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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, 1999
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.
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(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, 1999, the registrant had outstanding 12,458,880 shares
of Common Stock.
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OBJECTSHARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
as of June 30, 1999 and March 31, 1999 3
Condensed Consolidated Statements of Operations
for the three months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the three months ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 17
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURE 18
</TABLE>
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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 30th March 31st
1999 1999
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,437 $ 1,675
Accounts receivable, net of allowance of
$436 at June 30 and $205 at March 31 2,030 3,988
Inventories 13 24
Other current assets 328 413
-------- --------
Total current assets 3,808 6,100
Property and equipment:
Property and equipment 6,241 6,345
Less accumulated depreciation (5,473) (5,392)
-------- --------
Net property and equipment 768 953
Prepaid expenses and other current assets 144 148
Capitalized Software 522 522
Less Accumulated Amortization (76) (11)
-------- --------
446 511
-------- --------
Total assets $ 5,166 $ 7,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,020 $ 1,309
Accrued compensation and related expenses 783 893
Note payable 38 40
Capital lease obligation-short term 60 63
Other accrued liabilities 1,280 1,593
Deferred revenue 2,212 2,587
Line of credit 606 1,000
-------- --------
Total current liabilities 5,999 7,485
Commitments and contingencies
Capital lease obligation-long term 92 103
Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares - 30,000
Issued and outstanding shares -
12,459 at June 30 and 12,383 at March 31 12 12
Additional paid-in capital 50,236 50,160
Accumulated deficit (50,949) (49,837)
Accumulated other comprehensive loss (224) (211)
-------- --------
Total stockholders' equity (925) 124
-------- --------
Total liabilities and stockholders' equity $ 5,166 $ 7,712
======== ========
</TABLE>
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended June 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Net revenues:
Service $ 2,209 $ 2,285
License 1,009 1,418
-------- --------
Total net revenues 3,218 3,703
Cost of net revenues:
Service 1,474 1,084
License 383 173
-------- --------
Total cost of net revenues 1,857 1,257
-------- --------
Gross profit 1,361 2,446
Operating expenses:
Sales and marketing 1,503 1,817
Research and development 523 1,002
General and administrative 966 720
Restructuring -- (135)
-------- --------
Total operating expenses 2,992 3,404
-------- --------
Net loss from operations (1,631) (958)
Interest and other income, net 452 131
-------- --------
Loss before income taxes (1,179) (827)
Benefit for income taxes -- (49)
-------- --------
Net loss ($ 1,179) ($ 778)
======== ========
Net loss per share:
Basic ($ 0.09) ($ 0.06)
======== ========
Diluted ($ 0.09) ($ 0.06)
======== ========
Shares used in computing net loss per share:
Basic 12,414 12,231
======== ========
Diluted 12,414 12,231
======== ========
</TABLE>
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended June 30,
--------------------
1999 1998
------- -----
<S> <C> <C>
Net loss $(1,179) $(778)
------- -----
Other comprehensive income, net of tax:
Foreign currency translation adjustment (13) 8
======= =====
Comprehensive loss $(1,192) $(770)
======= =====
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended June 30
--------------------
1999 1998
------- -------
<S> <C> <C>
Operating Activities
- --------------------
Net loss $(1,179) $ (778)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 177 122
Changes in operating assets and liabilities:
Accounts receivable 1,958 1,776
Inventories 11 (22)
Other assets 126 80
Accounts payable and accrued liabilities (376) (1,463)
Accrued restructuring costs 0 (254)
Deferred revenue (375) (616)
------- -------
Net cash provided (used) in operating activities 342 (1,155)
Investing Activities:
- ---------------------
Net purchases of property and equipment 37 (3)
Maturities of marketable securities 0 600
Capitalized Software 0 (236)
Increase in other assets 0 (45)
------- -------
Net cash provided by (used in) investing activities 37 316
Financing Activities:
- ---------------------
Increase in line of credit (394) 0
Payments from capital lease obligations (14) 0
Decrease of note payable (2) 0
Sale of Java (270) 0
Proceeds from issuance of common stock, net of repurchases 76 55
------- -------
Net cash provided by financing activities (604) 55
------- -------
Effect of exchange rate changes on cash
and cash equivalents (13) 8
------- -------
Net decrease in cash and cash equivalents (238) (776)
------- -------
Cash and cash equivalents at beginning of period 1,675 5,134
------- -------
Cash and cash equivalents at end of period $ 1,437 $ 4,358
======= =======
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(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, 1999.
