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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 SEPTEMBER 30, 2000
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
OBJECTIVE SYSTEMS INTEGRATORS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 68-0239619
(State or other jurisdiction of (I.R.S. Identification Number)
incorporation or organization)
101 PARKSHORE DRIVE
FOLSOM, CALIFORNIA 95630
(Address of principal executive office, including zip code)
(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
--- ----
Number of shares of registrant's common stock outstanding as of
October 31, 2000: 37,271,143
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements...................... 1
Condensed Consolidated Balance Sheets at September 30, 2000
and June 30, 2000................................................ 1
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2000 and 1999........................ 2
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 2000 and 1999........................ 3
Notes to Condensed Consolidated Financial Statements............ 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 6
Item 3. Quantitative and Qualitative Disclosure About Market Risk....... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 16
Item 6. Exhibits and Reports on Form 8-K................................ 17
SIGNATURE 18
ii
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
--------------- -------------
(unaudited) (1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 26,306 $ 27,591
Short-term investments.......................................... 16,926 16,453
Accounts receivable (net of allowance of $2,189 and $1,950)..... 23,774 18,887
Prepaid expenses and other current assets....................... 2,211 1,700
--------------- -------------
Total current assets....................................... 69,217 64,631
Property and equipment, net.......................................... 9,381 9,570
Other assets, net.................................................... 2,222 2,522
--------------- -------------
Total assets............................................... $ 80,820 $ 76,723
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 5,543 $ 5,606
Accrued compensation............................................ 7,195 6,801
Accrued liabilities............................................. 1,841 1,507
Deferred revenue................................................ 10,619 10,033
--------------- -------------
Total current liabilities.................................. 25,198 23,947
Deferred revenue..................................................... 3,967 4,422
Other liabilities.................................................... 103 115
--------------- -------------
Total liabilities 29,268 28,484
--------------- -------------
Stockholders' equity:
Common stock ................................................... 95,709 94,597
Accumulated other comprehensive loss............................ (1,205) (1,044)
Accumulated deficit............................................. (42,952) (45,314)
--------------- -------------
Total stockholders' equity................................. 51,552 48,239
--------------- -------------
Total liabilities and stockholders' equity................. $ 80,820 $ 76,723
=============== =============
<FN>
(1) Information in this column derived from OSI's audited consolidated balance
sheet as of June 30, 2000
</FN>
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
-------------- ------------
<S> <C> <C>
Revenues:
License $ 12,098 $ 4,824
Service and other............................................. 9,407 7,187
-------------- ------------
Total revenues........................................... 21,505 12,011
-------------- ------------
Cost of revenues:
License 690 575
Service and other............................................. 3,821 3,879
-------------- ------------
Total cost of revenues................................... 4,511 4,454
-------------- ------------
Gross profit 16,994 7,557
-------------- ------------
Operating expenses:
Sales and marketing........................................... 8,602 6,079
Research and development...................................... 4,320 4,727
General and administrative.................................... 1,967 1,542
-------------- ------------
Total operating expenses................................. 14,889 12,348
-------------- ------------
Income (loss) from operations...................................... 2,105 (4,791)
Other income, net.................................................. 580 261
-------------- ------------
Income (loss) before income taxes.................................. 2,685 (4,530)
Provision for income taxes......................................... 323 199
-------------- ------------
Net income (loss).................................................. $2,362 $(4,729)
============== ============
Earnings (loss) per share:
Basic ...................................................... $ 0.06 $ (0.13)
============== ============
Diluted $ 0.06 $ (0.13)
============== ============
Shares used in earnings (loss) per share calculations:
Basic ...................................................... 37,107 35,630
============== ============
Diluted 40,355 35,630
============== ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................ $ 2,362 $ (4,729)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization.......................................... 1,356 2,593
Loss on disposal of fixed assets................................... 22 --
Effect of changes in:
Accounts receivable................................................ (4,881) 5,177
Prepaid expenses, other current assets and other assets............ (488) (268)
Accounts payable................................................... (6) (421)
Accounts compensation.............................................. 404 (595)
Accrued liabilities................................................ 357 13
Deferred revenue................................................... 131 (1,227)
--------------- --------------
Net cash provided by (used for) operating activities........... (743) 543
--------------- -------------
Cash flows from investing activities:
Purchases of short-term investments..................................... (462) (427)
Purchases of property and equipment..................................... (1,032) (704)
Purchases of other assets............................................... -- (43)
Proceeds from sale of property and equipment............................ 2 --
--------------- -------------
Net cash used for investing activities......................... (1,492) (1,174)
--------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net............................ 1,112 4
--------------- -------------
Net cash provided by financing activities...................... 1,112 4
--------------- -------------
Effect of exchange rate changes on cash...................................... (162) 19
--------------- -------------
Net decrease in cash and cash equivalents...................... (1,285) (608)
Cash and cash equivalents:
Beginning of the period.................................................. 27,591 15,811
--------------- --------------
End of the period........................................................ $ 26,306 $ 15,203
=============== =============
Cash paid during the year for:
Interest................................................................. $ -- $ --
Income taxes............................................................. $ 345 $ 179
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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OBJECTIVE SYSTEMS INTEGRATORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
These unaudited, condensed, consolidated financial statements have been prepared
by Objective Systems Integrators, Inc. ("OSI") under the rules and regulations
of the Securities and Exchange Commission. In accordance with those rules and
regulations, some of the information normally included in financial statements
prepared in accordance with generally accepted accounting principles has been
condensed or omitted.
