
will enable the building of a greater and greater proportion of existing
networks to become "flat."
Embedded Networking Products
Our wholly owned subsidiary, NETsilicon, Inc., develops and markets embedded
networking solutions. NETsilicon's products are incorporated into the design of
embedded systems to provide the ability to communicate over standards-based
Local Area Networks, Wide Area Networks and the Internet, enabling the
development of completely new embedded systems applications. We believe that
NETsilicon provides the first standards-based embedded networking system to
offer a single chip solution that, in conjunction with the physical interface
and memory, encompasses all of the required hardware and software necessary to
network-enable virtually any electronic device. For additional information about
NETsilicon, please refer to its amended registration statement which is
available online at www.freeedgar.com, www.sec.gov and from SEC Reg No.
333-62231.
Network Access
Our Annapolis Junction based network access business unit is engaged in the
design and manufacture of customer premise equipment (CPE), point-of-presence
(POP) and telecommunication carriers' central office products. Our products can
be categorized according to functionality and bandwidth requirements and they
provide Internet and intranet access to users. Our products can also be
categorized as CSU/DSU, routers, switches, modems, hubs, local area network
interface cards (LAN NIC) and remote access concentrators (IQX-200). The
bandwidth or speed required for these products varies from 56Kbps, 64Kbps, ISDN
(128Kbps) to T-1 (1.54Mbps). Our plans include the introduction of new products
such as CSU/DSU (Routermate Sentry) for T-3 (45 Mbps) speed, wide area network
interface cards (WAN NIC IX-2000) with Windows NT support for T-1 and ISDN
speed. We are evaluating additional enhancements and new products to support
xDSL, cable modems and optical technologies. Next generation remote access
concentrators will offer higher aggregation capacity, higher port capacity and
fault tolerant architecture with a hot swappable feature expected to be
developed by leveraging our expertise in optical networking and network access
area.
Wireless Products
Our Hong Kong-based wireless products business unit, which we acquired for the
purpose of providing low-cost manufacturing of our other products, also has its
own proprietary technologies and product designs focused on the wireless
marketplace. Through this business unit, we were one of the first companies to
develop a wireless enabled PDA with support for PHS standards for the Japanese
market. This PDA is capable of capturing and transmitting images, character
messages and downloading application software meant to work on this PDA to give
user capabilities like playing games. We also sell a line of magnetic and smart
card readers integrated in POS (point-of-sale) equipment for the Hong Kong and
mainland Chinese markets, and a line of numeric and alphanumeric financial
pagers initially
6
targeted for China. The Data Bank product line has multilingual translating
capability besides having extensive dictionary and calculator. Products are
manufactured in our 390,000-sq. ft., ISO-9001 and ISO-9002 certified facility in
China. Surplus manufacturing capacity and services in mechanical design, PCB
layout, prototype design and ODM/OEM assembly are utilized by us, as well as
contracted to third-party OEMs. In September of 1998, we announced our plans to
divest this business and, although there is no definite date at which we will
dispose of this unit we continue to pursue the sale of this business unit.
Products
We design, manufacture, and sell a wide range of networking and bandwidth
aggregation products. Our major product families have been referred to above and
are described here in greater detail:
GigaMux'TM' Metro Dense Wavelength Division Multiplexer
Launched officially in November 1997, GigaMux'TM' is a high-speed fiber optic
backbone multiplexer based upon dense wavelength-division multiplexing
technology. The product has a "built-from-the-ground-up" design for metropolitan
rings and other network topologies with distances up to 200 kilometers.
GigaMux'TM' uses ITU standard wavelength grids between 1530nm and 1560nm.
Providing 32 channels of high-speed data links of up to 2.5 Gbps each on a
single fiber, GigaMux'TM' increases capacity to 80 Gbps per fiber. The product
is designed to accommodate a mixed format of existing and emerging high-speed
networks and connections, including IP, ATM, SONET/SDH, Fast and Gigabit
Ethernet, Fibre Channel, xDSL, HDTV and others. It is also suitable for video
distribution networks.
The GigaMux'TM' system consists of three distinct elements: chassis, modules,
and management & control.
Chassis - The GigaNest features 16 universal slots, AC or DC dual redundant
power supplies, a combination cable routing tray, fan shelf, front door and
many other features required for NEBs compliance. GigaNest's flexibility
allows "on-the-fly" system design changes and upgrades.
Modules - GigaMux'TM' uses both active and passive modules that are
slot-independent and can coexist in a single chassis. The module design
increases system reliability, by eliminating the risk of an electrical
failure impacting the entire network.
Management & Control - The GigaMux'TM' Management Access Card manages all
active channel cards and resides in a separate management slot. Its front
panel provides an asynchronous terminal "craft interface" and LED status of
chassis power and temperature. The rear interface provides up to three
network or auxiliary asynchronous terminal connections.
GigaMux'TM' offers several unique benefits:
Cost effective scaleable architecture - As a customer's requirements grow,
the GigaMux'TM' system can be expanded incrementally. Each GigaMux'TM'
system is composed of basic building block modules. A fully functional
system can start with one active channel and later be expanded without
interrupting existing channel traffic. At gigabit data rates, error free
expansion is essential since a one-second interruption could impact a
billion bits of information. GigaMux'TM' allows customers to install
virtual fibers at any time at cost effective prices.
7
Flexibility - GigaMux'TM' gives unique mix-and-match flexibility. A single
fiber can be filled with IP, ATM, Fast and Gigabit Ethernet, FDDI, ESCON,
SDH/SONET, OC-1 through OC-48 and proprietary digital signals.
Additionally, GigaMux'TM' systems can be configured for full duplex,
simplex and combinations of duplex and simplex operations.
