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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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Commission file number: O-26886
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 68-0239619
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
100 BLUE RAVINE ROAD
FOLSOM, CALIFORNIA 95630
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(916) 353-2400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Number of shares of registrant's common stock outstanding as of April 30, 1997:
32,560,330
OBJECTIVE SYSTEMS INTEGRATORS, INC.
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets at March 31, 1997
and June 30, 1996................................................. 3
Condensed Consolidated Statements of Operations for the nine
months ended March 31, 1997 and March 31, 1996..................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended March 31, 1997 and March 31, 1996.................... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 8
PART II. OTHER INFORMATION
Item 5. Other information - Registration of Chief Executive Officer....... 13
Item 6. Exhibits and Reports on Form 8-K.................................. 14
Index to Exhibits................................................. 14
SIGNATURE................................................................... 15
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
MARCH 31, JUNE 30,
1997 1996
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ASSETS (UNAUDITED) (1)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 50,628 $ 53,988
Accounts receivable (net of allowances of $4,196
and $987)........................................ 30,903 32,198
Income tax refund receivable....................... 7,094 7,710
Prepaid expenses and other current assets.......... 5,254 2,364
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Total current assets........................... 93,879 96,260
Property and equipment, net........................... 15,098 9,822
Other assets, net..................................... 6,477 431
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Total assets...................................... $ 115,454 $ 106,513
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 4,547 $ 3,462
Accrued liabilities.............................. 6,116 2,644
Deferred revenue................................. 4,286 5,349
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Total current liabilities.................... 14,949 11,455
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Stockholders' equity:
Common stock...................................... 32 73,207
Additional paid-in capital........................ 81,354 -
Deferred stock compensation....................... (673) (996)
Retained earnings................................. 19,792 22,847
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Total stockholders' equity.................... 100,505 95,058
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Total liabilities and stockholders' equity.... $ 115,454 $ 106,513
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</TABLE>
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of June 30, 1996.
See notes to condensed consolidated financial statements.
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- -------
Revenues:
<S> <C> <C> <C> <C>
License................................................. $ 3,638 $10,031 $30,644 $26,478
Service and other....................................... 5,995 3,758 16,566 13,438
-------- -------- -------- -------
Total............................................... 9,633 13,789 47,210 39,916
-------- -------- -------- -------
Cost of revenues:
License................................................ 424 308 1,229 805
Service and other...................................... 5,263 2,736 13,178 8,686
-------- -------- -------- -------
Total.............................................. 5,687 3,044 14,407 9,491
-------- -------- -------- -------
Gross profit............................................... 3,946 10,745 32,803 30,425
-------- -------- -------- -------
Operating expenses:
Sales and marketing.................................... 7,351 4,073 19,494 10,418
Research and development............................... 3,150 2,168 9,377 4,719
General and administrative............................. 3,693 1,901 10,830 4,229
-------- -------- -------- -------
Total............................................... 14,194 8,142 39,701 19,366
-------- -------- -------- -------
Income (loss) from operations.............................. (10,248) 2,603 (6,898) 11,059
Other income, net.......................................... 646 988 1,988 1,189
-------- -------- -------- -------
Income (loss) before income taxes.......................... (9,602) 3,591 (4,910) 12,248
Provision (benefit) for income taxes....................... (3,660) 1,408 (1,855) 4,956
-------- -------- -------- -------
Net income (loss).......................................... $ (5,942) $ 2,183 $(3,055) $ 7,292
======== ======== ======== =======
Net income (loss) per share................................ $ (.18) $ .06 $ (.10) $ .22
======== ======== ======== =======
Shares used in per share computation....................... 32,304 35,348 31,948 33,114
======== ======== ======== =======
</TABLE>
See notes to condensed consolidated financial statements.
