<PAGE> 1
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UNITED STATES
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 quarter ended JUNE 30, 1998
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: 0-23132
OBJECTSHARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0143293
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16811 HALE AVENUE, SUITE A, IRVINE, CALIFORNIA 92606-5020 (Address
of principal executive offices)
(949) 833-1122
(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 periods 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
--- ---
As of July 31, 1998, the registrant had outstanding 12,319,845 shares of
Common Stock.
<PAGE> 2
OBJECTSHARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
as of June 30, 1998 and March 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three months ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 14
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
OBJECTSHARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,358 $ 5,134
Marketable securities -- 600
Accounts receivable, net of allowance
of $255 at June 30 and $622 at March 31 4,065 5,166
Inventories 182 164
Other current assets 799 819
-------- --------
Total current assets 9,404 11,883
Property and equipment:
Property and equipment 6,054 6,051
Less accumulated depreciation (4,975) (4,853)
-------- --------
Net property and equipment 1,079 1,198
Other assets 540 174
-------- --------
Total assets $ 11,023 $ 13,255
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,056 $ 1,134
Accrued compensation 781 1,088
Other accrued liabilities 1,432 2,492
Deferred revenue 2,590 3,215
Accrued restructuring costs 280 534
-------- --------
Total current liabilities 6,139 8,463
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares - 30,000
Issued and outstanding shares -
12,255 at June 30 and 12,199 at March 31 12 12
Additional paid-in capital 50,047 49,992
Accumulated deficit (44,969) (44,998)
Accumulated other comprehensive loss (206) (214)
-------- --------
Total stockholders' equity 4,884 4,792
======== ========
Total liabilities and stockholders' equity $ 11,023 $ 13,255
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended June 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Net revenues:
License $ 2,182 $ 1,782
Service 2,294 3,340
-------- --------
Total net revenues 4,476 5,122
Cost of net revenues:
License 177 385
Service 1,084 1,964
-------- --------
Total cost of net revenues 1,261 2,349
-------- --------
Gross profit 3,215 2,773
Operating expenses:
Sales and marketing 1,817 2,565
Research and development 897 1,541
General and administrative 787 1,282
Restructuring costs (135) --
-------- --------
Total operating expenses 3,366 5,388
-------- --------
Loss from operations (151) (2,615)
Interest and other income, net 131 117
-------- --------
Loss before provision for income taxes (20) (2,498)
(Benefit) provision for income taxes (49) 17
-------- --------
Net income (loss) $ 29 $ (2,515)
======== ========
Basic net income (loss) per share $ 0.00 $ (0.21)
======== ========
Shares used in computing basic
net income (loss) per share 12,231 11,925
======== ========
Diluted net income (loss) per share $ 0.00 $ (0.21)
======== ========
Shares used in computing diluted
net income (loss) per share 15,562 11,925
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended June 30,
----------------------
1998 1997
------- -------
<S> <C> <C>
Net income (loss) $ 29 $(2,515)
------- -------
Other comprehensive income, net of tax:
Foreign currency translation adjustment 8 (4)
------- -------
Comprehensive income (loss) $ 37 $(2,519)
======= =======
</TABLE>
See accompanying notes.
5
<PAGE> 6
OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months
ended June 30,
-----------------------
1998 1997
------- -------
<S> <C> <C>
Operating activities
Net income (loss) $ 29 $(2,515)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 122 359
Changes in operating assets and liabilities:
Accounts receivable 1,101 1,544
Inventories (18) (3)
Other current assets 20 141
Accounts payable and accrued liabilities (1,445) (152)
Accrued restructuring costs (254) (211)
Deferred revenue (625) (495)
------- -------
Net cash used in operating activities (1,070) (1,332)
Investment activities
Purchases of property and equipment (3) (13)
Maturities of marketable securities 600 2,000
Increase in other assets (366) (55)
------- -------
Net cash provided by investing activities 231 1,932
Financing activities
Proceeds from issuance of common stock, net of
repurchases 55 --
------- -------
Net cash provided by financing activities 55 --
------- -------
Effect of exchange rate changes on cash
and cash equivalents 8 (4)
------- -------
Net (decrease) increase in cash and cash equivalents (776) 596
Cash and cash equivalents at beginning of period 5,134 7,418
------- -------
Cash and cash equivalents at end of period $ 4,358 $ 8,014
======= =======
</TABLE>
See accompanying notes.
6
<PAGE> 7
OBJECTSHARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have
been prepared by the Company pursuant to the rules and regulations of the
United States Securities and Exchange Commission regarding interim financial
reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the audited
financial statements included in the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 1998.