The information in this report reflects all adjustments that we believe are
necessary to fairly state our financial position, results of operations, and
cash flows for the period presented. These adjustments consist of items that are
of a normally recurring nature.
These financial statements should be read in conjunction with the audited
financial statements and the notes contained in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2000. Results for interim periods are not
necessarily indicative of the results expected for the full fiscal year or for
any other period.
2. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average of
common shares outstanding. Diluted net income (loss) per share is computed using
the weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares are the incremental common shares
that could be issued (using the treasury stock method) following the exercise of
stock options. Common equivalent shares outstanding are not included in the net
loss per share calculations in loss periods as their inclusion would have the
effect of showing a smaller loss per share.
3. COMPREHENSIVE INCOME
Comprehensive income includes gains and losses from foreign currency
translations and unrealized gains and losses on equity securities. The following
table sets forth the calculation of comprehensive income:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
(in thousands) 2000 1999
-----------------------------
<S> <C> <C>
Net income (loss) $2,362 $(4,729)
Foreign currency translation losses (173) (26)
Unrealized gain on securities available for sale 12 --
=============================
Total comprehensive income (loss) $2,201 $(4,755)
=============================
</TABLE>
4
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4. RECENTLY ISSUED ACCOUNTING STANDARDS
We adopted Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, in the
first quarter of fiscal 2001. This statement requires balance sheet recognition
of derivatives as assets or liabilities measured at fair value. Accounting for
gains and losses resulting from changes in the values of derivatives depends on
the use of the derivative and whether it qualifies for hedge accounting. We have
assessed our existing contracts and arrangements for potential derivative
instruments. We have also addressed various other SFAS No. 133 issues. We have
determined that we do not hold derivatives or embedded derivatives as defined by
SFAS No. 133. Our adoption of SFAS No. 133 did not have a material impact on our
results of operations, financial position, or cash flows.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB No. 101), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB No. 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. We believe
that we comply with the provisions of SAB No. 101.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 (FIN No. 44), ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK
COMPENSATION, that clarifies guidance for certain issues related to the
application of Accounting Principles Board Opinion No. 25 (APB No. 25),
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. FIN No. 44 is effective July 1, 2000.
Implementation of FIN No. 44 had no material impact on our results of
operations, financial position, or cash flows.
5. SEGMENT AND GEOGRAPHIC INFORMATION
We conduct our business in one business segment. For the three-month period
ended September 30, 2000, one customer accounted for 13% of our total revenues.
No one customer accounted for more than 10% of our total revenues for the same
period in fiscal 2000.
The following table presents a summary of geographic information:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
(in thousands) 2000 1999
----------------------------------
<S> <C> <C>
Revenues:
United States.................................... $ 11,978 $ 6,089
Europe........................................... 1,462 1,909
Asia and Pacific Rim............................. 3,613 2,698
Latin America.................................... 3,413 1,230
Other............................................ 1,039 85
----------------------------------
Total.......................................... $21,505 $12,011
==================================
Long-lived assets:
United States.................................... $10,308 $12,632
Europe........................................... 364 138
Asia and Pacific Rim............................. 931 1,446
----------------------------------
Total.......................................... $11,603 $14,216
==================================
</TABLE>
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Some of the statements in this Quarterly Report are "forward-looking statements"
as defined in the Private Securities Litigation Reform Act of 1995, including
statements regarding expectations, beliefs, intentions, or strategies regarding
the future. They have been identified with an asterisk (*). Underlying these
statements are a number of assumptions regarding risks, both known and unknown,
which may cause our actual results to differ materially from those that are
expressed or implied. These risks include but are not limited to concentration
of product and customers; growth of sales, customer support and development
organizations; competition and technological change in our industry;
international licensing; dependence on third-party relationships; risk of
product defects; both general and industry-specific economic conditions in our
marketplace; fluctuations of quarterly results; and retention of key personnel.
We are not responsible for the accuracy or completeness of the forward-looking
statements in this Quarterly Report. We will not update them after the date of
this Quarterly Report, conform them to actual results, or conform them to
changes in our expectations. Additional information can be found in Item 1,
Notes to Condensed Consolidated Financial Statements, throughout Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, in Item 3, Quantitative and Qualitative Disclosure About Market
Risk, and in the Annual Report to Stockholders.