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $ (3,055) $ 7,292
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization..................................... 3,211 2,111
Amortization of deferred stock compensation....................... 323 317
Interest received on loans to shareholders........................ - 212
Effect of changes in (net of acquisition):
Accounts receivable........................................... 1,295 (16,429)
Income tax refund receivable.................................. 8,652 3,057
Prepaid expenses and other current assets..................... (2,890) (2,488)
Other assets.................................................. (777) (162)
Accounts payable.............................................. 1,085 629
Accrued liabilities........................................... 3,472 1,018
Deferred revenue.............................................. (1,063) 2,703
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Net cash provided by (used for) operating activities...... 10,253 (1,740)
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Cash flows from investing activities:
Purchases of property and equipment.................................. (8,487) (5,367)
Purchase of assets related to acquisition of distributor............. (5,269) -
Loans to shareholders collected...................................... - 4,200
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Net cash used for investing activities................... (13,756) (1,167)
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Cash flows from financing activities:
Proceeds from issuance of common stock............................... 143 59,519
Repayments of line-of-credit, net.................................... - (400)
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Net cash provided by financing activities................. 143 59,119
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Net increase (decrease) in cash and cash equivalents..................... (3,360) 56,212
Cash and cash equivalents:
Beginning of the period.............................................. 53,988 763
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End of the period.................................................... $ 50,628 $ 56,975
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Other cash flow information:
Cash paid during the period for:
Interest.......................................................... $ 1 $ 41
========== =========
Income taxes...................................................... - $ 3,790
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</TABLE>
See notes to condensed consolidated financial statements.
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited, condensed, consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosure
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The information furnished in this report reflects all
adjustments which, in the opinion of management, are necessary for a fair
statement of the financial position, results of operations and cash flows as of
and for the interim periods. Such adjustments consist of items of a normally
recurring nature. Certain reclassifications have been made to the prior year's
consolidated financial statements to conform with the current year's
presentation. The unaudited, condensed, consolidated financial statements
included herein should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on Form 10-
K for the fiscal year ended June 30, 1996. The results of operations for the
interim periods are not necessarily indicative of the results of operations
expected for the full fiscal year or for any other future period.
2. NET INCOME (LOSS ) PER SHARE
Net income (loss) per share is computed using the weighted average number
of common and dilutive common equivalent shares outstanding during the period.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins
and Staff Policy, such computations include all common and common equivalent
shares issued within 12 months of the initial public offering date as if they
were outstanding for all periods presented prior to the offering, using the
treasury stock method. Common equivalent shares consist of the incremental
common shares issuable upon the conversion of the convertible preferred stock
(using the if-converted method) and shares issuable upon the exercise of stock
options (using the treasury stock method). Common equivalent shares outstanding
are not included in the net loss per share computations as their inclusion would
be anti-dilutive.
3. RELATED PARTY TRANSACTION
For the quarter ended September 30, 1996, the Company had revenues of
approximately $3.0 million from Cisco Systems Inc. ("Cisco"). Revenue in
subsequent quarters have been insignificant. As of March 31, 1997, Cisco owns
1,315,789 shares of the Company's common stock and a vice president of Cisco is
a member of the Company's Board of Dirctors. At March 31, 1997, accounts
receivables from Cisco were approximately $66,000.
4. REINCORPORATION
At the Annual Meeting of Shareholders on November 14, 1996, the Company's
shareholders approved a proposal to change the Company's state of incorporation
to Delaware from California (the "Reincorporation") through a merger of
Objective Systems Integrators, Inc, a California corporation ("OSI California"),
with the Company's wholly-owned subsidiary, Objective Systems Integrators, Inc.,
a Delaware corporation ("OSI Delaware"). Among other things, in connection with
the Reincorporation, the authorized shares of common stock of the Company were
increased from 50,000,000 shares to 100,000,000 shares and a par value was
established for common stock of $0.001 per share. On January 28, 1997, the
Company completed the Reincorporation. As of the effective time of the merger,
OSI California ceased to exist. The Reincorporation effects only a change in
the legal domicile of the Company. It will not result in any change of name,
business,
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management, employees, fiscal year, assets or liabilities, Nasdaq National
Market trading symbol (OSII) or location of any of the facilities of the
Company.