In the opinion of management the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as
the audited financial statements and include all recurring adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of the operations for
interim periods presented. The operating results for the three months ended
June 30, 1998 are not necessarily indicative of the results expected for the
full fiscal year ending March 31, 1999.
2. Loss per Share
The Company has adopted SFAS 128, "Earnings Per Share," and applied this
pronouncement to all periods presented. This statement requires the
presentation of both basic and diluted net income (loss) per share for
financial statement purposes. Basic net income (loss) per share is computed
by dividing income (loss) available to common stockholders by the weighted
average number of common shares outstanding. Diluted net income (loss) per
share includes the effect of the potential shares outstanding, including
dilutive stock options and warrants using the treasury stock method.
3. Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Short-term
marketable securities consist principally of debt instruments with
maturities between three and twelve months. Long-term marketable securities
consist of debt instruments with maturities exceeding twelve months.
7
<PAGE> 8
OBJECTSHARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Restructuring Costs
The Company has recorded restructuring costs in prior years, the reserve
balance at the beginning of fiscal 1999 was $534,000. In the first quarter
of fiscal 1999, the Company made payments of $119,000 and recorded a return
of reserve of $135,000 for events that were completed. The Company expects
to utilize the remaining reserve in fiscal 1999.
5. Software Revenue Recognition
In October 1997, the Accounting Standards Executive Committee of the AICPA
issued SOP 97-2, Software Revenue Recognition which provides guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. SOP 97-2 is intended to reduce the diversity in
accounting for software revenue recognition and changes certain of the
specific criteria for recognizing revenue related to software licensing
arrangements. Specifically, the new SOP contains more restrictive revenue
recognition provisions for software arrangements containing multiple
elements (i.e. upgrades, enhancements, implementation and other services)
similar to the arrangements entered into by the Company. Effective April
1998, the Company has implemented the provisions of the new SOP. Adoption
of this new standard had no effect on the results of operations of the
Company.
6. Comprehensive Income
In April 1998, the Company adopted FASB Statement No. 130, Reporting
Comprehensive Income, which establishes standards for the reporting and
display of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders'
equity except those resulting from investments by and distributions to
shareholders.
7. Segment Information
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information, which requires publicly-held
companies to report financial and descriptive information about its
operating segments in financial statements issued to shareholders for
interim and annual periods. The statement also requires additional
disclosures with respect to products and services, geographical areas of
operations and major customers. The Company will adopt Statement No. 131 at
the end of fiscal 1999.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
ObjectShare, Inc. develops, markets and supports fully object-oriented
application development tools for use in development of distributed
client/server/web applications. The Company also provides a comprehensive range
of services, including customer support, training and consulting as integral
components of a complete solution. The Company's primary products are
VisualWorks, VisualWave and Distributed Smalltalk, which are application
development environments ("ADEs") based on the Smalltalk programming language,
and PARTS for Java, a visual programming environment based on the Java
programming language. VisualWorks, the Company's primary ADE, provides a visual
programming environment that enables programmers to develop, deploy, and
maintain applications ranging from workgroup and departmental applications to
complex enterprise-wide mission-critical client/server applications.
A new management team was installed during fiscal 1998 to refocus key areas,
including marketing, product development and services, sales and operations.
These actions included leveraging and redirecting the Company's technology and
consulting resources and revamping the marketing strategy to incorporate a more
solutions and services-oriented approach.
The first quarter saw a substantial increase in bookings of professional
services as the Company executes the strategy to expand its training and
consulting practice to meet the demand for object and component expertise.
Orders received included a consulting and services contract with Bell Atlantic
that should total several million dollars over the next twelve months.
This Form 10-Q includes a number of forward-looking statements that are subject
to certain risks and uncertainties that could cause the Company's actual results
and financial position to be affected negatively as events unfold in the market
for the Company's products. These events include, but are not limited to, the
risks inherent in the development and marketing of relatively new technologies,
and the Company's ability to deliver competitive products, retain key employees
and maintain sufficient sales revenue to fund ongoing research and development,
as well as the risks discussed below under "Factors Affecting Future Results".
The Company assumes no obligation to update or revise any such forward-looking
statements to reflect events or circumstances that may arise after this report
is filed, and that may have an effect on the Company's overall performance.
9
<PAGE> 10
Results of Operations
The following table sets forth for the periods indicated (I) the percentage of
net revenues represented by certain line items in the Company's Condensed
Consolidated Statements of Operations, (II) the gross margins on license and
service revenues and (III) the percentage changes from the preceding periods.
