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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 DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
Commission file number: O-26886
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA (DELAWARE AS OF JANUARY 28, 1997) 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 January 31,
1997: 32,308,188
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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.
Condensed Consolidated Balance Sheets at December 31, 1996, 3
and June 30, 1996.
Condensed Consolidated Statements of Income for the six
months ended December 31, 1996, and December 31, 1995. 4
Condensed Consolidated Statements of Cash Flows for the three
and six months ended December 31, 1996, and December 31, 1995. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial Condition and 7
Results of Operations.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. 12
Item 5. Other information - Reincorporation. 12
Item 6. Exhibits and Reports on Form 8-K. 13
Index to Exhibits. 13
SIGNATURES 14
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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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DECEMBER 31, JUNE 30,
1996 1996 (1)
------------- -----------
ASSETS (UNAUDITED)
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Current assets:
Cash and cash equivalents.............. $ 56,104 $ 53,988
Accounts receivable (net of allowances
of $2,892 and $987)................... 34,975 32,198
Income tax refund receivable........... 8,318 7,710
Prepaid expenses and other current
assets................................ 4,451 2,364
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Total current assets.................. 103,848 96,260
Property and equipment, net............. 14,269 9,822
Other assets............................ 492 431
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Total assets.......................... $118,609 $106,513
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 4,385 $ 3,462
Accrued liabilities.................... 4,472 2,644
Deferred revenue....................... 3,657 5,349
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Total current liabilities............. 12,514 11,455
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Shareholders' equity:
Common stock........................... 81,127 73,207
Deferred stock compensation............ (766) (996)
Retained earnings...................... 25,734 22,847
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Total shareholders' equity............ 106,095 95,058
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Total liabilities and shareholders'
equity.............................. $118,609 $106,513
============= ===========
</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 INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ------------------
1996 1995 1996 1995
--------- -------- -------- --------
Revenues:
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License............................. $13,902 $10,990 $27,007 $16,446
Service and other................... 6,121 5,177 10,571 9,680
--------- -------- -------- --------
Total............................ 20,023 16,167 37,578 26,126
--------- -------- -------- --------
Cost of revenues:
License............................. 445 288 806 497
Service and other................... 4,728 3,356 7,914 5,950
--------- -------- -------- --------
Total............................ 5,173 3,644 8,720 6,447
--------- -------- -------- --------
Gross profit.......................... 14,850 12,523 28,858 19,679
--------- -------- -------- --------
Operating expenses:
Sales and marketing................. 6,816 3,386 12,144 6,345
Research and development............ 3,505 1,333 6,227 2,551
General and administrative.......... 4,363 1,201 7,137 2,328
--------- -------- -------- --------
Total............................ 14,684 5,920 25,508 11,224
--------- -------- -------- --------
Income from operations................ 166 6,603 3,350 8,455
Other income, net..................... 659 216 1,342 201
--------- -------- -------- --------
Income before income taxes............ 825 6,819 4,692 8,656
Provision for income taxes............ 291 2,813 1,805 3,548
--------- -------- -------- --------
Net income............................ $ 534 $ 4,006 $ 2,887 $ 5,108
========= ======== ======== ========
Net income per share.................. $ .02 $ .12 $ .08 $ .16
========= ======== ======== ========
Shares used in per share computation.. 34,217 32,806 34,142 32,111
========= ======== ======== ========
</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)
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SIX MONTHS ENDED
DECEMBER 31,
-------------------
1996 1995
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Cash flows from operating activities:
Net income.............................................. $ 2,887 $ 5,108
Adjustments to reconcile net income to
net cash provided by (used for) operating activities:
Depreciation and amortization......................... 1,971 1,307
Amortization of deferred stock compensation 230 211
Interest received on loans to shareholders............ - 212
Effect of changes in:
Accounts receivable................................ (2,777) (14,405)
Income tax refund receivable....................... 7,187 -
Prepaid expenses and other current assets.......... (2,087) (701)
Accounts payable................................... 923 454
Accrued liabilities................................ 1,828 1,216
Income taxes payable............................... - 1,702
Deferred revenue................................... (1,692) 2,969
-------- --------
Net cash provided by (used for)
operating activities............................. 8,470 (1,927)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment..................... (6,479) (2,900)
Loans to shareholders collected......................... - 4,200
-------- --------
Net cash provided by (used for)
investing activities............................... (6,479) 1,300
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock.................. 125 59,633
Repayments of line-of-credit, net....................... - (400)
-------- --------
Net cash provided by financing activities......... 125 59,233
-------- --------
Net increase in cash and cash equivalents................ 2,116 58,606
Cash and cash equivalents:
Beginning of the period................................. 53,988 763
-------- --------
End of the period....................................... $56,104 $ 59,369
======== ========
Other cash flow information:
Cash paid during the period for:
Interest.............................................. $ - $ 30
======== ========
Income taxes.......................................... $ - $ 2,040
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</TABLE>
See notes to condensed consolidated financial statements.
