UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission File Number 0-21041
OBJECT DESIGN, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-0424252
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 Mall Road, Burlington, MA 01803
---------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 674-5000
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
----------------- -----------------
The number of shares outstanding of the registrant's common stock as of
April 30, 1997 was 26,890,524.
1
<PAGE>
OBJECT DESIGN, INC.
INDEX TO FORM 10-Q
Part I - Financial Information Page
- ------------------------------ ----
Consolidated Balance Sheets as of March 31, 1997 3
and December 31, 1996
Consolidated Statements of Income 4
for the three months ended March 31, 1997
and March 31, 1996
Consolidated Statements of Cash Flows 5
for the three months ended March 31, 1997 and March 31, 1996
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
Exhibit Index 10
Signatures
2
<PAGE>
OBJECT DESIGN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,630 $ 10,952
Marketable securities 8,484 11,087
Accounts receivable, less allowances of $898
and $823 at March 31, 1997 and
December 31, 1996 respectively 10,129 11,694
Accounts receivable - related parties 1,200 2
Prepaid expenses and other current assets 700 598
-------- --------
Total current assets 33,143 34,333
Marketable securities 738 --
Property and equipment, net 3,345 3,218
Other assets 621 910
-------- --------
Total assets $ 37,847 $ 38,461
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term obligations $ 86 $ 55
Accounts payable 2,003 1,850
Accrued expenses 2,172 2,506
Accrued compensation 1,098 1,531
Deferred revenue 3,498 3,874
Deferred revenue - related parties 250 292
-------- --------
Total current liabilities 9,107 10,108
Long-term obligations 114 120
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value: 5,000,000
shares authorized at March 31, 1997 and
December 31, 1996; no shares issued and
outstanding at March 31, 1997 or December 31, 1996 -- --
Common stock, $.001 par value; 200,000,000 shares
authorized at March 31, 1997 and December 31, 1996; 26,845,000 shares
issued and outstanding at March 31, 1997 and 26,602,830 shares issued
and outstanding at
December 31, 1996 27 27
Additional paid-in capital 62,119 62,928
Accumulated deficit (31,439) (33,533)
Net unrealized holding (loss) gain on marketable securities (16) 7
Cumulative translation adjustment (815) (218)
Advances to stockholders (887) (887)
Unearned compensation (363) (91)
-------- --------
Total stockholders' equity 28,626 28,233
======== ========
Total liabilities and stockholders' equity $ 37,847 $ 38,461
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
OBJECT DESIGN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Revenues:
Software $ 6,625 $ 5,612
Services 2,740 2,369
Related party software and services 1,790 1,015
-------- --------
Total revenues 11,155 8,996
Cost of revenues:
Cost of software 388 499
Cost of services 1,873 1,698
Cost of related party software
and services 163 210
-------- --------
Total cost of revenues 2,424 2,407
Gross profit 8,731 6,589
Operating expenses:
Selling and marketing 4,856 3,683
Research and development 2,114 1,804
General and administrative 1,112 911
-------- --------
Total operating expenses 8,082 6,398
Operating income 649 191
Other income net: 326 (22)
-------- --------
Income before provision for income taxes 975 169
Provision for income taxes 49 24
-------- --------
Net income $ 926 $ 145
======== ========
Accretion of redeemable preferred stock $ -- $ (333)
-------- --------
Net income (loss) available to common stockholders (Note B) $ 926 $ (188)
======== ========
Historical net income (loss) available to
common shareholders (Note B) $ 0.03 $ (0.02)
======== ========
Historical weighted average number of common and
common equivalent share (Note B) 28,918 9,751
======== ========
Supplementary net income per common and
common equivalent share (Note B) $ 0.03 $ 0.01
======== ========
Supplementary weighted average number of common and
common equivalent shares outstanding (Note B) 28,918 26,427
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
OBJECT DESIGN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 926 $ 145
Adjustments to reconcile net income
to net cash used for operating activities:
Depreciation and amortization 468 427
Bad debt expense 147 96
Other -- 8
Net changes in operating assets and
liabilities:
Accounts receivable 220 (608)
Prepaids and other current assets (102) 14
Other assets 289 15
Accounts payable 153 (268)
Accrued expenses (767) 158
Deferred revenue (418) (191)
-------- --------
Net cash provided (used) for operating activities 916 (204)
-------- --------
Investing activities:
Capital expenditures (615) (175)
Purchases of marketable securities (3,790) (3,466)
Proceeds from sale/maturity of