OVERVIEW
We develop, market, and sell software that manages communications networks for
voice and eServices in the evolving communications market. We were founded in
1989 to help telecommunications companies simplify the management of their
large-scale telephony networks. Since then, we have evolved our product line to
meet the changing needs of communication service providers, who are increasingly
focused on communications that use Internet technologies. As a result of
enhancements to our existing products and new products that we have introduced
during the past year, our NETeXPERT(R)1 family of management software allows our
customers to compete more successfully in the growing markets for Internet-based
communications services, such as wireless data and voice-over-Internet-protocol.
Our target markets include established and emerging providers of long-distance
and local voice services, Internet services, application services, Web-based
services, and other new-generation communications services. We differ from many
of our competitors in that we provide software for managing not just a single
network function but a broad range of functions essential to delivering and
monitoring high-quality communications services. Our products are designed to
help our customers adapt continuously to changing business directions and
technologies, while minimizing service disruptions, wasted or duplicate software
investments, and costly customization. To accomplish this, our products have
been built on our Unified Management Architecture ("UMA"), which provides the
built-in flexibility to create a single
--------
1 Please note the following trademarks we claim for our company and its
products: Objective Systems Integrators(TM), NETeXPERT(R), NETeXPERT(R) Virtual
Business Management(TM) (VBM(TM)), NETeXPERT(R) Virtual Process Management(TM)
(VPM(TM)), NETeXPERT Virtual Service Management(TM) (VSM(TM)), NETeXEL(TM), FM
eXEL(TM), CM eXEL(TM), AM eXEL(TM), PM eXEL(TM), NETeXEC(TM), ASP eXEC(TM), DSL
eXEC(TM), GPRS eXEC(TM), IP eXEC(TM), CIRCUIT eXEC(TM), MOBILE eXEC(TM), VIRTUAL
eXEC(TM), NETeXTEND(TM), NETeXSIGHT(TM), Unified Management Architecture(TM)
(UMA(TM)), Reference Platform Model(TM), CORBA Access(TM), DataArchiver(TM),
DBSync(TM), IDEAS(TM), NXRI(TM), Peer-to-Peer(TM) Server, Replica(TM),
VisualAgent(TM), and WebOperator(TM).
6
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integrated management system that can accommodate equipment and software from
different vendors, using diverse standards and protocols.
Given the increasing complexity of the environments they manage, communication
service providers are recognizing the need for streamlined, automated systems.
Building on our UMA, we have continued to extend our product line to facilitate
the ability of our customers to manage and automate their business processes
from end to end. In the first quarter of fiscal 2001, we released NETeXSIGHT, a
package that, with the help of visual tools, will allow users to automate the
management of quality (network fault and performance) in networks based on the
Internet protocol ("IP").* The Internet protocol describes software that tracks
the Internet addresses of nodes, routes, and outgoing messages, and recognizes
incoming messages. We believe that this entry-level product, which has been
designed to be implemented without complex programming, will position us to take
advantage of new opportunities in the emerging Managed Service Provider (MSP),
Application Service Provider (ASP), and Internet Service Provider (ISP)
markets.* We also believe that this product direction -- management software for
IP environments -- will benefit our installed base, most of whom have begun to
offer next-generation wireless and data services along with traditional services
based on wireless and wireline technologies.*
For the three-month period ended September 30, 2000, we had a net profit of $2.4
million compared with a net loss of $4.7 million for the same period in fiscal
2000. Overall, net profits increased noticeably due to an increase in the amount
of license, service and other revenues, coupled with an increase in gross
margins and the relatively lower operating expenses that resulted from our cost
control measures. Over the past year, we developed and enhanced our products
with new features and functionality. This resulted in further acceptance by our
customers, an improved sales process, and increased revenues. Some of the
factors that contributed to this increase are described in the section titled
"Results of Operations."
RESULTS OF OPERATIONS
REVENUES:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
(in thousands, except percentages)
2000 CHANGE 1999
-------- --------- --------
<S> <C> <C> <C>
License $12,098 151% $ 4,824
PERCENTAGE OF REVENUES 56% 40%
Services and other $ 9,407 31% $ 7,187
PERCENTAGE OF REVENUES 44% 60%
Total revenues $21,505 79% $12,011
</TABLE>
Our revenues are derived from license fees and fees for services that complement
our products, including professional services, software support, customer
support, and training. The increase in total revenues for the three months ended
September 30, 2000, compared with the three months ended September 30, 1999,
resulted primarily from an increase in orders related to the introduction of new
products under our UMA. These new products were NETeXSIGHT, CM eXEL 2.5, Virtual
Process Management ("VPM") 2.0, GPRS eXEC, and DSL eXEC. Increased revenues in
North America, Latin America, Asia, and the Pacific Rim were partially offset by
lower revenues in Europe.