Protection Switching and Bridging Modules - GigaMux'TM' has optical signal
protection modules which automatically or manually switch from primary to
secondary signals based on signal level threshold, thereby preventing a
loss of communications between parties. These modules are used to protect
fiber connections (also called links and trunks), groups of channels and/or
individual channels against equipment and route failures and are also
utilized to perform scheduled maintenance on network equipment. These
modules can be used in ring, point-to-point and other network
configurations.
Extended Range - For networks designed around the GigaMux'TM', we offer
combinations of optical fiber power amplifiers. These modules extend the
range of communications up to 200 km between end-points including pass-thru
losses at OADM sites along the route.
Pricing - We expect that prices for GigaMux'TM', on a per channel basis,
will be below the prices at which our competitors offer their comparable
DWDM equipment, when and if such equipment becomes available (we believe
that GigaMux'TM' is the only currently available 32 channel, full duplex,
data transparent DWDM specifically tailored for metro markets. We further
believe that competing products will not be available until mid-to-late
1999, potentially affording us a time advantage in securing orders from our
current and prospective telecommunication and enterprise customers).
The GigaMux'TM' system's flexibility is further enhanced with the insertion of
two optional elements:
Optical Add/Drop Multiplexers (OADMs) - OADMs enable network operators to
quickly and easily tap and deliver bandwidth by selectively adding and
dropping individual channels, or wavelengths, in any ring, point-to-point
or mesh-based network. The OADM's totally passive design allows channels to
be dropped at the photonic level without requiring any electrical
conversion. OADMs provide substantial flexibility for provisioning and
managing wavelengths in networks.
Electrical Photonic Concentrator (EPC) - EPC is a patent pending
combination of optical and electrical technology that subdivides 2.5 Gbps
DWDM channels into sub-rate channels of varying bandwidth while maintaining
total protocol and format transparency. This allows direct connection and
aggregation from customer premise equipment (CPE) such as routers, Gigabit
Ethernet and ATM switches, and SONET add-drop multiplexers to GigaMux DWDM
optical networks. For example, 512 customer premise devices operating at
155 Mbps, or OC-3, can be transported over a single fiber. EPC enables
customers to maximize fiber utilization, lower costs by bypassing costly
SONET equipment and reduce latency by connecting directly to the GigaMux
DWDM system. Considering that the average enterprise user today does not
require a full 2.5 Gbps connection, EPC enables metro service providers to
sell DWDM-based services directly to customers at much lower costs.
8
IQX-200'TM' Remote Access Server
The IQX-200'TM', designed to meet the needs of mid to small-size companies and
ISPs, is a highly integrated, standards-based remote access server. IQX-200'TM'
features high port density, resource pooling, scaleable integration, scaleable
architecture, flash-based configuration, and a variety of security options.
IQX-200'TM' also features support for several operating systems, WAN interface
types, and PPP. It contains our FASTRacc high speed LAN adapter architecture,
and our award-winning SmartRoute'r' software. Designed to be a powerful,
flexible backbone solution for Internet access, remote office access, and
telecommuting access, the IQX-200'TM' emphasizes performance and value, with
maximum flexibility and scalability using standards-based modular technologies.
The IQX-200'TM' is easily expandable from a minimum of eight to a maximum of 96
concurrent connections via T-1, ISDN BRI, digital modem or any combination
thereof. IQX-200'TM' systems began shipping in the fourth quarter of fiscal
1998.
We believe that the IQX-200'TM' is the first remote access server ("RAS")
concentrator to focus on the medium size enterprise and that our potential
competitors are generally focusing on higher bandwidth solutions offering
greater numbers of ports per chassis. That focus on the medium size enterprise
is manifested in the design of the IQX-200'TM', which incorporates functions
which the networking customer would ordinarily have to purchase additional
equipment in order to obtain. The incorporation of these functions in a single
solution makes switching simpler with the IQX-200'TM', and also reduces its
overall cost to the networking customer. Network growth is easily and cost-
effectively managed with IQX-200'TM' through the addition of WAN interface cards
for T-1/PRI and BRI. Each T-1/PRI card supports up to 24 connections and each
4-port BRI card handles up to eight connections. Scalability is achieved without
sacrificing performance by using a 200 MHz CPU with a Reduced Instruction Set
Computing ("RISC") processor on each add-on interface card. The 10BaseT and
100BaseT auto sensing link-up Fast Ethernet enables maximum throughput to LAN
resources and eliminates bottlenecks at network servers without changing
drivers or configuration.
Significant IQX-200'TM' design features:
SmartRoute Software and FASTracc Architecture - the SmartRoute software
provides efficient LAN-to-LAN routing over ISDN. The FASTracc high speed
LAN adapter architecture optimizes throughput and data handling for fiber
and copper line networks. These technologies provide maximum throughput to
LAN resources and minimize bottlenecks at the network server.
FDDI Interface - FDDI interfaces allow the IQX-200'TM' to be used in
high-speed applications by using fiber's immunity to radio frequency
interference. Additionally, by using the FDDI dual- attached interface, the
IQX-200'TM' can directly connect to a network backbone, eliminating the
need for a switch to provide collision free throughput and network
self-healing.
Mixed WAN Connectivity - the IQX-200 supports mixed T-1/PRI and BRI WAN
connections with on-board CSU/DSU and NT-1 interfaces, creating increased
flexibility in WAN connectivity supporting remote and mobile users.
Protocols and OS - to meet the additional bandwidth demands of heavy volume
transfers, IQX-
9
200 supports LAN-to-LAN routing, multiple link PPP. Multiple protocol
LAN-to-LAN routing includes TCP/IP and IPX. IPX keep-alive packets provide
ISDN spoofing to create affordable virtual LAN configurations. IQX-200 also
supports Frame Relay protocol.