<TABLE>
<CAPTION>
Percentages of total net
revenues for the Percent Change
three months ended 1998 compared
June 30, to 1997
-------------------- --------------
1998 1997 Three Months
---- ---- ------------
<S> <C> <C> <C>
Net revenues:
License 49% 35% 22%
Service 51% 65% (31%)
---- ----
Total net revenues 100% 100% (13%)
Cost of net revenues:
License 4% 8% (54%)
Service 24% 38% (45%)
---- ----
Total cost of net revenues 28% 46% (46%)
---- ----
Gross margin 72% 54% 16%
Operating expenses:
Sales and marketing 41% 50% (29%)
Research and development 20% 30% (42%)
General and administrative 18% 25% (39%)
Restructuring costs (4%) 0% N/A
---- ----
Total operating expenses 75% 105% (38%)
Loss from operations (3%) (51%) (94%)
Interest and other income, net 3% 2% 12%
Loss before income taxes 0% (49%) (99%)
(Benefit) provision for income taxes (1%) 0% (388%)
Net income(loss) 1% (49%) (101%)
Gross margin:
License 92% 78% 44%
Service 53% 41% (12%)
</TABLE>
Net revenues
- ------------
Total net revenues for the three months ended June 30, 1998 were $4.5 million,
a decrease of 13% from the comparable period of fiscal 1998.
License revenues for the first quarter of fiscal 1999 increased 22% from the
comparable period of fiscal 1998. License sales, particularly renewals, are
often seen as a barometer of marketplace acceptance. Accordingly, the sales
increase in this market segment in the first quarter is viewed by management as
an important indicator for the Company's new strategy. International sales in
the first quarter of fiscal 1999 were $.5 million with 23% of the Company's
revenues coming from outside the United States.
Service revenues for the first quarter of fiscal 1999 decreased 31% from the
comparable period of fiscal 1998. Fiscal 1998's results reflected a backlog of
service work that was being completed, which was not repeated in the first
quarter of fiscal 1999. Service and training billings were light in the first
part of the quarter, but increased in June and will continue to ramp up as
newly-awarded contracts are started, including Bell Atlantic.
10
<PAGE> 11
Cost of revenues
- ----------------
Cost of license revenues is primarily comprised of the cost of production of the
Company's products and related royalties. Costs associated with license
revenues decreased 54% from the comparable period of fiscal year 1998, due
primarily to the reduction of royalties and lower packaging costs.
Cost of service revenues consists primarily of salaries, commissions, facility
expenses, travel-related expenses, and advertising. Costs of service revenues
for the first quarter of fiscal 1999 decreased by 45% from the comparable period
of fiscal 1998, as consultant and training overheads and inefficiency have been
greatly reduced, as a result of the prior year's restructuring.
Operating expenses
- ------------------
Operating expenses, excluding restructuring costs, declined $1.9 million
compared to the first quarter of fiscal year 1998.
Sales and marketing expenses consisting primarily of salaries, commissions,
travel-related expenses, and advertising, have declined by 29% and dropped by
$748,000 over the same period of fiscal 1998. Marketing expenses are now at 41%
of revenues. The decrease is largely due to the delayering of management,
tightened marketing focus, and strategic direction, which resulted in a
reduction of personnel and reductions in overall marketing expenditures.
Research and development expenses for the first quarter of fiscal 1999 were $.9
million, a decrease of 42% from the comparable period of fiscal 1998. The
decrease was due to manpower reductions, refocusing of personnel to key
development milestones, and reducing pure research.
General and administrative expenses for the first quarter were $.8 million, a
decrease of 39% from the comparable period of fiscal 1998. This decrease was
largely due to the reduction in workforce, which resulted in the cross training
of personnel to handle different operational areas.
Interest and other income (expense), net
- ----------------------------------------
Interest and other income (expense), which includes foreign exchange gains of
$70,000, was $131,000 in the first quarter of fiscal 1998 compared to $117,000
in the first quarter of the prior year.
Provision for income taxes
- --------------------------
The Company recorded income for the first three months of fiscal 1999 and losses
for the first three months of fiscal 1998, it provided for foreign taxes of
$(49,000) and $17,000, respectively.
Restructuring Costs
- -------------------
The Company has recorded restructuring costs in prior years, the reserve balance
at the beginning of fiscal 1999 was $534,000. In the first quarter of fiscal
1999, the Company made payments of $119,000 and recorded a return of reserve of
$135,000 for events that were completed. The Company expects to utilize the
remaining reserve in fiscal 1999.