7
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We instituted a new pricing model in fiscal 2000 based on network performance
and customer usage levels. This model was designed to give our customers greater
flexibility and additional choices when selecting and licensing our products.
This model has been in effect for three quarters, where we experienced revenue
growth. However, the change could negatively impact our short-term revenues if
we are not able to continue to attract sufficient volume to offset our lower
entry prices.*
LICENSE REVENUES. In earlier periods, software licenses were generally granted
and priced on a per-server basis although we did grant some site, networkwide,
or enterprisewide licenses for larger installations. Going forward, licenses
will also be granted on customer usage basis, or what we refer to as
performance-based pricing. We generally recognize license revenues when a
noncancelable license agreement has been signed, product has been shipped, there
are no uncertainties surrounding product acceptance, the fees are fixed and
determinable, and collection is probable.
We recognize revenue under contracts requiring significant customization using
the percentage-of-completion method of contract accounting, based on the ratio
of incurred costs to total estimated costs. Although, generally our license
agreements do not provide for a right of return, we maintain reserves for
returns and potential credit losses.
License revenues increased in absolute dollars and as a percentage of total
revenues for the three-month period ended September 30, 2000, compared with the
three-month period ended September 30, 1999. The introduction of new features
and functionality into our products, as well as our new pricing model,
contributed to an increase in orders from both new and existing customers.
We are continuing to increase the size and competency of our direct sales force
and to build relationships with current and new distribution partners. We added
additional sales staff during the three-month period ended September 30, 2000
and expect to continue doing so throughout fiscal 2001.* Given the significant
number of new products we have introduced, the need to train our sales and
support personnel in those products, and the relatively short average tenure of
our direct sales force, historic per-salesperson productivity rates may be
difficult to achieve in the near term.*
We anticipate that our license revenues will continue to represent a majority of
total revenues.* However, we also believe that historic growth rates in our
license revenues should not be used as an indication of growth rates for future
periods.* We expect that recent implementation of new strategies or
usage-pricing models may have an effect on our revenues.* While the number of
orders placed by new and existing customers may increase, the license revenue
per customer may potentially be reduced in any given reporting period.* Longer
term, our usage-based pricing should establish future revenue streams as our
customers' usage of our products grows. We also believe that competition in our
markets is intense and increasing.* This could result in price reductions,
reduced gross margins, or loss of market share, any of which would have a
material, adverse effect on our business, operating results, and financial
condition.*
SERVICES AND OTHER REVENUES. We recognize revenues for training, consulting, and
professional services as the services are performed and acceptance criteria are
met. We offer support contracts to our customers. These contracts provide
telephone support, updates, and maintenance of our products during the support
period. Revenues from support contracts are deferred and recognized ratably over
the term of the support agreement. Payments for support fees are generally made
in advance and are nonrefundable.
During the three-month period ended September 30, 2000, service and other
revenues increased in absolute dollars and decreased as a percentage of total
revenues when compared with the three-month period ended September 30, 1999.
This was caused, in part, from our higher level of license sales. The
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growth in absolute dollars is due to increased maintenance and professional
services revenues. The decrease as a percentage of total revenues was due to a
relative increase in license revenues. For the three-month period ended
September 30, 1999, license revenues were abnormally low as a percentage of
total revenues because of a decrease in orders for our products from both
existing and potential new customers. For the three-month period ended September
30, 2000, license revenues were more typical. However these percentages can vary
greatly from period to period.*
We expect that our services and other revenues will continue to represent a
significant portion of total revenues.* We anticipate a continued demand for
professional services in connection with the licensing of our products, renewal
of existing support contracts, and incremental support revenues attributable to
a growing installed base.* We also believe that prior growth rates for services
and other revenues may not be sustainable and should not be relied on as an
indication of future growth rates.*
INTERNATIONAL REVENUES. Although revenues from outside the United States have
decreased as a percentage of total revenues from 49% for the three-month period
ended September 30, 1999 to 44% for the three-month period ended September 30,
2000, international revenues have still increased in absolute dollars. We will
continue to invest and build our European and Asia-Pacific operations.* Overall,
we do not perceive any weakness in any of the international markets within which
we operate.*
We expect that our international revenues will continue to account for a
material portion of our total revenues in future periods.* International
business involves a number of inherent risks, including longer collection
periods, greater difficulty in collections, fluctuations in the real cost of
services given changes in relative exchange rates, difficulty in staffing and
managing operations, a longer sales cycle, potentially unstable political and
economic conditions, unexpected changes in regulatory requirements, including a
slowdown in the rate of privatization of telecommunications services, reduced
protection for intellectual property rights, potentially adverse tax
consequences, and tariffs or other trade barriers. In addition, access to
foreign markets is sometimes difficult due to the established relationships
between government-owned or government-controlled communications providers and
local suppliers of communications products. As a result, we may not be able to
continue penetrating international markets successfully. In addition, we cannot
give assurances we will be able to sustain or increase revenue from
international licensing and services or that the factors listed above will not
adversely affect our future international business. Any of these factors could
have a material, adverse effect on our business, operating results, and
financial condition.*
<TABLE>
<CAPTION>
COST OF REVENUES:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
(in thousands, except percentages)
2000 CHANGE 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cost of license revenues........................... $ 690 20% $ 575
PERCENTAGE OF REVENUES............................. 3% 5%
Cost of service and other revenues................. $3,821 (1%) $3,879
PERCENTAGE OF REVENUES............................. 18% 32%
Total cost of revenues............................. $4,511 1% $4,454
PERCENTAGE OF REVENUES............................. 21% 37%
Gross profit....................................... $16,994 125% $7,557
PERCENTAGE OF REVENUES............................. 79% 63%
</TABLE>
9
<PAGE>
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 and
duplication, manuals, packaging materials, shipping expenses, amortization of
capitalized software costs, and related labor costs. For the three-month period
ended September 30, 2000, compared with the three-month period ended September
30, 1999, cost of license revenues increased primarily due to the increased
number of licenses that we issued. The relative percentage of cost of license
revenues decreased over the same periods due to the effects of amortizing
certain fixed costs over a larger base of license revenues.