Security - the IQX-200'TM' has built-in firewall protection and other
security options which include PAP, CHAP, Access Shifting and Dial-back.
Additionally, IQX-200'TM' is resistant to unauthorized access by supporting
third party RADIUS for authentication, authorization and accounting.
Unique benefits of IQX-200 include:
Open Architecture - unlike many competitors who sell "closed-box" systems,
the IQX-200'TM' features on open architecture allowing customers to
upgrade, expand, or mix and match their configuration. As desired WAN
access technologies evolve from analog to T-1 or ISDN, IQX-200'TM' provides
customers a simple path for technology migration.
Distributed Processing Power - IQX-200'TM' allocates processing duties into
separate areas instead of relying on one centralized processor to handle
all the traffic for the entire unit, which can cause traffic to slow. With
a dedicated processor on each expansion card and on the motherboard, data
transmission is maximized.
Scalability - IQX-200'TM' customers can address user growth requirements
without having to replace their RAS, as would be required with most
competing products. The IQX-200'TM' allows customers to start with just 8
ports and add expansion cards to increase capacity to 96 ports, an ideal
feature for growing enterprises. In addition, IQX-200'TM' provides LAN easy
migration from slower 10BaseT (10Mbps) to faster 100BaseT and FDDI
(100Mbps).
Low Cost of Ownership - the IQX-200'TM' is competitively priced on a per
port basis. Additionally, for ISPs who have FDDI backbones, IQX-200'TM'
saves time and expense by bypassing the need to buy additional equipment
such as switches to connect the RAS to their backbone.
Customers, Sales and Marketing
Our customers generally fit the following customer profiles:
Service Providers - these customers provide communication services and
include telecommunication carriers, Internet Service Providers, cable
companies, and wireless communication providers.
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 with the
10
exception of one customer, no single customer has accounted for ten percent or
more of our net sales in a single year. US WEST accounted for 12.5% of net sales
for the year ended January 31, 1999. Allied Telesyn International Corp.,
accounted for 22.9% of net sales for year ended January 31, 1998 and 22.7% of
net sales for the year ended January 31, 1997. US WEST purchased caller
identification devices, and Allied Telesyn International Corp. purchased network
access products including hubs and transceivers. US WEST accounted for 18.7% of
net receivables at January 31, 1999 and Allied Telesyn International Corp.
accounted for 13.3% of net receivables at January 31, 1998.
Our strategy to reach our customers is to hire, 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 Osicom support staff,
begin educating the people responsible for recommending, evaluating, marketing
services and products. We also discuss our vision, technologies, 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 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 US 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 is lynchpin to our ultimate success.
Our sales organization at January 31, 1999 consisted of 76 individuals,
including managers, sales representatives, and support personnel. We also have
joint sales, support and marketing agreements with 3 European partners who are
compensated on a commission basis. Through these agreements, there are an
additional 55 individuals who sell, support and market our GigaMux'TM' family
of products throughout Europe.
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
11
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 installation
plan. We generally provide complete equipment installation, test and system
integration, basic customer training as related to equipment operation and
diagnostics. Equipment relocation services are also available.
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.
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 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 into a single common
standards-based platform. 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, 1999 there were 109 people working in our research and
development area. Our research and development expenses were $9.9 million, $7.2
million and $6.1 million for the fiscal years ended January 31, 1999, January
31, 1998 and January 31, 1997, respectively.
Manufacturing and Quality
We manufacture as well as outsource our products. We operate a manufacturing
plant which is both ISO-9001 and ISO-9002 certified, although all of our
products are not currently produced at that facility. However, it is our goal to
have all of our products carry the ISO-9001 Seal of Approval for commercial
markets. Because ISO-9001 is the most stringent of the ISO-9000 series, we
perceive this to be a competitive advantage in global markets. We are pursuing
the sale of this business based in Hong Kong which has the ISO certified
manufacturing plant. It is our intention to continue doing business with this
business unit even after its sale as long as the economics and quality are
favorable.
12
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.
Our ASICs are critical to our ability to make timely shipments to our customers,
and therefore to our overall success. Hence, we obtain ASICs from more than one
foundry. We believe our products can be reengineered to minimize the effects of
component shortages. To minimize the risks of component or product shortages we
attempt to maintain multiple supply sources, however, there can be no assurance
that such sources will be adequate to meet our needs.
Patent, Trademarks and Licenses
We currently hold 17 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
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
13
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.
Many of our telecommunications customers want to time their cost and revenue. We
offer, through Osicom Finance and others, customized financing options including
leasing.
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. One customer accounted for 18.7% and 13.3% of net
receivables at January 31, 1999 and January 31, 1998, respectively. The total of
our five largest net receivables represented 40.0% of accounts receivable at
January 31, 1999 and 33.2% of net receivables at January 31, 1998. All accounts
were within terms.
Backlog
At January 31, 1999, our backlog was approximately $18.8 million compared with
an approximate backlog of $22.3 million at January 31, 1998. 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
significant or 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
14
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.