5. PURCHASE OF DISTRIBUTOR
In the quarter ended March 31, 1997, the Company purchased certain assets
of one of its distributors located in Australia that specializes in network
management and intelligent network systems and services, and has been a
distributor of OSI's products since June 1995. The distributor's customer base
includes telecommunications carriers, switch vendors, and information technology
providers throughout Australia, New Zealand, and the Asia-Pacific region. The
total purchase price was approximately $5 million. The Company has accounted for
this transaction under the purchase method of accounting for business
combinations and, as such, has recorded the assets acquired as of the date of
acquisition at their fair market values. The purchase price in excess of the
assets fair market value represent intangible assets which are amortized over a
2 to 10 year life.
6. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). The
Company is required to adopt SFAS 128 in fiscal 1998 and will restate, at that
time, earnings per share (EPS) data for prior periods to conform with SFAS 128.
Earlier application of SFAS 128 is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
If SFAS 128 had been in effect during the quarter or nine-month period
ended March 31, 1997, basic and diluted EPS would not have been different than
the EPS currently reported for the period. If SFAS 128 had been in effect during
the quarter ended March 31, 1996, basic and diluted EPS would have been $0.07
and $0.06, respectively. For the nine-month period ended March 31, 1996, basic
and diluted EPS would have been $0.25 and $0.22, respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements in this Report are forward-looking, based on current
expectations, and entail various risks and uncertainties that could cause actual
results to differ materially from these expressed. These risks and uncertainties
are described in the first paragraph under "Overview," in the second paragraph
under "Revenues," in the second paragraph under "License Revenues," in the
second paragraph under "Service and Other Revenues," under "Sales and
Marketing," under "Research and Development," under "General and
Administrative," and under "Significant Fluctuations in Quarterly Operating
Results."
OVERVIEW
The Company develops, markets and supports object-oriented, client/server
software systems for network operations support and management. The Company was
founded in June 1989 and began shipments of its NetExpert framework in August
1990. As of March 31, 1997, the Company had directly or indirectly licensed its
products to approximately 157 customers worldwide. In fiscal years 1994, 1995
and 1996, the Company experienced substantial revenue growth which is not
expected to continue in fiscal 1997. Revenue from licenses, service and support
of NetExpert software has accounted for substantially all of the Company's
revenues since inception. A typical NetExpert software sale generally includes a
combination of license fees, fees for professional services and fees for
maintenance, customer support and training.
The Company believes that revenues from the license, service and support of
its NetExpert product will continue to account for substantially all of the
Company's total revenues for the foreseeable future. A significant portion of
the Company's revenues has been, and will continue to be, derived from
substantial orders placed by large organizations. The timing of these orders and
their fulfillment has caused, and will continue to cause, material fluctuations
in the Company's operating results, particularly on a quarterly basis. The
Company believes that its quarterly revenues and operating results are likely to
vary significantly in the future. The Company also believes that period-to-
period comparisons of its revenue and results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
The Company contracts with its foreign customers primarily in U.S.
dollars and, at this time foreign currency exchange risk is considered
immaterial. Foreign exchange rate risk may increase in the future.
The Company distributes and sells its NetExpert products to end users in
North America primarily through a direct sales organization and, to a lesser
extent, through systems integrators, distributors and with assistance from its
third-party marketing relationships. Outside of North America, the Company sells
its products and services principally through systems integrators, local
distributors and, to a lesser extent, a direct sales force. The Company intends
to enter into additional international markets and to continue expanding its
operations within and outside of North America by growing its direct sales
force, opening additional customer support and sales offices, adding
distributors and pursuing additional strategic relationships.
RESULTS OF OPERATIONS
Revenues
The Company's revenues are derived from license fees and fees for a full
range of services complementing its products, including professional services,
software maintenance, and customer support and training. Software licenses are
generally granted and priced on a per-seat basis, although the Company may grant
site, network-wide or enterprise-wide licenses for larger installations. The
Company's software licenses generally provide for an initial fee and are
nonroyalty-bearing. Revenue from software licenses for which collectibility is
probable and customer acceptance is not dependent on the fulfillment of other
significant
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obligations on the part of the Company is generally recognized after shipment.