COST OF SERVICES AND OTHER REVENUES. Cost of services and other revenues
consists primarily of personnel costs related to providing professional services
and maintenance services in connection with our products. It also includes
outside service fees paid to third-party providers of professional services,
related travel costs, overhead, and estimated losses related to professional
services contracts. The cost of services and other revenues for the three-month
period ended September 30, 2000, compared with the three-month period ended
September 30, 1999, decreased primarily because of a reduction in head count and
related costs within our professional services group. This was partially offset
by increased head count and related costs in our maintenance and technical
support service groups. We expect cost of services and other revenues will
continue to increase in absolute dollars but decrease as a percentage of total
revenues, as we plan to increase personnel costs as projects require.*
The gross profit increased both in absolute dollars and as a percentage of total
revenues for the three-month period ended September 30, 2000, compared to the
three-month period ended September 30, 1999. This was caused by a significant
increase in license revenues balanced against our relatively flat total costs of
revenue.
<TABLE>
<CAPTION>
OPERATING EXPENSES:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
(in thousands, except percentages)
2000 CHANGE 1999
------------- ------------ ------------
<S> <C> <C> <C>
Sales and marketing $ 8,602 42% $ 6,079
PERCENTAGE OF REVENUES 40% 51%
Research and development $ 4,320 (9%) $ 4,727
PERCENTAGE OF REVENUES 20% 39%
General and administrative $ 1,967 28% $ 1,542
PERCENTAGE OF REVENUES 9% 13%
Total operating expenses $14,889 21% $12,348
PERCENTAGE OF REVENUES 69% 103%
</TABLE>
SALES AND MARKETING. Sales and marketing expenses consist mainly of salaries,
commissions, and bonuses for sales and marketing personnel. They also include
facilities costs associated with sales and customer support offices, promotional
expenses, and contract administration. Sales and marketing expenses increased
significantly for the three-month period ended September 30, 2000, compared to
the three-month period ended September 30, 1999. This was due to increases in
sales commissions from our increased sales, increases in head count and related
expenses, and increased participation in various trade shows to expand our
markets and promote our new product line.
10
<PAGE>
We expect that our sales and marketing expenses in future periods will continue
to increase in absolute dollars and could increase as a percentage of revenues.
This increase in costs will result from our active hiring program, increased
focus on marketing programs, and expenses associated with developing and
maintaining agreements with various partners involved in the sale of our
products.*
RESEARCH AND DEVELOPMENT. Research and development expenses decreased in the
three-month period ended September 30, 2000, compared with the three-month
period ended September 30, 1999. The decrease in expenses mainly reflects a
decline in head count and related expenses. In the three-month period ended
September 30, 1999, we recorded additional amortization expense in the amount of
$.6 million related to purchased technology which was fully amortized before the
three-month period ended September 30, 2000. We expect to commit significant
resources to research and development to enhance and extend our core technology
and product lines.*
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist mainly
of personnel costs for finance, human resources, legal affairs, and general
management. Also included are outside legal and accounting fees, corporate
insurance expenses, and provision for doubtful accounts. General and
administrative expenses increased for the three-month period ended September 30,
2000, compared with the three-month period ended September 30, 1999 due to an
increase in average head count and related expenses such as travel, telephone,
and office supplies.
General and administrative expenses may increase in the future with continued
growth and the hiring of additional personnel.* Although we believe our
allowance for doubtful accounts is adequate at the end of the first quarter of
fiscal 2001, we will continue to review this allowance and adjust it as needed.