5
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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. 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 PER SHARE
Net income 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).
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 the
quarter ended December 31, 1996 was insignificant. Cisco currently 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 Directors. At December 31, 1996, accounts
receivables from Cisco were approximately $44,000.
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. On January 28, 1997,
the Company completed the Reincorporation. As of the effective time of the
merger, OSI California ceased to exist. The Reincorporation affects only a
change in the legal domicile of the Company. It will not result in any change
of name, business, management, employees, fiscal year, assets or liabilities,
Nasdaq National Market trading symbol (OSII) or location of any of the
facilities of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Quarterly Report on Form 10-Q are forward-looking
statements based on current expectations, and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. Such risks and uncertainties are
set forth 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" 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 NetExpert/TM in August 1990. As of
December 31, 1996, the Company had directly or indirectly licensed its products
to more than 154 customers worldwide. The Company has experienced substantial
revenue growth in each of the last three fiscal years and has been profitable in
each of the last thirteen quarters. Revenue from licenses, service and support
of NetExpert has accounted for substantially all of the Company's revenues since
inception. A typical NetExpert sale generally includes a combination of license
fees, fees for professional services and fees for maintenance, customer support
and training. The Company believes that revenue from the license, service and
support of NetExpert will continue to account for substantially all of the
Company's total revenue in fiscal 1997 and for the foreseeable future
thereafter. 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 and 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 distributes and sells NetExpert to end users in North America
primarily through a direct sales organization. Outside of North America, the
Company sells its products and services principally through systems integrators
and local distributors and, to a lesser extent, through a direct sales force.
The Company intends to enter into additional international markets and to
continue to expand its operations outside of North America by expanding 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 up-front fee and are non-
royalty bearing. Revenue from software licenses for which collectibility is
probable and customer acceptance is not dependent on the fulfillment of other
significant vendor obligations is generally recognized after shipment and
customer acceptance. Costs associated with insignificant vendor obligations are
accrued. Revenue from software licenses with other significant vendor
obligations is generally recognized using a 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 six months ended
December 31, 1996, the Company increased its accounts receivable reserve from
$1.0 million to $2.9 million. The Company offers 12-month support contracts to
its customers generally at a cost of 10% to 20% of the
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customer's aggregate license price. 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 non refundable. Revenues for training, consulting and
professional services are generally recognized as the services are performed.
Total revenues increased 24% to $20.0 million in the second quarter of
fiscal 1997 from $16.2 million in the second quarter of fiscal 1996. Total
revenues increased 44% to $37.6 million for the six-month period ended December
31, 1996 from $26.1 million for the six-month period ended December 31, 1995.
Total revenues increased due to a larger number of licenses of NetExpert,
NetExpert application rule sets and maintenance fees, partially offset by a
decrease in revenues from professional services. The Company's product and
service list prices did not change significantly between comparison periods.
Currently, the Company believes its products are priced at a premium compared to
its competitors. The Company anticipates that competition will increase,
resulting in downward pricing pressure on the Company's products and services.
International revenues decreased to 27% of total revenues in the second
quarter of fiscal 1997 from 28% of total revenues in the second quarter of
fiscal 1996. International revenues were 32% of total revenues for the six-month
period ended December 31, 1996, as compared to 31% for the six-month period
ended December 31, 1995.