Costs associated with the obligations are accrued. Revenue from software
licenses that involve significant obligations on the part of the Company is
generally recognized using percentage-of-completion basis, using input or output
measurements, as appropriate. Although the Company's license agreements
generally do not provide for a right of return, reserves are maintained for
returns and potential credit losses. For the nine months ended March 31, 1997,
the Company increased its accounts receivable reserves from $1.0 million to $4.2
million. The increase in the accounts receivable reserve is due primarily to the
increased age of the Company's accounts receivables as well as other items noted
under the section "Liquidity and Capital Resources." The Company offers 12-month
support contracts to its customers. The support contract entitles the customer
to telephone support, product updates and product maintenance during the support
period. Maintenance revenues from ongoing customer support and product upgrades
are deferred and recognized ratably over the term of the maintenance agreement,
typically 12 months. Payments for maintenance fees are generally made in advance
and are generally nonrefundable. Revenues for training, consulting and
professional services are generally recognized as the services are performed.
Total revenues decreased 30% to $9.6 million in the third quarter of fiscal
1997 from $13.8 million in the third quarter of fiscal 1996. In the third
quarter of fiscal 1997, domestic revenues were 70% and international revenues
were 30%. The decrease in domestic revenues related, in part, to developments in
two markets: in the CLEC (competitive local exchange carrier) market,
implementation of total deregulation in the local loop has been delayed; and in
the PCS (personal communications system) market, large investments required for
FCC licenses have, in some cases, caused the service providers to seek
additional financing to complete the build-out of their network infrastructure.
Total revenues increased 18% to $47.2 million for the nine-month period ended
March 31, 1997 from $39.9 million for the nine-month period ended March 31,
1996. Total revenues increased for this period due to a larger number of
licenses of the Company's NetExpert framework, licenses of NetExpert application
rule sets and increased related maintenance fees. The Company's product and
service list prices did not change significantly between comparison periods.
International revenues represented 30% of total revenues in the third
quarter of fiscal 1997 and 1996. The decrease in international revenues was due
primarily to a decline in orders from the Asia-Pacific region. International
revenues were 28% of total revenues for the nine-month period ended March 31,
1997, as compared to 31% for the nine-month period ended March 31, 1996.
License Revenues. License revenues decreased 64% to $3.6 million in the
third quarter of fiscal 1997 from $10.0 million in the third quarter of fiscal
1996. The decline in domestic and international orders as noted above related
primarily to license revenues. License revenues increased 16% to $30.6 million
for the nine-month period ended March 31, 1997, from $26.5 million for the nine-
month period ended March 31, 1996.
License revenues represented 38% and 73% of total revenues in the third
quarter of fiscal 1997 and 1996, respectively, and represented 65% and 66% of
total revenues for the nine-month period ended March 31, 1997, and March 31,
1996, respectively. As was the case in the third quarter of fiscal 1997, the
Company expects that prior growth rates of the Company's license revenues are
not sustainable and should not be relied upon as an indication of growth rates
for any future period. The Company also believes that competition in its markets
will increase, which could result in price reductions, reduced gross profit
margins or loss of market share, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
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Service and Other Revenues. Service and other revenues increased 60% to
$6.0 million in the third quarter of fiscal 1997 from $3.8 million in the third
quarter of fiscal 1996. Service and other revenues increased 23% to $16.6
million for the nine-month period ended March 31, 1997, from $13.4 million for
the nine-month period ended March 31, 1996. Service and other revenues increased
from period to period primarily due to increased maintenance and customer
support fees resulting from a larger installed base of the Company's products.