available for sale marketable securities 5,652 --
Purchase of minority interest -- (53)
-------- --------
Net cash provided (used) for investing
activities 1,247 (3,694)
-------- --------
Financing activities:
Proceeds from issuance of redeemable
convertible preferred stock -- 4,917
Proceeds from exercise of stock options 87 39
Principal payments on long-term borrowings (6) (208)
Principal additions (payments) on capital lease
obligations 31 (13)
-------- --------
Net cash provided for financing
activities 112 4,735
Effect of exchange rate changes on cash (597) 80
-------- --------
Net change in cash and cash equivalents 1,678 917
Cash and cash equivalents, beginning of year 10,952 2,465
-------- --------
Cash and cash equivalents, end of period $ 12,630 $ 3,382
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
Notes to Consolidated Financial Statements
A. Basis of Presentation
The consolidated financial statements include the accounts of Object Design,
Inc. (the "Company") and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. In the opinion of
management, the accompanying condensed consolidated financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the consolidated financial position, results of operations and
cash flows of the Company. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's Annual Report
on Form 10-K filed for the year ended December 31, 1996.
B. Net Income (Loss) per Common and Common Equivalent Share
Net income (loss) per common share is based upon the weighted average number of
common shares and common equivalent shares outstanding. Common equivalent shares
are included in the per share calculations where the effect of their inclusion
would be dilutive.
In accordance with Securities and Exchange Commission Staff Accounting Bulletin
No. 83 ("SAB No. 83"), all common and common equivalent shares issued during the
twelve month period prior to the date of the filing of the Company's initial
public offering ("IPO") have been included in the calculations as if they were
outstanding for all periods. As permitted under SAB No. 83, these common
equivalent shares, which consist of stock options, were determined using the
treasury stock method and assumed an initial public offering price of $10.00 per
share.
Supplementary net income (loss) per common share has been computed in the same
manner except that all outstanding shares of Preferred Stock that were
convertible into common stock upon the effectiveness of the IPO are treated as
having been converted into Common Stock at the date of the original issuance.
Net income (loss) per common share on a proforma basis is the same as net income
(loss) per common share on a supplementary basis.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share", which is
effective for fiscal years ending December 15, 1997, including interim periods.
SFAS 128 permits an entity to disclose pro forma earnings per share amounts
computed using SFAS 128 in the notes to the financial statements in periods
prior to adoption. SFAS 128 specifies the computation, presentation, and
disclosure requirements for earnings per share and is substantially similar to
the standard recently issued by the International Accounting Standards Committee
entitled International Accounting Standards, Earnings Per Share (IAS 33). The
company plans to adopt SFAS 128 in 1997 and has not yet determined the impact.
6
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of operations:
Total Revenues. The Company's total revenues increased 24.0% from $9.0 million
for the three months ended March 31, 1996 to $11.2 million for the three months
ended March 31, 1997. This growth resulted primarily from unit volume increases
in Objectstore database software licenses, and increases in Related Party
revenue and service revenues as discussed below.
Software Revenues. Software revenues increased 18.1% from $ 5.6 million for the
three month period ended March 31, 1996 to $6.6 million for the three month
period ended March 31, 1997. These increases were primarily due to increased
unit volume of Objectstore database software licenses which more than offset a
decline in the average selling price during the quarter. The Company continued
to expand its customer base from its traditional customers in the
telecommunications, networking, finance, engineering and engineering design
industries to a growing number of customers in a broader group of industries as
the result of the Company's new focus of selling to customers that are
developing and deploying applications on the Internet and intranet. The
Company's sales to Internet and intranet customers have had a lower ASP than
have sales to its traditional customer base, as a result of a different pricing
structure for the Internet and Intranet market. It is expected for future
quarters that the Company's ASP will continue to decline as Internet revenues
make up a growing percentage of revenues.