Our current and prospective competitors include OEMs, product manufacturers of
Internet, client and remote access equipment, optical networking equipment and
embedded networking solutions. Competitors for our optical networking products
include Lucent Technologies Inc., Nortel Networks Corporation, CIENA
Corporation, Alcatel Alsthom Group, LM Ericsson Telephone Co., and Pirelli SpA,
as well as a number of smaller, more specialized companies. Networks access/IP
competitors include many of the same competitors as in optical networking
products, and a number of other competitors including Cisco Systems, Inc., 3Com
Corporation, Ascend Communications, Cabletron Systems, Inc., NEC Corporation,
Siemens AG, IBM, Intel Corporation and several 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 personal computer 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 is 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, 1999, we employed
1,318 full-time employees and independent contractors. Of these, 109 were in
engineering, 915 in manufacturing and quality assurance, 76 in sales and
marketing, 202 in administration, and 16 in executive positions. Of the 1,318
employees, 981 are employed by our Hong Kong business unit. 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
When used anywhere 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
15
executive officer, the words or phrases, "will likely result," "are expected
to," "is anticipated," "estimated," "project," or "outlook" or similar
expressions (including confirmations by an authorized executive officer of
any such expressions made by a third party with respect to us) are intended
to identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
include our plans to develop new products, expand its sales force, expand
its customer base, make acquisitions, establish strategic relationships
and expand within international markets. Such forward-looking statements also
include our expectations concerning factors affecting the markets for its
products, such as demand for increased bandwidth, the migration from private to
public networks, growth in corporate use of the Internet, expansion of switches
between LANs, remote access for corporate networks, deregulation and increased
competition, the introduction of a wide range of new communication services and
technologies and growth in the domestic and international market for network
access solutions.
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 business is increasingly competitive. The markets for the products and
services we offer are intensively competitive, highly fragmented and
characterized by rapidly changing technology, evolving industry standards,
price competition and frequent new product introductions. A number of
companies offer products that compete with one or more of our products. Our
current and prospective competitors include OEMs, product manufacturers of
Internet access and remote access equipment, and manufacturers of WAN
servers and client access and optical networking products. In the optical
networking and network access equipment market, we compete primarily with
Cisco Systems, Inc., 3Com Corporation, Ascend Communications, Cabletron
Systems, Inc., Lucent Technologies Inc., CIENA Corporation, Nortel Networks
Corporation, Pirelli SpA, NEC Corporation, Alcatel Alsthom Group, Siemens
AG, LM Ericsson Telephone Co., IBM, Intel Corporation and several 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
than us. In particular, established companies in the personal computer
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 currently are subject to intense
16
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 we face will not have a material adverse effect on our
business, operating results and financial condition.
Our business could be harmed by new product developments, rapid
technological changes and dependence on traditional and emerging
technologies. The telecommunications and networking industry is
characterized by rapidly changing technologies, evolving industry
standards, frequent new product introductions, short product life cycles
and rapidly changing customer requirements. The introduction of products
embodying new technologies and the emergence of new industry standards can
render existing products obsolete and unmarketable. Our future success will
depend on our ability to enhance our existing products, to introduce new
products to meet changing customer requirements and emerging technologies,
and to demonstrate performance and cost advantages and cost-effectiveness
of our products over competing products and technologies. As technologies
such as DWDM, Sonet, Gigabit Ethernet, Fiber Channel, Frame Relay,
Asynchronous Transfer Mode ("ATM"), Asymmetric Digital Subscriber Line
("ADSL") and communication over copper, fiber, wireless networks or all
optical networks ("AON") are developed and gain market acceptance, we will
be required to further enhance our products. If our current and prospective
future products do not achieve widespread customer acceptance, our
business, operating results and financial condition would be materially and
adversely affected.
We have historically derived a substantial majority of our revenues from
the sale of networking products. In the event that current LAN and WAN
technology is modified or replaced and we are unable to modify our products
to support the new technology, or alternative technologies, or if the
introduction of our recently introduced products are unsuccessful, our
business, operating results and financial condition could be materially and
adversely affected. We have in the past and may in the future experience
delays in developing and marketing product enhancements or new products
that respond to technological change, evolving industry standards and
changing customer requirements. We may experience difficulties that could
delay or prevent the successful development, introduction and marketing of
these products or product enhancements. New products and product
enhancements may not adequately meet the requirements of the marketplace
and achieve any significant degree of market acceptance. Our failure, for
technological or other reasons, to develop and introduce new products and
product enhancements in a timely manner and cost-effective manner would
have a material adverse effect on our business, operating results and
financial condition. In addition, the future introductions or even
announcement of products by us or one of our competitors embodying new
technologies or changes in industry standards or customer requirements
could render our then-existing product obsolete or unmarketable. There can
be no assurance that the introduction or announcement of new product
offerings by us or one or more of our competitors will not cause customers
to defer purchase of our existing products. Such deferment of purchases
could have a material adverse effect on our business, operating results and
financial condition.
Our business could be harmed by defective products. Complex products such
as those offered by us may contain undetected or unresolved defects when
first introduced or as new versions are
17
released. While we have not experienced any material errors in the past,
the occurrence of such errors, and the inability to correct such errors,
could result in the loss of market share, the delay or loss of market
acceptance of our products, material warranty and recall expense, diversion
of engineering and other resources from our product development efforts as
well as a loss of credibility with our customers. Any of such occurrences
could have a material adverse effect upon our business, operating results
or financial condition.
Our business depends on contract manufacturers and limited source
suppliers. Though we manufacture many of our own products, we also
materially rely upon independent contractors to manufacture to
specification certain of our other components, subassemblies, systems and
products. We also rely upon limited-source suppliers for a number of
components used in our products, including certain key microprocessors,
lasers, optical filters and other components. No assurance can be given
that these independent contractors and suppliers will be able to meet our
future requirements for manufactured products, components and subassemblies
in a timely manner. We generally purchase limited-source components
pursuant to purchase orders and have no guaranteed supply arrangements with
these suppliers. 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.
We believe there are alternative suppliers of alternative components for
all of the components contained in our products. However, any extended
interruption in the supply of any of the key components currently obtained
from a limited source would disrupt our operations and have a material
adverse effect on our business, operating results and financial condition.