This could result in additional charges to general and administrative expenses.*
<TABLE>
<CAPTION>
OTHER INCOME, NET:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
(in thousands, except percentages)
2000 CHANGE 1999
-------------- ------------ ----------------
<S> <C> <C> <C>
Other income, net $ 580 122% $261
PERCENTAGE OF REVENUES 3% 2%
</TABLE>
OTHER INCOME, NET. Other income, net consists primarily of interest income,
gains or losses on foreign exchange, and miscellaneous bank charges. The
increase in other income, net was due primarily to an increase in interest
income which was earned on a higher average cash balance during the three-month
period ended September 30, 2000, compared with the three-month period ended
September 30, 1999.
<TABLE>
<CAPTION>
PROVISION FOR INCOME TAXES:
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
(in thousands, except percentages)
2000 CHANGE 1999
------------- ------------- --------------
<S> <C> <C> <C>
Provision for income taxes $ 323 62% $ 199
PERCENTAGE OF REVENUES 2% NM 2%
</TABLE>
(NM- Not meaningful)
11
<PAGE>
PROVISION (BENEFIT) FOR INCOME TAXES. The provision for income taxes includes
state and foreign income taxes. The increase in provision for income taxes for
the three-month period ended September 30, 2000, compared with the three-month
period ended September 30, 1999 is due mostly to an increase in foreign income
taxes.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In recent months, we have been monitoring projected capital expenditures by U.S.
telecommunications carriers and trying to evaluate the effect this may have on
our business. Early projections by the U.S. carriers indicate that they will
increase their capital expenditures, but at a lower rate than was the case
during the last calendar year. While we believe that this may have an impact on
our business, we also believe that carriers will continue to invest in services
that drive revenue growth and give them a competitive advantage.* Our UMA-based
products have been designed to help carriers achieve these goals. We also
believe that the diversity of our business, in terms of technologies supported,
products offered, geographies and markets addressed, will help to lessen the
effects of slower growth in any particular part of the industry. However, if the
demand for communications services does not grow as is currently projected and,
as a result, carriers do not invest in their infrastructure, there may be a
material, adverse affect on our results of operations, financial positions or
cash flows.*
QUARTERLY RESULTS. Our quarterly operating results have varied significantly in
the past and we expect that this will continue to be the case going forward.*
Fluctuation in quarterly license revenues is caused by the timing of large
orders by our customers, including incumbent global and local telecommunication
providers and new, emerging communication service providers. Orders are
typically preceded by long sales cycles and, accordingly, it has been and will
continue to be difficult to predict when they will be received.* The failure to
obtain a large order during any given reporting period, for whatever reason,
could have a material, adverse effect on our business.
We typically receive a significant portion of our orders and record the
resulting revenue in the last month of a quarter, and frequently in the last
weeks or even days of a quarter. Expense levels are based, in part, on our
expectations of future revenues. If actual revenues are below expectations,
operating results will be adversely affected. In particular, because only a
small portion of our expenses vary with revenue, net income may be
disproportionately affected if anticipated revenues are not realized.* We
believe this customer buying pattern will continue.*
Our quarterly operating results have also varied and may continue to vary
significantly from quarter to quarter based on factors such as the capital
spending patterns of our customers; changes in our pricing policies or those of
our competitors; increased competition; cancellation of licenses or support
agreements; changes in operating expenses; personnel changes; fluctuation in
product demand; the number, timing, and significance of new products and product
enhancements by us and by our competitors; our ability to develop, introduce,
and market new and enhanced versions of our products in a timely manner; the mix
of direct and indirect sales; our assessment of our allowance for doubtful
accounts; sales returns; and general economic factors, among others.*
Because of these factors, quarterly revenue and operating results have been and
will continue to be difficult to forecast.*
SALES CYCLE. Revenues are also difficult to forecast because the sales cycle,
from initial evaluation to product installation, varies substantially from
customer to customer. Purchase of an Operations Support
12
<PAGE>
System (OSS) application generally involves a significant commitment of capital,
with the attendant time requirements often associated with a customer's internal
approval procedures. It also involves the need to test and accept new
technologies that affect crucial operations. For these and other reasons, the
sales cycle for our products is typically lengthy and subject to a number of
significant risks over which we have little or no control.
KEY PERSONNEL. Our future success depends to a significant degree on the
continuing contributions of key management, sales, professional services,
customer support, and product development personnel.* The loss of, or the
inability to attract and retain, key personnel could adversely affect our
business.* We have experienced and continue to experience difficulty in
recruiting qualified personnel. Competition for qualified employees is intense
in the software industry, and there can be no assurance that we will be
successful in attracting and retaining the people we need. The complex nature of
our customers' networks requires that we recruit and hire personnel with
expertise in, and a broad understanding of, the telecommunications industry.
There are only a limited number of qualified personnel available for employment.