Service and other revenues represented 62% and 27% of total revenues in the
third quarter of fiscal 1997 and 1996, respectively, and represented 35% and 34%
of total revenues for the nine-month period ended March 31, 1997, and March 31,
1996, respectively. The growth in service and other revenues as a percentage of
total revenues is due to the decline in the level of license revenues. The
Company anticipates that service and other revenues will continue to represent a
significant portion of its total revenues in future periods, primarily as a
result of continued demand for professional services in connection with
increased licenses of its NetExpert software, renewal of existing maintenance
contracts and incremental maintenance revenues attributable to the increasing
installed base of NetExpert software. The Company expects that prior growth
rates of the Company's service and other revenues are not sustainable and should
not be relied upon as an indication of growth rates for any future period.
Additionally, if the Company's license revenues do not continue to expand,
revenues will decline as the current installed customer base matures.
Cost of Revenues
Cost of License Revenues. Cost of license revenues consists primarily of
license fees paid to third-party software vendors and the costs of product
media, duplication, manuals, packaging materials, shipping expenses,
amortization of capitalized software costs and related labor costs. Cost of
license revenues increased 38% to $424,000 in the third quarter of fiscal 1997
from $308,000 in the third quarter of fiscal 1996. Cost of license revenues
increased 53% to $1,229,000 for the nine-month period ended March 31, 1997, from
$805,000 for the nine-month period ended March 31, 1996. The increase in cost of
license revenues resulted primarily from additional fees paid to third-party
software vendors and higher production overhead costs. Gross profit on license
revenue was 88% of license revenue in the third quarter of fiscal 1997 and 97%
in the third quarter of fiscal 1996. Gross profit on license revenue was 96% and
97% for the nine-month periods ended March 31, 1997, and March 31, 1996,
respectively. The decrease in gross profit as a percentage of revenues from the
third quarter of fiscal 1997 compared to the third quarter of fiscal 1996 and
from the nine-month period ended March 31, 1997, compared to the nine-month
period ended March 31, 1996, was due to higher production costs as a percentage
of license fees which related to lower license revenue volume in the third
quarter of fiscal 1997.
Cost of Service and Other Revenues. Cost of service and other revenues
consists primarily of personnel costs for providing professional services,
consulting fees paid to third-party providers of professional services,
personnel costs for telephone support, maintenance, shipment of product upgrades
and customer training. Cost of service and other revenues increased 92% to $5.2
million in the third quarter of fiscal 1997 from $2.7 million in the third
quarter of fiscal 1996. Cost of service and other revenues increased 52% to
$13.2 million for the nine-month period ended March 31, 1997, from $8.7 million
for the nine-month period ended March 31, 1996. The increase in cost of service
and other revenues is primarily due to increases in personnel head count and
related costs in professional services, consulting fees paid to outside
contractors, telephone support, maintenance, and customer training. Gross profit
on service and other revenues was 12% and 27% in the third quarter of fiscal
1997, and 1996, respectively. Gross profit on services and other revenues was
20% and 35% for the nine-month periods ended March 31, 1997, and 1996,
respectively. The decrease in gross profit as a percentage of revenues from the
third quarter of fiscal 1997 compared to the third quarter of fiscal 1996 and
from the nine-month period ended March 31, 1997, compared to the nine-month
period ended March 31, 1996, was due to increased salary and related costs from
additional head count, costs related to outside contractors and other related
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costs associated with building infrastructure and providing services to the
Company's customers.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses for sales and marketing personnel, facilities
costs associated with the Company's sales and customer support offices, and
promotional expenses. Sales and marketing expenses increased 80% to $7.4 million
in the third quarter of fiscal 1997 from $4.1 million in the third quarter of
fiscal 1996. Sales and marketing increased 87% to $19.4 million for the nine-
month period ended March 31, 1997, from $10.4 million for the nine-month period
ended March 31, 1996. Sales and marketing expenses represented 76% and 30% of
total revenues in the third quarter of fiscal 1997 and 1996, respectively. Sales
and marketing expenses represented 41% and 26% of total revenues for the nine-
month period ended March 31, 1997, and 1996, respectively. The increase in sales
and marketing expenses as a percentage of revenues resulted primarily from the
expansion of the Company's worldwide sales and marketing organization, expansion
and support of the Company's indirect sales channels, particularly outside of
North America, and increased expenses for trade shows, advertising and other
marketing programs. Sales and marketing expenses in future periods will continue
to increase in absolute dollars.