We may not be able to successfully protect our proprietary rights and
technology. Our ability to compete is dependent in part on our propriety
rights and technology. We rely primarily on a combination of patent,
copyright and trademark laws, trade secrets, confidentiality procedures and
contract provisions to protect our proprietary rights. We generally enter
into confidentiality agreements with our employees and sometimes with our
customers and potential customers and limit access to the distribution of
our software, hardware designs, documentation and other proprietary
information. There can be no assurance that the steps we take in this
regard will be adequate to prevent the misappropriation of our technology.
Furthermore, though we have been issued patents, there can be no assurance
that the patent application process will be beneficial to us. While we have
filed various patent applications and will file additional applications in
the future, such applications may be denied. Any patents, once issued, may
be circumvented by our competitors. Furthermore, there can be no assurance
that others will not develop technologies that are superior to ours.
Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use information
that we regard as proprietary. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of
the United States. There can be no assurance that our means of protecting
our proprietary rights in the United States or abroad will be adequate or
that competing companies will not independently develop similar technology.
The success of our business is dependent on key personnel. Our business and
prospects depend to significant degree upon the continuing contributions of
our key personnel. We do not have employment contracts with most of our key
personnel and do not maintain any key person life insurance policies. The
loss of key management or technical personnel, including Par Chadha, our
18
Chief Executive Officer, Xin Cheng, our President, Ron Mackey, our
Executive Vice President of Technology, and William Peisel, the Chief
Technology Officer of our NETsilicon subsidiary, could materially and
adversely affect our business, operating results and financial condition.
These individuals have in the past, and continue to significantly
contribute to the creation and development of our products. We believe that
our prospects depend in large part upon our ability to attract and retain
highly skilled engineering, managerial, sales, marketing and administrative
personnel. Competition for such personnel is intense, and there can be no
assurance that we will be successful in attracting and retaining such
personnel. Failure to attract and retain key personnel could have a
material adverse effect on our business, operating results and financial
condition.
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.
Furthermore, 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. Any future inability to
obtain on a timely basis foreign regulatory approvals could materially and
adversely affect our business, operating results and financial condition.
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
19
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 revenues may be adversely affected due to events or issues that are out
of our control. Delays or lost sales have and can be caused by other
factors beyond our control, including late deliveries by vendors of
components, changes in implementation priorities, slower than anticipated
growth in demand for the services that our products support and delays in
obtaining regulatory approvals for new services. Delays and lost sales have
occurred in the past and may occur in the future. Operating results in
recent periods have been adversely affected by delays in receipt of
significant purchase orders from customers. In addition, we have in the
past experienced delays as a result of the need to modify our products to
comply with unique customer specifications. Our net sales for the year
ended January 31, 1999 declined as compared to the year ended January 31,
1998. The decline in net sales was primarily attributable to our Far East
Division which had a reduction in net sales resulting from both the recent
unfavorable conditions in Asia and the Pacific Rim as well as the reliance
on a single customer in the past. We are managing our Far East Division's
transition away from reliance on this single customer by actively pursuing
a broader customer base and extending the Far East Division's business into
the development of new, proprietary products lines. There can be no
assurance that such efforts will be successful. These and similar delays or
lost sales could materially and adversely affect our business, operating
results and financial condition.
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.
We have incurred net losses over the last three years and may experience
future losses. We have incurred losses during the years ended January 31,
1999, 1998 and 1997 of $13.4 million, $16.0 million and $15.6 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
20
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.
Our future success will depend on our ability to manage growth. We have
experienced significant growth through acquisitions as well as internal
growth. This growth has placed a significant strain on our financial and
management personnel and information systems and controls, and we must
implement new and enhance existing financial and management information
systems and controls and must add and train personnel to operate such
systems effectively. Our intention is to continue to pursue our growth
strategy through efforts to increase sales of existing products. The
introduction of new products can be expected to place even greater pressure
on our existing personnel and compound the need for increased personnel,
expanded information systems, and additional financial and administrative
control procedures. There can be no assurance we will be able to
successfully manage expanding operations.
We may be subject to risks associated with acquisitions. As described more
fully in Note A to the Consolidated Financial Statements contained in Part
II herein, we have made several major acquisitions during the two years
ended January 31, 1997. We have incurred significant charges for purchased
technologies, restructuring, and valuation allowances in connection with
the assets acquired in these acquisitions. There can be no assurance that
any future acquisitions will not result in similar charges.
Our strategy is to review acquisition prospects that would complement our
existing products, augment our market coverage and distribution ability or
enhance our technological capabilities. While we have no current agreements
or negotiations underway with respect to any new acquisitions, we may
acquire additional businesses, products or technologies in the future.
Future acquisitions made by us could result in charges similar to those
incurred in connection with prior acquisitions, issuance of potentially
dilutive equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other
intangible assets, any of which could materially and adversely affect our
business, results of operations, financial condition, and the price of our
common stock. Acquisitions entail numerous risks, including the
assimilation of the acquired operations, technologies and products,
diversion of management's attention to other business concerns, risks of
entering markets in which we have no or limited prior experience and
potential loss of key employees of acquired organizations. No assurance can
be given that we will be able to successfully integrate the products,
technologies or personnel of any business that may be acquired in the
future, and the failure of us to do so could have a material and adverse
effect on our business, financial condition and results of operations.
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.
21
Definitions
As used in this Annual Report on Form 10-K, the following terms have the
meanings indicated:
"10/100 MAC" means a dual speed (10 and/or 100 Mbps) Ethernet Media Access
Controller.
"Access Shifting" means a method of network security.
"API" means Application Programming Interface, which is a set of procedures for
controlling a device via software and/or firmware.
"ARM" means Advanced Risc Machines and is the term representing its
high-performance, low-cost, power-efficient RISC processors, peripherals and
system-chip designs.