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, 1999 are not necessarily indicative of the
results expected for the full fiscal year ending March 31, 2000.
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
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
4. Restructuring Costs
The Company has recorded restructuring costs in the second quarter of
fiscal 1998 and the third and fourth quarteres of fiscal 1997. In 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 utilized 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 operation of the Company.
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OBJECTSHARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
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
adopted Statement No. 131 at the end of fiscal 1999. There was no
effect on the consolidated results of operations or financial position
of the Company.
8. Line of Credit
The Company has a credit agreement with a commercial bank that provides
a revolving line of credit for borrowings, limited to 70% of eligible
accounts receivable, up to a maximum of $5,000,000. The credit
agreement also provides letters of credit subject to certain condition
for borrowings up to a maximum amount of $500,000. Maxumum aggregate
borrowings under the credit agreement is $5,000,000. The credit
agreement expires on December 9, 1999. Interest accrues at prime plus a
variable percentage, adjusted monthly, ranging from 0.75% to 1.75%
(8.5% at June 30, 1999). At June 30, 1999, borrowings under the line of
credit and letters of credit were $606,000. The credit agreement is
secured by all the Company's assets including intellectual property. At
June 30, 1999, the Company was in violation of certain financial
covenants. No waiver has been obtained for such violation, therefore,
the bank may at any time demand repayment of the outstanding
borrowings.
9. Disposition of Assets
On April 8, 1999, the Company completed the sale of certain rights and
assets to a software company "the Buyer" in exchange for approximately
$725,000 in cash and the assumption of liabilities in the approximate
amount of $96,000. The rights and assets consisted, among other things:
the Company's propriety computer software application development
environments, including VisualSmalltalk and PARTS for Java, a visual
programming environment based on Java programming language; products
currently in development to support Enterprise JavaBeans and legacy
software system integration; all technology, warranties, documentation
and other intellectual property rights of the Company related to such
software; as well as certain personal property. Pursuant to a software
license agreement between the Company and the Buyer, the Buyer
licensed back to the Company: the rights to continue to provide support
and maintenance and to sell the VisualSmalltalk product line; and the
rights to (i) sell, for a period of one year, and (ii) provide support
and maintenance, perpetually, the PARTS for Java product line. The sale
of these assets resulted in a gain of $483,000 for the Company.
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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.
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.
In addition to the other information set forth in this report, the
following are certain risks that should be considered with regard to the Company
and its common stock.
DECREASED ACCEPTANCE OF SMALLTALK
The Company's application development tools are largely based on the
Smalltalk programming language. This dependence has been a major factor in the
Company's sales decline in recent years due in large part to corporate users'
reluctance to make new and/or additional investments in Smalltalk-based
applications. This reluctance correlates to the perception that Java has emerged
as the leading programming language for future object-oriented application
development. A leading market research company recently indicated that Smalltalk
has lost any hope of becoming a mainstream technology as Java has stolen the
spotlight and has become the market leading object-orientated technology.