Research and Development. Research and development expenses increased 45%
to $3.2 million in the third quarter of fiscal 1997 from $2.2 million in the
third quarter of fiscal 1996. Research and development expenses increased 99% to
$9.4 million for the nine-month period ended March 31, 1997, from $4.7 million
for the nine-month period ended March 31, 1997. Research and development
expenses represented 33% and 16% of total revenues in the third quarter of
fiscal 1997 and 1996, respectively. Research and development expenses
represented 20% and 12% of total revenue for the nine-month period ended March
31, 1997, and 1996, respectively. The increase in research and development
expenses was primarily attributable to increased staffing costs, including
salaries, bonuses and recruiting expenses, and associated equipment, facilities,
and support, for software engineers. The Company anticipates that it will
continue to commit significant resources to research and development in future
periods to enhance and extend its core technology and product lines. The Company
also expects that research and development expenses in future periods will
continue to increase in absolute dollars.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, human resources, network and
information systems, and general management, as well as insurance and outside
services expenses. General and administrative expenses increased 94% to $3.7
million in the third quarter of fiscal 1997 from $1.9 million in the third
quarter of fiscal 1996. General and administrative expenses increased 156% to
$10.8 million for the nine-month period ended March 31, 1997, from $4.2 million
for the nine-month period ended March 31, 1996. General and administrative
expenses represented 38% and 14% of total revenues in the third quarter of
fiscal 1997 and 1996, respectively. General and administrative expenses
represented 23% and 11% of total revenue for the nine-month periods ended March
31, 1997, and 1996, respectively. The increase in general and administrative
expenses resulted primarily from an increase of allowance for doubtful accounts
of $0.9 million and $3.5 million in the third fiscal quarter of 1997 and the
nine-month period ended March 31, 1997, respectively. As noted in the section
"Liquidity and Capital Resources," the increase in allowance for doubtful
accounts is due primarily to the increased age of the Company's accounts
receivables. Additionally, increased staffing, facilities costs, training
related to implementation of a new information system, and associated expenses
necessary to manage and support the Company's growth caused general and
administrative expenses to increase. The Company expects that general and
administrative expenses may increase in future periods in absolute dollars.
Provision (benefit) for Income Taxes
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The provision (benefit) for income taxes includes federal, state and
foreign income taxes. The effective tax rates for the third quarter of fiscal
1997 and 1996 were 38% and 39%, respectively, and for the nine-month period
ended March 31, 1997, and 1996, were 38% and 40%, respectively. The effective
tax rates for these periods differ from the federal statutory rate primarily due
to the effect of research and development tax credits, state income taxes, and
foreign taxes. As of March 31, 1997, the Company had no net operating loss or
other tax credit carryforwards.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have varied and will continue to
vary significantly depending on a wide variety of factors, such as capital
spending patterns of the Company's customers, the lengthy sales cycles for the
Company's products, increased competition, cancellation of licenses or
maintenance agreements, changes in operating expenses, personnel changes,
fluctuations in demand for the Company's NetExpert software, the number, timing
and significance of new product and product enhancements by the Company and its
competitors, the mix of direct and indirect sales, and general economic factors,
among others. A significant portion of the Company's revenues have been, and
will continue to be, derived from substantial orders placed by large
organizations, including the Regional Bell Operating Companies, competitive
local exchange carriers, new competitive access providers, and global
telecommunication providers. The timing of these orders and their fulfillment
has caused and will continue to cause material fluctuations in the Company's
operating results, particularly on a quarterly basis. Because of these factors,
quarterly revenue and operating results have been, and will continue to be,
difficult to forecast. The sales cycle associated with the licensing of the
Company's products is typically subject to a number of significant risks,
including customers' budgetary constraints and internal acceptance reviews, over
which the Company has little or no control. In addition, the Company typically
realizes a significant portion of its license revenues in the last month of a
quarter, frequently in the last weeks or even days of a quarter.