"ADSL" means Asymmetric 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. ADSL supports data rates from 1.5 to 9 Mbps when receiving data (known as
the downstream rate) and from 16 to 640 Kbps when sending data (known as the
upstream rate). ADSL requires a special ADSL modem. ADSL is not currently
available to the general public except in trial areas, but many believe that it
will be one of the more popular choices for Internet access over the next few
years.
"ASIC" means Application Specific Integrated Circuit which is an integrated
circuit created for a specific customer's application, in contrast to a general
purpose integrated circuit in which the same chip is used by many different
customers.
"ATM" means Asynchronous Transfer Mode which is a type of networking technology
based on transferring data in cells or packets of a fixed size which are
relatively small when compared to sizes used in older technologies. 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 an enterprise network. Individual
workgroup or departmental networks 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). Ethernet has a 10 Mbps bandwidth and FDDI has a 100Mbps
bandwidth.
"BOOTP" means Bootstrap Protocol and is a protocol used for assigning TCP/IP
addressing information. BOOTP enables a diskless workstation to discover its own
address, the address of a BOOTP server on the network, and a file to be loaded
into memory to boot the machine thereby allowing the workstation to boot without
either a hard or floppy disk drive.
22
"BRI" means basic rate interface which is a single, 64 kilobyte, ISDN circuit
which consists of two B-channels that can carry voice or data and one D-channel
which carries call-control information. See also "PRI".
"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 foward decision on each packet received from any of the networks
to which it is connected.
"Broadband" means the LAN channel technology that provides several paths for
transmitting text, graphics, voice or video data so that different types of data
can be transmitted simultaneously.
"CHAP" means Challenge Handshake Authentication Protocol which is a type of
network security in the authentication agent (typically the network server)
sends the user program a key to be used to encrypt the user name and password.
After a connection is made with the server the user is sent a "challenge"
message requesting a value obtained by the preset encryption, if the value
received from the user does not match the servers own computation the connection
is usually terminated. This protocol allows the username and password to be
transmitted in an encrypted form to protect against eavesdroppers.
"CLEC" means a Competitive Local Exchange Carrier.
"Collision" means an occurrence when two stations try to send packets at the
same time.
"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 is required for both ends of T-1 or T-3
connection, and the units at each end must be from the same manufacturer to
operate.
"DBS" means Digital Broadcasting System.
"DHCP" means Dynamic Host Configuration Protocol, which is an extension to BOOTP
that adds support for information beyond the basic TCP/IP addressing. This
protocol provides for dynamic addressing thereby allowing a device to have a
different address each time it connects to the network and in some systems, a
device's address can change while it is still connected. Dynamic addressing
simplifies network administration because the software keeps track of addresses
rather than requiring an administrator to manually assign each new user a unique
address. Many ISP's use dynamic addressing for dial-up users.
"Dial-back" means a network security procedure whereby the user connects to the
network providing name and password and the network disconnects the user and
"calls back" the user at a pre-set number
23
to provide authentication.
"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 fast than
Ethernet.
"FDDI" means a Fiber Distributed Data Interface and is a fiber optic network
that supports transmission speeds up to 100 Mbps.
"Firewall" means a hardware and software combination that serves as a gateway
between an organization's internal network and the Internet. Employees can get
out onto the Net, but unauthorized individuals cannot get into the protected
network.
"FTP" means a File Transfer Protocol and is the TCP/IP protocol for file
transfer between a host and a remote computer.
"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.
"HTML" means Hyper Text Markup Language which is a format for information to be
viewed by a web browser.
"HTTP" means Hyper Text Transfer Protocol which is the method by which a web
server communicates to and from one or more client processes.
"Hub" means a central connection device to which computers and peripheral
devices are attached with its own dedicated cabling. A single hub accepts only
one type of cabling.
"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
24
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 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.
"JETSEND" means a set of API's and protocols, defined by Hewlett Packard, used
from communications between web based devices.
"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.
"Multiple link PPP" means multiple link point to point protocol, which is a type
of data transfer over the Internet.
"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).
"NT-1" means a type of Network Terminator which is a device that is required on
both ends of phone line which work in tandem to provide what is called Echo
Cancellation which provides clear incoming data. The NT-1 also converts the line
from the single-par, full duplex wiring on the phone company side of the device
to a two-pair line with separate transmit and receive lines on the subscriber
side of the device thereby allowing multiple devices to co-exist on the circuit.
"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.
"ODM" means original design manufacturer.
"Packet" means the "envelop" 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.
"PAP" means Password Authentication Protocol, which is the most basic form of
network security, in which a user's name and password are transmitted over a
network and compared to a table of name-password pairs. Typically, the passwords
stored in the table are encrypted. The main weakness of PAP
25
is that both the username and password are transmitted in an unencrypted form
and therefore can be intercepted by eavesdroppers.
"POP3" means Post Office Protocol, version 3, which is a method by which a
client can retrieve messages from an email server.
"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.
"PRI" means primary rate interface which is a group of 64K ISDN circuits, or
BRI's, in a single "package" which consists of 23 B-channels (30 in Europe) that
can carry voice or data and one D-channel which carries call-control
information. See also "BRI".
"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.
"RADIUS" means Remote Authentication Dial-In User Service, which is an
authentication and accounting system used by many ISPs. When a user dials in to
the ISP the user must enter a username and password. This information is passed
to a RADIUS server, which checks that the information is correct, and then
authorizes access to the ISP system.
"RAM" means Random Access Memory, which is volatile memory which only
"remembers" as long as power is applied; when the power is turned off the data
in RAM is erased. RAM is used for the main memory in personal computers
"RAS" means remote access server and is a device that facilitates the connection
of remote systems and users, generally over dial-up circuits.