Corporate users' reluctance to invest in Smalltalk is further compounded by the
Company's declining sales and recurring operating losses from fiscal 1996
through fiscal 1999. These losses have caused customers to become concerned
about the Company's ability to continue to maintain, support and enhance its
product line. Because the Company is a leading vendor among a small number of
vendors providing Smalltalk-based tools, such concerns exacerbated customer
reluctance to make investments in the Smalltalk programming language generally,
and the Company's products in particular. In addition, use of the Company's
Smalltalk-based products requires user-organizations to make a substantial
investment in the retraining of programmers, which can be expensive and can
reduce the productivity of programmers during the training period, or to hire
experienced Smalltalk programmers, which are in scarce supply. The Company
believes that Smalltalk continues to provide certain advantages over competing
programming languages, but if these advantages are not recognized by corporate
users as having sufficient value to their organizations, the downward trend in
sales of Smalltalk-based application development tools will continue. This would
have a material adverse effect on the Company's results of operations
NEED FOR CONTINUED ACCEPTANCE OF OBJECT-ORIENTED TECHNOLOGY
The Company currently derives substantially all of its revenue from its
product family of object-oriented application development environments and
related products and services and expects this concentration to continue for the
foreseeable future. As a result, any factor adversely affecting the demand for,
or pricing of, object-oriented application development environments and related
products and services, would have a material adverse effect on the Company's
business and results of operations. In addition, the future success of the
Company's current product family depends upon continued market acceptance of
object-oriented technology, particularly continued investment by corporate users
in developing mission-critical applications. Because object-oriented technology
represents a fundamental shift in programming methodology, it requires a
substantial investment in the retraining of programmers, which can discourage
organizations from choosing object-oriented tools. Even if organizations choose
to make the investment required to use object-oriented
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technology, there can be no assurance that they will choose products based on
the Smalltalk language, such as the Company's products, or that the Company will
be successful in the market for object-oriented application development
environments, which is already crowded with larger and better-funded competitors
such as Oracle, IBM, Sun Microsystems and Symantec. There are a number of
potential approaches to implementing object technology, including the use of
languages other than Smalltalk, such as C++, object extensions of COBOL, Java,
object-based third-generation programming languages ("3GLs"), and other new
languages and software tools that may currently be under development or that may
be developed in the future.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company has experienced significant quarterly fluctuations in
operating results and anticipates such fluctuations in the future. Fluctuations
may be caused by numerous factors including, but not limited to, those discussed
above. License revenues in any quarter depend on orders shipped in the quarter.
The Company generally ships orders as received and, as a result, 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 fluctuations in quarterly license revenues. In addition, license
revenues in quarters after a new product release may be affected by the amount
of upgrade revenue, which tends to increase soon after the release of a new
product and then decline rapidly. License revenues may also be affected by
seasonal trends, which may include relatively lower sales in the summer months
when many businesses experience lower sales. Service revenues tend to fluctuate
as consulting projects, which may continue over several quarters, are undertaken
or completed. Operating results may also fluctuate due to factors such as the
demand for the Company's products, the mix of products and services, the size
and timing of customer orders, the introduction of new products and product
enhancements by the Company or its competitors, changes in the proportion of
revenues derived from licenses versus service fees, commencement or conclusion
of significant consulting projects, changes in the level of operating expenses,
and competitive conditions in the industry. Because the Company's staffing and
other operating expenses are based on anticipated revenues, operating results
will be adversely affected if the anticipated level of revenues is not realized
in the expected quarter or over the course of the year. The Company's results in
recent quarters are not necessarily indicative of future results and the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as the sole indicator of future performance, although such
comparisons may be useful in establishing an overall trend in financial results.
VOLATILITY OF STOCK PRICE
The market for the Company's common stock is highly volatile. The
trading price of the Company's common stock has been and will likely continue to
be subject to wide fluctuations in response to quarterly variations in the
Company's operating results, announcements of new products or technological
innovations by the Company or its competitors, general market fluctuations, and
other events and factors. Changes in earnings estimates made by brokerage firms
and industry analysts relating to the market in which the Company does business,
or relating to the Company specifically, have in the past resulted and could in
the future result in an immediate and adverse effect on the market price of the
Company's common stock.
On June 23, 1999 the Company's stock was de-listed from Nasdaq Stock
Market. Currently the Company is traded on the OTC Bulletin Board under the
symbol "OBJS".
TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for software for client/server/web computing environments is
characterized by rapidly changing technology, evolving industry standards and
frequent new product introductions. The Company must continually update its
existing products to keep them current with changing customer needs, technology,
and competitive products. New technologies could render existing products
obsolete. If the
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Company is unable to enhance its existing products and introduce new products in
response to changing customer requirements, or if such products are not
introduced on a timely basis, fail to receive market acceptance, or contain
significant errors, the Company's business and results of operations will be
materially and adversely affected.