License Revenues. License revenues increased 26% to $13.9 million in the
second quarter of fiscal 1997 from $11.0 million in the second quarter of fiscal
1996. License revenues increased 64% to $27.0 million for the six-month period
ended December 31, 1996 from $16.4 million for the six-month period ended
December 31, 1995. License revenue increased from period to period due to
additional licenses to existing customers of the Company's NetExpert, as well as
new customer installations.
License revenues represented 69% and 68% of total revenues in the second
quarter of fiscal 1997 and 1996, respectively, and represented 72% and 63% of
total revenues for the six-month period ended December 31, 1996 and December
31, 1995, respectively. The Company anticipates that license revenues will
continue to represent a majority of its total revenues for the foreseeable
future. 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.
Service and Other Revenues. Service and other revenues increased 18% to $6.1
million in the second quarter of fiscal 1997 from $5.2 million in the second
quarter of fiscal 1996. Service and other revenues increased 9% to $10.6 million
for the six-month period ended December 31, 1996 from $9.7 million for the six-
month period ended December 31, 1995. Service and other revenues increased from
period to period primarily due to increased maintenance and customer support
from a larger installed base of the Company's products.
Service and other revenues represented 31% and 32% of total revenues in the
second quarter of fiscal 1997 and 1996, respectively, and represented 28% and
37% of total revenues for the six-month period ended December 31, 1996 and
December 31, 1995, respectively. 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 NetExpert, renewal of existing
maintenance contracts and incremental maintenance revenues attributable to the
increasing installed base of NetExpert. 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.
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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,
amortizationof capitalized software costs and related labor costs. Cost of
license revenuesincreased 55% to $445,000 in the second quarter of fiscal 1997
from $288,000 inthe second quarter of fiscal 1996. Cost of license revenues
increased 62% to $806,000 for the six-month period ended December 31, 1996 from
$497,000 for thesix-month period ended December 31, 1995. The increase in cost
of license revenues resulted primarily from additional fees paid to third-party
software vendors. Gross profit on license revenue was 97% of total revenues in
each of the second quarters of fiscal 1997 and 1996 and in each of the
six-month periods ended December 31, 1996 and 1995.
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 41% to $4.7
million in the second quarter of fiscal 1997 from $3.4 million in the second
quarter of fiscal 1996. Cost of service and other revenues increased 33% to $7.9
million for the six-month period ended December 31, 1996 from $6.0 million for
the six-month period ended December 31, 1995. The increase in cost of service
and other revenues is primarily due to increases in personnel and related costs
in professional services, telephone support, maintenance, and customer training.
Gross profit on service and other revenues was 23% and 35% in the second quarter
of fiscal 1997 and 1996, respectively. Gross profit on services and other
revenues was 25% and 39% for the six-month periods ended December 31, 1996 and
1995, respectively. The decrease in gross profit from period to period was due
to increased salary and related costs from additional head count, costs related
to outside contractors and other related 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 101% to $6.8
million in the second quarter of fiscal 1997 from $3.4 million in the second
quarter of fiscal 1996. Sales and marketing increased 91% to $12.1 million for
the six-month period ended December 31, 1996 from $6.3 million for the six-month
period ended December 31, 1995. Sales and marketing expenses represented 34%
and 21% of total revenues in the second quarter of fiscal 1997 and 1996,
respectively. Sales and marketing expenses represented 32% and 24% of total
revenue for the six-month period ended December 31, 1996 and 1995,respectively.
The increase in sales and marketing expenses 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. The Company expects that sales and marketing
expenses in future periods will continue to increase in absolute dollars and may
increase as a percentage of total revenues.
Research and Development. Research and development expenses increased 163%
to $3.5 million in the second quarter of fiscal 1997 from $1.3 million in the
second quarter of fiscal 1996. Research and development increased 144% to $6.2
million for the six-month period ended December 31, 1996 from $2.6 million for
the six-month period ended December 31, 1995. Research and development expenses
represented 18% and 8% of total revenues in the second quarter of fiscal 1997
and 1996, respectively. Research and development expenses represented 17% and
10% of total revenue for the six-month period ended December 31, 1996 and 1995,
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
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absolute dollars and may increase as a percentage of total revenues.