Failure to attract and retain key personnel would have a material, adverse
effect on our business condition.*
GROWTH. To compete effectively and manage future growth, we also need to improve
our internal operational, financial, and management information systems,
procedures, and controls in a timely manner. Management of future growth also
means that we must expand, train, motivate, and manage our workforce. We can
give no assurances that our personnel, systems, procedures, and controls will be
adequate to support existing and future operations. The failure to improve
operational, financial, and management systems, or to expand, train, motivate,
and manage employees, could have a material, adverse effect on our business.*
PRODUCT DEFECTS. Software products as complex as those we offer are likely to
contain defects when they are introduced or when new versions are released.
Although we are not aware of any material software defects in our products, we
can give no assurances, despite extensive testing both by us and by our
customers, that errors will not be found after commercial licensing begins. This
could result in delayed or lost revenue, loss of market share, or failure to
achieve market acceptance.* Any of these could have a material, adverse effect
on our business.*
COMPETITION. Our products are designed for use in an evolving network operations
support and management applications market. Competition in this market is
intense, with customer consolidation and resulting network operations
convergence, rapidly changing technologies, evolving industry standards,
frequent new product introductions, and rapid changes in customer requirements.
Our competitors offer a variety of solutions to address this market. We believe
that competition has increased and will continue to increase.* Additionally,
some of our customers regularly evaluate whether to design and develop their own
network operations support and management applications or to acquire them from
outside vendors. We can give no assurances that our current or potential
competitors will not develop lower-cost products that are comparable or superior
to ours or that they will not be able to adapt more quickly to new technologies,
evolving industry trends, or changes in customer requirements. If we are not
able to compete successfully against current and future competitors, our
business will be materially and adversely affected.
13
<PAGE>
INTERNATIONAL BUSINESS. We expect that our international business will continue
to account for a significant portion of our total revenues.* We intend to
continue expanding our operations outside of North America.* This will require
significant management attention and the expenditure of significant financial
resources.* The result could adversely affect our operating margins if the
investments are not accompanied by sufficient revenue growth. *
Historically, our transactions have been primarily in U.S. dollars. However, as
we further expand our operations outside of the United States, transactions in
other currencies are likely to increase.* This will result in a corresponding
increase in our exchange rate risk. If exchange rates change unfavorably, this
could result in charges to operations. Although we have tried to reduce the risk
of fluctuations in exchange rates by pricing our products and services in U.S.
dollars whenever possible, we pay our local expenses in local currencies. We do
not engage in hedging transactions with respect to those obligations. Currency
exchange fluctuations in countries where we license our products could have a
material, adverse effect on our business by making our pricing noncompetitive
with products priced in local currencies.*
RESELLER RELATIONSHIPS. A key element of our business strategy is to expand our
distributor, systems integrator, and value-added reseller channels. We are
currently investing, and plan to continue investing, significant resources to
develop these channels of distribution.* Though we are in discussions with a
number of interested firms we can give no assurances that we will be able to
attract additional partners who can market our products effectively. If we are
unable to develop these relationships or if our partners are unable to market
our products effectively, our business operating results and financial condition
would be materially and adversely affected.*
PROPRIETARY TECHNOLOGY. Our success and ability to compete depends in large part
on our proprietary software technology. To protect our proprietary rights, we
rely on a combination of various technical measures, as well as trade secret,
copyright, and trademark laws. We also rely on nondisclosure agreements and
other contractual arrangements. Despite our efforts, unauthorized parties may
attempt to copy our products or to obtain and use our proprietary information.*
The steps we have taken may be insufficient to prevent misappropriation of our
technology. Our precautions may not preclude competitors from developing
products with functionality or features that are similar to those in our
products. In addition, effective copyright and trade secret protection may be
unavailable or limited in certain countries outside the United States. While we
believe that our products and trademarks do not infringe upon the proprietary
rights of third parties, infringement claims may arise in the future as the
number of products and competitors in our industry increases. Any such claim,
with or without merit, could be time-consuming, result in costly litigation, and
divert the attention of our technical and management personnel.* This could
result in a material, adverse impact on our business.*
THIRD-PARTY SOFTWARE. Finally, we rely on software licensed from third parties,
including software that is integrated with internally developed software and
used to perform key functions. The continued availability of this software
cannot be assured. Nor can we give assurances that, on expiration of our current
agreements, renewals will be available on commercially reasonable terms.
Absence of these licenses could have a material, adverse effect on our
business.*
Based upon all of the above, we believe that our quarterly revenues and
operating results may vary significantly in the future.* We also believe that
period-to-period comparisons of results are not necessarily meaningful and
should not be relied on as indications of future performance.* Further, we
believe that it is likely that our revenues or operating results could be below
the expectations of public market analysts and investors in some future
quarter.* If this occurs, the price of our Common Stock could be materially,
adversely affected.*
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the three-month period ended September 30, 2000, we experienced a net
decrease in cash and cash equivalents of $1.3 million. This compares with a net
decrease of $0.6 million during the same period in fiscal 2000. The decrease in
cash for the most recent quarter resulted from a $0.7 million decrease in cash
from operating activities and a $1.5 million decrease in cash from investing
activities, including $0.5 million in purchases of short-term investments and $1
million in purchases of property and equipment. Our use of cash was partially
offset by $1.1 million in net proceeds that we received as a result of issuing
common stock on the exercise of employee stock options.