Service Revenues. Service revenues increased 15.7% from $2.4 million for the
three month period ended March 31, 1996 to $2.7 million for the three month
period ended March 31, 1997. This increase is the result of an increase in the
number of customer deployments in the first three months of 1997.
Related Party Software and Services. Revenues from related parties increased
76.4% from $1.0 million for the three month period ended March 31, 1996 to $ 1.8
million for the three month period ended March 31, 1997. The increase is the
result of a major purchase by IBM of Objectstore licenses in the first quarter
of 1997 in connection with a few major deployments of IBM applications running
on Objectstore. It is not expected that this revenue stream will continue at
this level in the quarters ahead.
Cost of Software. Cost of software decreased 22.2% from $ .5 million for the
three month period ended March 31, 1996 to $ .4 million for the three month
period ended March 31, 1997 and decreased as a percent of software revenues from
8.9% to 5.9% for March 31, 1996 and 1997, respectively. This decrease reflects
lower royalty costs in the first three months of 1997 due in part to the revenue
mix change toward Objectstore licenses which carry lower royalty rates than
certain tools and related products sold by the Company.
7
<PAGE>
Cost of Services. Cost of services increased 10.3% from $1.7 million for the
three month period ended March 31, 1996 to $1.9 million for the three month
period ended March 31, 1997 but declined as a percent of service revenues from
71.7% to 68.4% for the same periods. This improved service margin reflects the
leverage of fixed costs as revenues increase and also the effect of a revenue
mix change towards more maintenance revenue, which typically carries a higher
margin.
Selling and Marketing. Selling and marketing expenses increased 31.8% from $3.7
million for the three month period ended March 31, 1996 to $4.9 million for the
three month period ended March 31, 1997 and increased as a percentage of total
revenues from 40.9% to 43.5% for the same periods. These increases are
reflective of the Company's initiative to expand its worldwide sales force as
well as invest in lead generating marketing programs. The Company intends to
continue to expand its direct sales force and maintain higher levels of
marketing investments directed at the Internet and distributed computing market
opportunities throughout 1997.
Research and Development. Research and development expenses increased 17.2% from
$1.8 million for the three month period ended March 31, 1996 to $2.1 million for
the three month period ended March 31, 1997 but decreased as a percent of total
revenues from 20.1% to 19.0% for the same periods. The Company expects that
research and development expenses will increase in dollar amount in future
periods as the Company continues to enhance ObjectStore and its current related
products and to develop new products for the Internet and distributed computing
applications.
General and Administrative. General and administrative expenses increased 22.1%
from $.9 million for the three months ended March 31, 1996 to $ 1.1 million for
the three months ended March 31, 1997 but declined slightly as a percentage of
revenue from 10.1% to 10.0% for the same period. The increase in dollar amount
is reflective of the increased staffing and certain other professional expenses
associated with the reporting requirements of a public company.
Provision for Income Taxes. The Company's effective tax rate of 5% for the three
months ended March 31, 1997 reflects an alternative minimum tax provision. The
effective tax rate in both periods presented is lower than the statutory rate
principally due to the utilization of net operating loss carryforwards.
8
<PAGE>
Liquidity and Capital Resources. Prior to its IPO in July 1996, the Company had
financed its operations through a combination of sales of Preferred Stock, bank
lines of credit and capital and operating leases. During July 1996, the Company
completed its IPO and sold an aggregate of 3,000,000 shares of common stock at
$7.00 per share resulting in net proceeds to the Company, after underwriting
commissions and other costs, of $18,216,000.
As of March 31, 1997, the Company had cash and cash equivalents of $12.6
million, up from $3.4 million for the same period last year. During the three
months ended March 31, 1997, the Company had net income of $.9 million and
generated a net cash increase of $1.7 million. The Company's operating
activities provided cash of $.9 million and used $.2 million for the three month
periods ended March 31, 1997 and March 31, 1996, respectively. The Company's
investing activities provided $1.3 million of cash in the three month period
ended March 31, 1997, compared with cash used by the Company's investing
activities of $3.7 million in the corresponding period of 1996. This increase is
attributable primarily to the net sale of $1.3 million of marketable securities
in the three month period ended March 31, 1997. In the three months ended March
31, 1997, the Company's improved results of operations and net cash provided
from investment activities, partially offset by the impact of exchange rate
fluctuations, contributed to the cash generation.