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
professional services expenses. General and administrative expenses increased
263% to $4.4 million in the second quarter of fiscal 1997 from $1.2 million in
the second quarter of fiscal 1996. General and administrative expenses
increased 207% to $7.1 million for the six-month period ended December 31, 1996
from $2.3 million for the six-month period ended December 31, 1995. General and
administrative expenses represented 22% and 7% of total revenues in the second
quarter of fiscal 1997 and 1996, respectively. General and administrative
expenses represented 19% and 9% of total revenue for the six-month periods ended
December 31, 1996 and 1995, respectively. The increase in general and
administrative expenses resulted primarily from a reserve of $2.5 million for
bad debts in the six-month period ended December 31, 1996 as well as 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. The Company expects that general and administrative expenses
may increase in future periods in absolute dollars and may increase as a
percentage of total revenues.
Provision for Income Taxes
The provision for income taxes includes federal, state and foreign income
taxes. The effective tax rate for the second quarter of fiscal 1997 and 1996
was 35% and 41%, respectively, and for the six-month period ended December 31,
1996 and 1995 was 38% and 41%, 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 December 31, 1996, 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 other factors, such as capital spending patterns
of the Company's customers, the lengthy sales cycles of the Company's products,
increased competition, cancellation of licenses or maintenance agreements,
changes in operating expenses, personnel changes,; fluctuations in demand for
NetExpert, 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, new competitive access providers and global telecommunication
providers and the timing of such orders and their fulfillment has caused and
will continue to cause material fluctuations in the Company's operating results,
particularly on a quarterly basis. Due to the foregoing factors, quarterly
revenue and operating results have been and will continue to be difficult to
forecast. The sales cycle associated with the purchase of the Company's
products is typically lengthy and 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 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 revenue.
The Company's business has experienced and is expected to continue to
experience significant seasonality, in part due 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.
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Based upon all of the foregoing, the Company believes that quarterly
revenues and operating results can be expected to vary significantly in the
future and 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, raising approximately $59.5 million, net of underwriting discount
commissions and other expenses. The Company's operating activities provided for
$8.5 million for the six-month period ended December 31, 1996. The Company
currently expects to make capital expenditures of $8.0 million to $10.0 million
in the next 12 months, primarily for the purchase of computer equipment and
related software, furniture and fixtures and leasehold improvements. The $8.0
million to $10.0 million of capital expenditures includes capital expenditures
associated with developing and expanding international markets.
As of December 31, 1996, the Company had working capital of approximately
$91.3 million, including $56.1 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 (i) a fluctuating rate per annum equal to the prime rate in effect from
time to time, or (ii) a fixed rate per annum equal to 2% above the London
Interbank Offered Rate. As of December 31, 1996, 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 six-month period ended December 31, 1996 the Company increased its
allowance for doubtful accounts from $1.0 million to $2.9 million. As of
December 31, 1996, accounts receivable of approximately $16.5 million had been
outstanding for more than 120 days, of which approximately $10.5 million were
beyond payment terms. The reason that accounts are beyond payment terms varies
from customer to customer, but generally relates to the internal budget function
of the customer, particularly in the case of Regional Bell Operating Company
customers, delays in the launch of the customer's system in which the Company's
product is included, and increased international revenues, which typically have
slower payment cycles. Approximately $9.0 million of the accounts receivable
outstanding greater than 120 days as of December 31, 1996 were due from nine
customers of the Company. Each of these organizations continues to license
products and services from the Company. In addition, the Company believes that
each of the nine customers is creditworthy.
The Company believes that existing cash balances and cash flow from
operations will be sufficient to support its working capital requirements for at
least the next 12 months. Thereafter, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On November 14, 1996, the Company held an Annual Meeting of Shareholders for
11
<PAGE>
which it solicited votes by proxy. The following is a brief description of the
matters voted on at the meeting and a statement of the number of votes cast for
and against and the number of abstentions.