As of September 30, 2000, we had working capital of approximately $44 million.
This included $43 million in cash, cash equivalents, and short-term investments.
We also have a $2.5 million secured revolving line of credit. Under our line of
credit, borrowings bear interest at either (1) a fluctuating rate per year equal
to the prime lending rate then in effect, or (2) a fixed rate per year that is
2% above the London Inter-Bank Offered Rate. As of September 30, 2000, no
amounts had been borrowed under our line of credit.
Some of our accounts receivable are beyond their payment terms. We maintain an
allowance for doubtful accounts that we believe is adequate to cover potential
credit losses.* At September 30, 2000, reserves for doubtful accounts and sales
returns were $2.5 million. We believe our present reserves are adequate to
provide for potential credit losses or sales returns.*
For the three-month period ended September 30, 2000, we spent $1 million for
capital items, principally computer hardware, computer software, and
communications equipment. We expect that capital expenditures will increase in
fiscal 2001 and in the future. This increase will be necessary to support the
planned growth in our head count and related equipment and infrastructure
requirements.
We believe that our cash balances and our cash flow from operations are
sufficient to support our working capital requirements for at least the next
twelve months. Thereafter, if cash generated from operations cannot satisfy
working capital requirements, we may need to raise additional funds. Financing
may not be available or, if it is, may not be obtainable on terms that are
favorable to us or our stockholders.* If we raise additional capital by issuing
equity or convertible debt securities, ownership dilution to stockholders will
result. If funds are unavailable, our business may be adversely affected.*
In 1998 our Board of Directors authorized a stock repurchase program under which
we were authorized to purchase up to 1,000,000 shares of our common stock. As of
September 30, 2000, we had repurchased 493,000 shares of common stock on the
open market, at an average purchase price of $4.47, for $2,208,000. We may
continue repurchasing shares in the future.*
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market rate risk based on a change in interest rates relates
primarily to our investment portfolio, which consists of cash equivalents and
short-term investments. Cash equivalents are highly liquid investments with
original maturities of three months or less and are stated at cost. We do not
believe our exposure to interest rate risk is material for these balances, which
were $24.5 million on September 30, 2000. The securities in our short-term
investment portfolio are generally classified as available-for-sale. Short-term
investments were $16.9 million on September 30, 2000. We do not use derivative
financial investments in our short-term investment portfolio; we place our
investments with high-quality issuers and, by policy, limit our credit exposure
to any one issuer. We are averse to principal loss and attempt to ensure the
safety of our investment funds by limiting default, market, and reinvestment
risk. If market interest rates were to change immediately and uniformly by 10%
from the rates in effect on September 30, 2000, the fair value of our cash
equivalents and short-term investments would change by an insignificant amount.
FOREIGN CURRENCY EXCHANGE RATE RISK
As a global business, we face exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices
evolve and they could have a material adverse impact on our business, operating
results, and financial position.* Historically, our primary exposure has related
to local currency expenses since the functional currencies of our foreign
subsidiaries are local. A hypothetical 10% change in foreign currency rates
would have an insignificant impact on our business, operating results, and
financial position.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be a party to litigation incident to the ordinary
course of our business. As of the date of this Report, we do not believe that
there is material litigation pending against us or involving our business.
However, any litigation, whether we are the plaintiff or defendant and
regardless of the outcome, could result in substantial costs and significant
diversion of effort by our technical and management personnel. In addition, we
can give no assurances that material litigation, either by or against us, will
not be necessary to resolve issues that may arise in the future. Given the
uncertainties of litigation, any litigation could have a material, adverse
effect on our business, financial condition, or operating results.*
There are no material developments in the litigation previously reported in our
Annual Report on Form 10-K for the fiscal year ending June 30, 2000.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3.1/1 Certificate of Incorporation
3.2/1 Bylaws, as amended to date
10.34/* Master License Agreement Between Registrant and Supernet Co., LTD
10.35/* Enterprise License Agreement Between Registrant and eSpire
Communications, Inc.
27.1 Financial Data Schedule
/1 Incorporated by reference to exhibits filed with Registrant's
Registrations Statement on Form S-1 (Reg. No. 33-97506) as
declared effective by the Commission on November 30, 1995
* Confidential treatment has been requested with respect
to certain portions of this exhibit. Omitted portions
have been filed separately with the SEC.
b) Reports on Form 8-K
None
17
<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: November 13, 2000 By: /S/ LAWRENCE F. FIORE
---------------------------------
Lawrence F. Fiore, Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
18