The Company believes that its current cash, cash equivalents and marketable
securities, its capital leases and funds generated from operations, if any, will
provide adequate liquidity to meet the Company's capital and operating
requirements through at least 1997.
9
<PAGE>
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings, either outstanding or pending with
respect to the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit Numbers Description
- --------------------------------------------------------------------------------
*4.1 Specimen certificate for Common Stock of the Company
11.1 Statement regarding Computation of Net Income (Loss) per
Common and Common Equivalent Share
27.1 Financial Data Schedule
- --------------------------------------------------------------------------------
* Incorporated by reference to the similarly-numbered exhibit filed as part
of the Registrant's Registration Statement on Form S-1, File No. 333-05241.
b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended March 31, 1997
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Object
Design, Inc. has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized, on May 14, 1997.
OBJECT DESIGN, INC.
(Registrant)
May 14, 1997 By: /s/ Robert N. Goldman
_________________________________
Robert N. Goldman
President, Chairman of the Board
May 14, 1997 By: /s/ Lacey P. Brandt
_________________________________
Lacey P. Brandt
Chief Financial Officer
<PAGE>
Object Design, Inc.
Statement Regarding Computation of Net Income (Loss)
per Common and Common Equivalent Share (Exhibit 11.1)
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1997 1996
<S> <C> <C>
Historical - Primary:
Weighted average issued common
stock outstanding 26,608 2,387
Weighted average common stock
equivalents and cheap stock (2) 2,310 7,364
Less: assumed purchases of
treasury shares -- --
-------- --------
Weighted average number of
common and common
equivalent shares outstanding 28,918 9,751
======== ========
Net income 926 145
Less: accretion of redeemable convertible
preferred stock to redemption value -- (333)
-------- --------
Net income (loss) available to common
stockholders $ 926 $ (188)
======== ========
Net income (loss) per common and
common equivalent share $ 0.03 $ (0.02)
Supplementary (1)
Weighted average issued common
and preferred stock outstanding (1) 26,608 19,063
Weighted average common stock
equivalents and cheap stock (2) 2,310 7,364
Less: assumed purchases of treasury
shares -- --
-------- --------
Weighted average number of
common and common
equivalent shares outstanding 28,918 26,427
======== ========
Net income $ 926 $ 145
Net income per share $ 0.03 $ 0.01
======== ========
</TABLE>
Notes:
(1) All shares of convertible preferred stock are considered, on a
supplementary basis, to be common stock and are included using the
if-converted method on the dates of their original issuance.
(2) In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 83, issuances of common stock, common stock equivalents and
Series J Preferred Stock within one year prior of the initial filing of
the registration statement, at share prices below the assumed initial
public offering price of $10.00 per share are considered to have been
made in anticipation of the contemplated public offering for which the
registration statement was prepared. Accordingly, these stock issuances
are treated as if issued and outstanding, using the treasury stock
method for options, since the inception of the Company.
11
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001014955
<NAME> OBJECT DESIGN, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1,000
<CASH> 12,630
<SECURITIES> 8,484
<RECEIVABLES> 10,129
<ALLOWANCES> 898
<INVENTORY> 0
<CURRENT-ASSETS> 33,143
<PP&E> 9,988
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<TOTAL-ASSETS> 37,847
<CURRENT-LIABILITIES> 9,107
<BONDS> 114
0
0
<COMMON> 27
<OTHER-SE> 28,599
<TOTAL-LIABILITY-AND-EQUITY> 37,847
<SALES> 6,625
<TOTAL-REVENUES> 11,155
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<OTHER-EXPENSES> 8,082
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<NET-INCOME> 926
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<EPS-DILUTED> .03
</TABLE>