The Company's expense levels are based, in part, on its expectations as
to future revenue levels. Therefore, if revenue levels are below expectations,
operating results are likely to be materially adversely affected. In particular,
because only a small portion of the Company's expenses varies with revenue, net
income may be disproportionately affected by a reduction in revenues. This
proved to be the case in the third quarter of fiscal 1997.
The Company's business has experienced and is expected to continue to
experience significant seasonality in certain quarters, due in part to an
increase in capital expenditures by customers in certain quarters. The Company
has historically had higher revenues for its products during the quarter ending
in December and weaker revenues during the quarter ending in March. The Company
believes that this pattern is likely to continue.
Because of the foregoing, the Company believes that quarterly revenues and
operating results can be expected to vary significantly in the future. The
Company also believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Further, it can be expected that in some
fiscal quarters the Company's revenues or operating results will be below the
expectations of stock market analysts and investors. If either occurs, the price
of the Company's common stock could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its operations primarily
through cash generated from operations and, to a lesser extent, from capital
equipment leases. In addition, in November 1995 the Company completed its
initial public offering of common stock, raising approximately $59.5 million,
net of underwriting discount commissions and other
<PAGE>
expenses. The Company's operating activities provided $10.0 million in cash for
the nine-month period ended March 31, 1997. The Company currently expects to
make capital expenditures of $9.0 million to $12.0 million in the next 12
months, primarily for the purchase of computer equipment and related software,
furniture and fixtures and leasehold improvements. The $9.0 million to $12.0
million of capital expenditures includes capital expenditures associated with
developing and expanding international markets.
As of March 31, 1997, the Company had working capital of approximately
$78.9 million, including $50.6 million in cash and cash equivalents. In
addition, the Company has an unsecured revolving line of credit with Wells Fargo
Bank, pursuant to which the Company may borrow up to $2.5 million. Under the
line of credit, which expires in January 1999, borrowings bear interest at
either a fluctuating rate per annum equal to the prime rate in effect from time
to time or a fixed rate per annum equal to 2% above the London Interbank Offered
Rate. As of March 31, 1997, there were no borrowings outstanding under the line
of credit.
From time to time, accounts receivable of the Company remain outstanding
beyond their payment terms. The Company maintains an allowance for doubtful
accounts that it believes is adequate to cover any potential credit losses.
During the nine-month period ended March 31, 1997, the Company increased its
accounts receivable reserves from $1.0 million to $4.2 million. As of March 31,
1997, accounts receivable of approximately $15.6 million had been outstanding
for more than 120 days, of which approximately $12.3 million were beyond payment
terms. The reason that certain accounts are beyond payment terms varies from
customer to customer, but generally relates to: delays in the implementation of
the Company's software products within customer projects, disputes related to
acceptance of completed systems, and failure of some customers to make certain
scheduled contract payments. Approximately $10.3 million of the accounts
receivable outstanding greater than 120 days as of March 31, 1997, were due from
twelve customers of the Company. Generally, the Company believes that each of
the twelve customers is creditworthy. Moreover, each of these organizations
continues to license products and procure services from the Company.
The Company believes that existing cash balances and cash flow from
operations will be sufficient to support its working capital requirements for
the foreseeable future. At some point, if cash generated from operations is
insufficient to satisfy working capital requirements, the Company may be
required to raise additional funds. No assurance can be given that additional
financing will be available or that, if available, financing will be obtainable
on terms favorable to the Company or its shareholders. To the extent the Company
raises additional capital by issuing equity or convertible debt securities,
ownership dilution to the Company's shareholders will result. If adequate funds
are not available, the Company's business may be adversely affected.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION - RESIGNATION OF CHIEF EXECUTIVE OFFICER
On April 19, 1997, Joseph T. Ambrozy resigned as the Company's President
and Chief Executive Officer and as a member of the Company's Board of Directors.