FACTORS AFFECTING FUTURE RESULTS
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. The Company's results
in recent quarters are not necessarily indicative of future results and the
Company believes that period-to-period, or year over year comparisons of its
financial results should not be relied upon as an indicator of future
performance.
11
<PAGE> 12
License revenues in any quarter depend on orders shipped. The Company generally
ships orders as received and, as a result, typically has little or no backlog.
Quarterly revenues and operating results therefore depend on the volume and
timing of orders received during the quarter, which are difficult to forecast.
Historically, the Company has received a substantial portion of its product
orders in the last month of the quarter, with a concentration of such orders in
the last week. Delays in the receipt of orders can therefore cause significant
variations in quarterly license revenues. License revenues may also be affected
by seasonal trends, as well as other factors. Service revenues tend to fluctuate
as consulting projects, which may continue over several quarters, are completed.
The Company believes that its recent stabilization of license revenues and
reductions in operating expenses has created a more stable environment, with
turnover of technical staff substantially lower than in previous periods.
Intense competition for qualified technical personnel continues to be a threat,
in particular given the reduced size of the technical staff, however, turnover
is frequently a product of organizational stability and development focus
which the Company believes has clearly improved.
In the last several quarters, the Company has maximized its strategic
partnerships to leverage complementary technologies. Considerable emphasis has
been placed on partnership arrangements, in which the Company has assumed a
project integration management role, resulting in a stronger systems solution
selling strategy. Partnership relationships are subject to complex contractual
and operational relationships and require both technical and commercial
sophistication. However, the Company believes that the partnerships that have
been entered into strengthen the firm's market reach and complement the
Company's offerings.
The Company does not appear to have significant direct exposure to Asian market
fluctuation as less than 5% of sales are to the region. Indirect impact on the
Company as caused by the economic difficulties in Asia on the Company's
customers is harder to predict and will vary from company to company.
The Company does not currently believe its products will be impacted by the Year
2000 issue. Internal Company operating systems have been evaluated for Year 2000
compliance and have been found to be non-compliant. An internal software
selection and implementation project is expected to be completed no later than
January 1, 1999. Costs related to this transition will be expensed as incurred
and are not projected to be material to the Company's operating results.
Although, the Company is not aware of any significant potential problems of its
customers or suppliers that it believes will have a material adverse effect on
the Company's business, it is not possible to quantify the effect of Year 2000
issues residing with the Company's customers and suppliers.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash, cash equivalents and marketable
securities of $4.4 million and working capital of $3.3 million compared to $5.7
million and $3.4 million, respectively, as of March 31, 1998.
The Company used cash for operations of $1.1 million in the first three months
of fiscal 1999, which was comprised of decreases in accounts payable, accrued
liabilities, accrued restructuring costs, and deferred revenues of $2.3 million,
partially offset by a decrease in accounts receivable of $1.1 million and
depreciation and amortization of $122,000. The Company has no significant
capital commitments for fiscal 1999.
The Company believes it has adequate resources to sustain its present level of
operations for at least the next twelve months. Management believes that its
existing balances of cash, cash equivalents, and marketable securities, in
combination with its return to operating profitability, should be sufficient to
meet its cash requirements for continuing its core business.
12
<PAGE> 13
The Company may from time to time consider the acquisition of products,
technologies, or businesses complementary to its overall business strategy
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) The exhibit listed below is filed herewith as part of this report.
27 Financial Data Schedule
B) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended June 30,
1998.
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.
DATE: August 14, 1998
OBJECTSHARE, INC. a
Delaware Corporation
By: /s/ GLENN J. BROWN
----------------------------------------
Glenn J. Brown
Vice President and Chief Financial
Officer (on behalf of the Registrant
and as principal financial officer)
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------ -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Company's Form 10-Q for the period ending
June 30, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,358
<SECURITIES> 0
<RECEIVABLES> 4,320
<ALLOWANCES> (255)
<INVENTORY> 182
<CURRENT-ASSETS> 9,404
<PP&E> 6,054
<DEPRECIATION> (4,975)
<TOTAL-ASSETS> 11,023
<CURRENT-LIABILITIES> 6,139
<BONDS> 0
0
0
<COMMON> 50,047
<OTHER-SE> (44,969)
<TOTAL-LIABILITY-AND-EQUITY> 11,023
<SALES> 4,476
<TOTAL-REVENUES> 4,476
<CGS> 1,261
<TOTAL-COSTS> 3,366
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> (20)
<INCOME-TAX> (49)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