In particular, the market for the Company's products has been adversely
affected by the emergence of Java as the dominant language for developing
web-based client applications. Many of the Company's customers have chosen to
evaluate the capabilities of Java-based products before making additional
investments in the Company's products, which has had a direct adverse impact on
license revenues. Also, the growth of the Internet as a means of communicating
information about competitive products has shortened the average development
cycle for the Company's products and the average life cycle for the Company's
products. This has caused an increase in competition in the market for the
Company's products and a requisite increase in development expenses as the
Company strives to release products on a shorter cycle with significant
additional functions. The failure of others to develop or enhance technologies
that are critical to broad public acceptance and use of the Internet may also
affect the Company's ability to market its products for Internet application
development.
COMPETITION
The market for application development tools for large-scale
client/server/web computing environments is intensely competitive and the
Company expects competition to continue to increase. The Company's competitors
include a broad range of companies that develop and market tools and languages
for software application development, including Borland, Forte, Informix,
Microsoft, Oracle, Sun Microsystems, and Sybase. Many of the Company's current
and prospective competitors have significantly greater financial, technical,
manufacturing, and marketing resources than the Company. Moreover, these
companies may produce additional products competitive with those of the Company
and there can be no assurance that the Company could compete effectively with
such products.
The principal competitive factors affecting the market for the
Company's products include product functionality, quality and reliability, the
timing of product introductions, customer support and price. Based on a
combination of these factors, the Company believes that it will have to
incorporate significant additional functions in a relatively short period of
time for its products to remain competitive. There can be no assurance that the
Company will be able to do so or that the Company will be successful in the face
of increasing competition from new products and enhancements introduced by
existing competitors and by new companies entering the market.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success in software products depends upon its proprietary
technology. The Company relies on a combination of copyright, trademark and
trade secret laws, confidentiality procedures, and licensing arrangements to
establish and protect its proprietary rights. In addition, the Company currently
holds one patent. As part of its confidentiality procedures, the Company
generally enters into non-disclosure agreements with its employees, distributors
and corporate partners, and limits access to and distribution of its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain foreign countries.
The Company provides its products to end-users primarily under
"shrink-wrap" license agreements, which could be held unenforceable in whole or
in part in various jurisdictions. The Company makes a portion of its source code
available to its customers, which increases the likelihood of misappropriation
or other misuse of the Company's products.
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The Company is not aware that any of its products infringe upon the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future products. The Company expects that software product developers
will increasingly be subject to such claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in the industry segment overlaps. Any such claims, with or without
merit, could result in costly litigation or might require the Company to enter
into royalty or licensing agreements. Such royalty or license agreements, if
required, may not be available on terms acceptable to the Company or at all.
DEPENDENCE ON THIRD-PARTY RELATIONSHIPS
In its product offerings, ObjectShare uses certain products and
technologies of various third-party software developers, including both complete
products offered as extensions of the Company's product line and technology used
in the enhancement of internally developed products. Such products and
technologies are obtained from the third-party providers under contractual
license agreements, which in some cases are for limited time periods and in some
cases provide that such licenses may be terminated under certain circumstances.
There can be no assurances that the Company will be able to maintain adequate
relations with these third-party providers, that these third-party providers
will commit adequate development resources to maintain these products and
technologies, or that the license agreements that are for limited time periods
will be renewed upon termination. ObjectShare has established a number of
strategic relationships with management consultants, system integrators, and
computer system and software providers. These companies provide software
development, marketing, reselling, and training services that the Company
believes are important to its existing and future business. These relationships
are non-exclusive and may be discontinued at any time.
DEPENDENCE ON KEY PERSONNEL
The Company's future success will depend upon its ability to attract
and retain highly qualified personnel. Loss of key personnel or inability to
hire and retain qualified personnel could have a material adverse effect on the
Company's business and results of operations. Competition for qualified
personnel is intense and has recently intensified in the Company's geographic
and industry segments. The loss of key personnel, or an inability to hire
qualified personnel will adversely affect the Company's business and results of
operations. In August 1999, James Sutter resigned as a member of the Company's
Board of Directors, leaving the Company with a three person Board of Directors.
Also, Winston Hickman resigned as the Company's CFO and Eugene Goda was
appointed as CFO.