"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. A repeater contains no logic-integrated circuits.
"RISC" means reduced instruction set computing which is a type of microprocessor
that recognizes a relatively limited number of instructions. One advantage of
reduced instruction set devices is that they can execute their instructions very
fast because the instructions are so simple and another, perhaps more important,
is that RISC chips require fewer transistors which makes them cheaper to design
and produce.
"ROM" means Read-Only Memory, which is non-volatile memory whose contents are
determined during manufacturing, and can't be modified only read.
26
"Router" means a network translator that reads network-addressing information
within packets to provide greater selectivity in directing traffic over multiple
LAN 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.
"SMTP" means Simple Mail Transfer Protocol, which is a standard used to e-mail
servers and clients to send messages.
"SNMP" means Simple Network Management Protocol which is a standards based
method of monitoring and controlling networked ("shared") devices.
"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.
"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 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.
"UDP" means User Datagram Protocol, which is a connectionless protocol that,
like TCP, runs on top of IP networks. Unlike TCP, UDP provides very few error
recovery services, offering instead a direct way to send and receive datagrams
over an IP network.
"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.
27
"xDSL' means 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). xDSL requires a special xDSL modem.
xDSL will be one of the more popular choices for Internet access over the next
few years.
28
Item 2. Properties.
We occupy 541,000 square feet of office, manufacturing and distribution space:
147,000 square feet in the United States and 394,000 square feet in Hong Kong
and China, as detailed below.
Our facilities under lease include:
Location Square Footage Facility Type Expiration Date
- -------- -------------- ------------- ---------------
Annapolis Junction, Maryland 72,000 Manufacturing October 31, 1999
Fremont , California 18,000 Office/Manufacturing July 31, 2000
Guandong, China 390,000 Office/Manufacturing May 31, 1999
Aurora, Illinois 15,000 Office October, 31, 2001
Santa Monica, California 6,200 Office April 30, 2001
Waltham, Massachusetts 30,000 Office/Manufacturing September 30, 2001
Waltham, Massachusetts 6,000 Office September 30, 2001
We have six sales offices located around the United States, and one sales office
in the United Kingdom totaling 10,700 square feet. All such offices are leased
for varying terms.
The facilities we own are:
San Diego, California - 36,000 square foot office and manufacturing
facility
Hong Kong, China - 4,000 square foot office facility
See Note E to the Consolidated Financial Statements contained in Part II herein
for terms and amounts of mortgages on the facilities we own.
We believe that our existing and planned facilities are and will remain adequate
for the foreseeable future.
Item 3. Legal Proceedings.
On April 23, 1999, a securities class action lawsuit entitled Lehavi v. Osicom
Technologies, Inc., et al., Case No. 99-04408, was filed in the United States
District Court for the Central District of California against us and our former
Chief Financial Officer. This lawsuit purports to be brought on behalf of all
persons who purchased our common stock during the period from July 1, 1998
through April 21, 1999, inclusive (the "putative class period").
On April 22, 1999, a securities class action lawsuit entitled Herman Wunsch, et.
al., v. Osicom Technologies, Inc., et al., Case No. 99-04322, was filed in the
United States District Court for the Central District of California against us
and our CEO, President and former Chief Financial Officer. This lawsuit purports
to be brought on behalf of all persons who purchased our common stock during the
period from July 2, 1998 through April 20, 1999, inclusive (the "putative class
period").
29
Both class actions generally allege that, during the putative class period, the
defendants made false or misleading public statements which caused the price of
our common stock to be artificially inflated. The class action asserts that the
defendants' conduct violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, and SEC Rule 10b-5 promulgated thereunder, as well as state common
law. The class actions do not specify an amount of damages. Based upon various
press releases, we believe that lawsuits making similar allegations have been
filed against us, although we have not been served with any other complaints. We
intend to defend the class actions and any other similar lawsuits 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 legal proceedings incidental to
the conduct of our business. We believe that none of these proceedings will have
a material adverse impact on our financial condition or results of operations.
In October and November 1997, we issued 78,049 common shares, valued at
$528,000, and made a cash payment of $72,000 in settlement of the class action
case against Builders Warehouse Association, Inc. ("BW"), related to events and
actions in 1993 and 1994, that was asserted against us subsequent to BW's merger
with us. None of our officers and directors were associated with BW during the
period for which the litigation was filed. The settlement agreement allows us to
assert the claims brought by the plaintiffs against the original defendants in
the action which includes the former directors of BW, former officers of BW and
financial and public relations advisors to BW. We received $315,000 from the
original defendants in the action during the year ended January 31, 1999.
Item 4. Submission of Matters to a Vote of Security Holders
None.
30
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, 1997 to January 31,
1999, based upon information obtained from Nasdaq and taking into account the
2-for-1 split on February 12, 1996 and 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 1997-1998 High Low
---------------- ---- ---
Quarter from February 1, 1997 to April 30, 1997 $35.63 $20.44
Quarter from May 1, 1997 to July 31, 1997 $26.81 $16.88
Quarter from August 1, 1997 to October 31, 1997 $19.03 $8.53
Quarter from November 1, 1997 to January 31, 1998 $18.75 $6.09
Fiscal 1998-1999
----------------
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
On April 28, 1999, the average of the high and low bid quotation for our common
stock was $10.19 per share. There is no assurance that a market in our common
stock will continue.
As of April 30, 1999 (the latest practicable date) there were 1,371 shareholders
of record, including brokerage firms and nominees, of our common stock.
We have never paid any cash dividends on our common or preferred 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.