1. The following nominees were elected as Directors, to hold office until
the next Annual Meeting and until their successors are elected and qualified.
<TABLE>
<CAPTION>
Nominee Votes Votes Withheld
------- ----- --------------
<S> <C> <C>
Tom L. Johnson 30,147,813 18,342
Richard G. Vento 30,147,813 18,342
Joseph T. Ambrozy 30,146,355 19,800
George F. Schmitt 30,157,235 8,920
Jonathan B. Shantz 30,157,255 8,900
Kornel Terplan 30,156,535 9,620
2. An amendment to the 1994 Stock Option Plan was approved whereby the
number of shares of Common Stock reserved for issuance was increased by 810,330
shares.
Votes
-----
For: 28,653,934
Against: 1,424,474
Abstain: 11,547
Broker Non-Votes: 76,200
3. The reincorporation of the Company as a Delaware corporation was
approved.
Votes
-----
For: 24,417,632
Against: 2,694,063
Abstain: 9,127
Broker Non-Votes: 3,045,333
4. The appointment of Deloitte & Touche LLP as independent auditors of
the Company for the fiscal period ending June 30, 1997 was approved.
Votes
-----
For: 30,153,530
Against: 3,442
Abstain: 9,183
Broker Non-Votes: 0
</TABLE>
ITEM 5. OTHER INFORMATION - 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"). In
connection with the Reincorporation, the following changes to the bylaws
and certificate of incorporation of OSI Delaware were approved: (a)
shareholder action by written consent was eliminated; (b) the remaining
directors can appoint a director to replace a director removed by the
shareholders; (c) special meetings of the shareholders may only be
called by the Board
12
<PAGE>
of Directors; and (d) shareholders intending to nominate candidates for
election as directors to propose items of business for consideration at
shareholders meetings must meet certain advance notice requirements. In
addition, 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. On January 18, 1997, the Board of Directors of OSI
Delaware amended the Bylaws to permit any holder of more than 15% of the
shares of the Company's common stock to call a special meeting of the
shareholders.
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, management, employees,
fiscal year, assets or liabilities, Nasdaq National Market trading symbol
(OSII) or location of any of the facilities of the Company.
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 December 31, 1996.
13
<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: February 12, 1997 By: /s/ David M. Allen
---------------------------------------
David M. Allen, Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
14
<PAGE>
EXHIBIT 11.1
OBJECTIVE SYSTEMS INTEGRATORS, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- --------------------
1996 1995 1996 1995
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Net income $ 534 $ 4,006 $ 2,887 $ 5,108
========== ========== ========== =========
Weighted average common and preferred
shares outstanding 32,062 28,228 31,770 27,633
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) 2,155 3,790 2,372 3,690
---------- ---------- ---------- ---------
Weighted average common and equivalent shares 34,217 32,806 34,142 32,111
========== ========== ========== =========
Net income per share $ .02 $ .12 $ .08 $ .16
========== ========== ========== =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANICAL INFORMATION EXTRACTED FROM 12/31/96
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 6-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> OCT-01-1996 JUL-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 56,104 56,104
<SECURITIES> 0 0
<RECEIVABLES> 34,975 34,975
<ALLOWANCES> 2,892 2,892
<INVENTORY> 0 0
<CURRENT-ASSETS> 103,848 103,848
<PP&E> 21,036 21,036
<DEPRECIATION> 6,767 6,767
<TOTAL-ASSETS> 118,609 118,609
<CURRENT-LIABILITIES> 12,514 12,514
<BONDS> 0 0
0 0
0 0
<COMMON> 81,127 81,127
<OTHER-SE> (766) (766)
<TOTAL-LIABILITY-AND-EQUITY> 118,609 118,609
<SALES> 0 0
<TOTAL-REVENUES> 20,023 37,578
<CGS> 5,173 8,720
<TOTAL-COSTS> 19,857 34,228
<OTHER-EXPENSES> (659) (1,342)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 825 4,692
<INCOME-TAX> 291 1,805
<INCOME-CONTINUING> 534 2,887
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 534 2,887
<EPS-PRIMARY> .02 .08
<EPS-DILUTED> .02 .08
</TABLE>