The co-founders of the Company and Co-Chairmen of its Board of Directors,
Richard G. Vento and Tom L. Johnson, assumed the posts of Co-Chief Executive
Officers of the Company.
In connection with his resignation, Mr. Ambrozy and the Company entered
into an agreement under which Mr. Ambrozy will be retained as a consultant to
the Company until such time as his issued but unvested options in the Company's
Common Stock have become fully vested. From the date of Mr. Ambrozy's
resignation through the end of calendar 1997, Mr. Ambrozy will be paid a
consulting fee at a rate equal to his prior base salary of $350,000 per year.
Thereafter, Mr. Ambrozy will be paid a consulting fee of $1.00 per year. Mr.
<PAGE>
Ambrozy's existing options, which are not subject to repricing at any time, are
in the following amounts:
<TABLE>
<CAPTION>
Number of Shares Option Price
---------------- ------------
<S> <C>
50,000 $10.20
240,000 $13.00
200,000 $22.50
</TABLE>
In connection with his agreement, approximately 390,000 of Mr. Ambrozy's options
to purchase the Company's Common Stock will not be subject to early termination.
The Company has also agreed to pay Mr. Ambrozy the lump sum of $1 million, in
principal part as required by his employment contract. In addition, the Company
will reimburse Mr. Ambrozy for certain costs, and indemnify him against certain
potential losses, that he may incur in disposing of his California residence and
relocating within the United States. Finally, the Company will reimburse Mr.
Ambrozy for the premium costs of continuing a term life insurance policy in the
amount of $1 million and payable to the Mr. Ambrozy's beneficiary. This policy
is for each of the next four years.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1 Statement regarding computation of per share earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the quarter ended March 31, 1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OBJECTIVE SYSTEMS INTEGRATORS,
INC.
Dated: May 15, 1997 By: /s/ David M. Allen
-------------------------
David M. Allen, Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
<PAGE>
EXHIBIT 11.1
OBJECTIVE SYSTEMS INTEGRATORS, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ -----------------------------
1997 1996 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(5,942) $ 2,183 $(3,055) $ 7,292
======== ======= ======= =======
Weighted average common and preferred shares
outstanding 32,304 30,648 31,948 28,638
Equivalent shares from options granted during
twelve month period prior to the Company's
initial public offering - 788 - 788
Equivalent shares attributed to options, (treasury
stock method) - 3,912 - 3,688
-------- ------- ------- -------
Weighted average common and equivalent shares 32,304 35,348 31,948 33,114
======== ======= ======= ========
Net income (loss) per share $ (.18) $ .06 $ (.10) $ .22
======== ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM 3/31/97 FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> JAN-01-1997 JUL-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1997
<CASH> 50,628 50,628
<SECURITIES> 0 0
<RECEIVABLES> 30,903 30,903
<ALLOWANCES> 4,196 4,196
<INVENTORY> 0 0
<CURRENT-ASSETS> 93,879 93,879
<PP&E> 14,484 14,484
<DEPRECIATION> 8,007 8,007
<TOTAL-ASSETS> 115,454 115,454
<CURRENT-LIABILITIES> 14,949 14,949
<BONDS> 0 0
0 0
0 0
<COMMON> 81,386 81,386
<OTHER-SE> (673) (673)
<TOTAL-LIABILITY-AND-EQUITY> 100,505 100,505
<SALES> 0 0
<TOTAL-REVENUES> 9,633 47,210
<CGS> 5,687 14,407
<TOTAL-COSTS> 19,881 54,108
<OTHER-EXPENSES> (646) (1,908)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (9,602) (4,910)
<INCOME-TAX> (3,660) (1,855)
<INCOME-CONTINUING> (5,942) (3,055)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,942) (3,055)
<EPS-PRIMARY> (.18) (.10)
<EPS-DILUTED> (.18) (.10)
</TABLE>