31
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, 1999 and 1998, 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, 1996 and 1995,
and the consolidated balance sheet data set forth below at January 31, 1997,
1996, and 1995 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,
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,
-----------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Statement of Operations Data:
Net sales $ 94,949 $119,049 $115,912 $ 34,473 $ 27,631
Net income (loss) from operations $(13,388) $(16,034) $(15,609) $ (1,317) $ 968
Net income (loss) from operations
per share:
Basic $ (1.99) $ (3.25) $ (5.90) $ (1.09) $ 0.18
Diluted $ (1.99) $ (3.25) $ (5.90) $ (1.09) $ 0.18
Balance Sheet Data:
Cash and cash equivalents $ 4,685 $ 1,912 $ 4,055 $ 910 $ 87
Working capital $ 3,358 $ 7,303 $ 9,598 $ 4,894 $ 3,322
Total assets $ 86,764 $ 89,687 $ 78,476 $ 29,860 $ 12,157
Total debt (including short-term debt) $ 47,906 $ 46,967 $ 43,606 $ 25,183 $ 8,990
Stockholders' equity $ 38,858 $ 42,720 $ 32,870 $ 4,677 $ 3,167
32
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". (See Note B to the Consolidated Financial
Statements contained in Part II herein).
Results of Operations: Comparison of the Years Ended January 31, 1999 and
January 31 1998
Net sales for the twelve months ended January 31, 1999 were $94.9 million
compared to $119.0 million for same period ended January 31, 1998, a decrease of
$24.1 million or 20.3%. A weakened Asian economy and the loss of their largest
customer caused sales of our Wireless segment (formally known as our "FED"
operations) to decline by $16.6 million over fiscal 1998. Sales to this customer
were 7.0 million and $27.3 million for fiscal 1999 and fiscal 1998. Sales by our
Network Access segment also declined by $14.9 million over fiscal 1998 as
shipments of legacy products decreased. Sales for our Optical Networking segment
increased by $2.0 million over fiscal 1998. Shipments of our Gigamux family of
products accounted for this increase. Sales for NETsilicon increased by $5.5
million over fiscal 1998. Shipments were made to 20 OEM customers during fiscal
1999 compared to seven OEM customers in fiscal 1998 contributing to this sales
increase.
Gross margins increased to 36.4% from 31.2% for the twelve months ended January
31, 1999 compared to the same period ended January 31, 1998. The higher gross
margin of our Gigamux products accounted for the increase in gross margin to
43.1% from 36.6% during fiscal 1999 over fiscal 1998 of our Optical Networking
segment. In addition, shipments of higher margin products by our Wireless
segment increased gross margin to 22.3% during fiscal 1999 compared to 15.3% in
fiscal 1998. The gross margin for NETsilicon decreased to 45.6% compared to
48.7% from the prior year. Late delivery of the NET+ARM chip and the slower than
expected realization of general raw material cost reductions resulted in this
gross margin decline. Gross margins for our Network Access segment remained
relatively constant with the prior year.
Selling and marketing expenses increased to $19.1 million during fiscal 1999
from $17.6 million in fiscal 1998. During fiscal 1999, selling and marketing
expenses represented 20.1% of net sales compared to 14.8% of net sales in fiscal
1998. Our Wireless segment incurred external commissions in Fiscal 1999 of
$1.7 million on $11.8 million in sales of our Caller ID device to a US-based
RBOC. This spending reduction partially offset the increase in external
commissions.
Engineering, research and development expenses increased to $9.9 million or
10.4% of net sales during fiscal 1999 from $7.2 million or 6.1% of net sales in
fiscal 1998. This resulted in a 37.5% increase in research and development costs
over the prior year. Continued research and development efforts in the
33
Gigamux product family for our Optical Networking segment, the IXQ-200 remote
access server in our Network Access segment and the NET+ family of products in
NETsilicon, partially offset by a $2.1 million decrease in these expenditures
capitalized from 1998 and 1999 was the cause for the increased spending.
General and administrative expenses increased to $16.7 million during fiscal
1999 from $15.1 million in fiscal 1998. A significant amount of this decrease
was due to our Wireless segment recording approximately $1.0 million of
additional reserves against their accounts receivable during Fiscal 1999
compared to Fiscal 1998. Our Optical Networking segment, in preparing for
expected growth of our Gigamux products, incurred the additional expenses to
build the infrastructure domestically, in Europe and Asia to adequately prepare
for the expected business growth.
Other operating expenses were $852,000 during fiscal 1999 compared to $11.9
million in fiscal 1998. Amortization of purchased technology cost and the excess
cost over net book value of assets acquired accounted for these expenses during
fiscal 1999.
Other operating expenses during fiscal 1998 included acquisition-related charges
of $6.9 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), amortization of excess cost over net book
value of assets acquired ($461,000) as well as valuation allowances recorded
against purchased intangible assets including purchased technology ($4.6 million
including $3.7 million related to Cray and $893,000 related to RNS), customer
lists ($812,000 related to PDP), excess cost over net book value of assets
acquired ($233,000 related to a prior acquisition by BW) 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).
Interest expense net of other income was $1.4 million during fiscal 1999
compared to $1.1 million in fiscal 1998. The interest expense is attributed
primarily to short term borrowings against our lines-of-credit and, remained
relatively constant compared with the prior year. During fiscal 1998, the
interest expense was offset by a gain on disposal of assets by our Wireless
segment for property sold in Hong Kong.
There was no provision for income taxes for the year ended January 31, 1999 as
compared to $246,000 for the year ended January 31, 1998. The tax provision for
the fiscal year 1998 was the result of the profitable operations of our Wireless
segment for the fiscal year. We have carry forwards of domestic federal net
perating losses, which may be available, in part, to reduce future taxable
income
34
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, the Company provides a valuation allowance for a
deferred tax asset when in management's opinion it is more likely than not that
some portion or all of the assets will not be realized. (S