MANAGING A CHANGING BUSINESS
Since its inception, the Company has experienced changes in its
operations which have placed significant demands on the Company's
administrative, operational, and financial resources. The Company has
experienced both rapid growth and substantial downturns, which have caused
extreme stresses on the organization, both in the immediate term and in the
longer term. In recent years, the Company has implemented a number of
restructurings and reductions in its workforce. As a result, the Company has
incurred a number of risks associated with its reduced operating size and
capabilities. These risks include an increased sensitivity to employee turnover,
with a greater likelihood that turnover would have a significant negative effect
on the Company's operations, potentially causing delays in product delivery
schedules; a reduced ability to pursue diversified research and development
efforts, particularly for projects that are not profitable in the near term; and
the need for the Company to effectively manage dramatically changing operations.
INTERNATIONAL OPERATIONS
Approximately 31%, 31%, and 32% of the Company's net revenues for the
years ended March 31, 1999, 1998, and 1997, respectively, were attributable to
international sales. Approximately half of international revenues are derived
from service revenues. International sales are made primarily through
distributors, and are therefore largely dependent on the efforts of these third
parties. Other risks associated with international operations include tariff
regulations and requirements for export licenses, customer or governmental
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requirements for local-language versions of products; unexpected changes in
regulatory requirements; longer accounts receivable payment cycles; difficulties
in managing international operations; potentially adverse tax consequences;
economic and political instability; restrictions on repatriation of earnings;
foreign exchange translation and transaction exposure; and the burdens of
complying with a wide variety of foreign laws. In addition, the laws of certain
countries do not protect the Company's products and intellectual property rights
to the same extent as do the laws of the United States. There can be no
assurance that such factors will not have an adverse effect on the Company's
future international sales and, consequently, on the Company's business,
financial position, and results of operations.
FUTURE CAPITAL REQUIREMENTS
As described in Item 7 to the Form 10K Annual Report under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources, it is anticipated that the
Company will need additional funds to support its operations during the year.
The terms of any equity financing may be dilutive to the Company's stockholders,
and the terms of any debt financing are likely to contain restrictive covenants
which limit the Company's ability to pursue certain courses of action. There can
be no assurance that additional funding will be available on acceptable terms,
if at all. If adequate funds are not available, the Company will experience
severe liquidity problems. This matter raise substantial doubt as to the
Company's ability to continue as a going concern.
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.
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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 1999 compared to 1998
------------------------------ ---------------------
June 30, 1999 June 30, 1998 Three Months
------------- ------------- ------------
<S> <C> <C> <C>
Net revenues:
Service 69% 62% (3%)
License 31% 38% (29%)
---- ---- ----
Total net revenues 100% 100% (13%)
Cost of net revenues:
Service 46% 29% 36%
License 12% 5% 121%
---- ---- ----
Total cost of net revenues 58% 34% 48%
---- ---- ----
Gross margin 42% 66% (44%)
Operating expenses:
Sales and marketing 47% 49% (17%)
Research and development 16% 27% (48%)
General and administrative 30% 20% 34%
Restructuring costs 0% (4%) 100%
---- ---- ----
Total operating expenses 93% 92% (12%)
---- ----
Loss from operations (51%) (26%) 70%
Interest and other income, net 14% 4% 245%
---- ---- ----
Loss before income taxes (37%) (22%) 43%
(Benefit) provision for income
taxes 0% (1%) (100%)
---- ----
Net loss (37%) (21%) 52%
Gross margin:
Service 33% 53% (39%)
License 62% 88% (50%)
</TABLE>
Net revenues
Total net revenues for the three months ended June 30, 1999 were $3.2
million, a decrease of 13% from the comparable period of fiscal 1999.
Service revenues for the first quarter of fiscal 2000 decreased 3% from
the comparable period of fiscal 1999. Service and training billings were
slightly lower in the quarter, but will continue to ramp up as newly-awarded
contracts are started.
License revenues for the first quarter of fiscal 2000 decreased 29%
from the comparable period of fiscal 1999. The decline is the result of
Smalltalk's weakness in the marketplace and the customer concerns regarding the
financial viability of the Company. International sales in the first quarter of
fiscal 1999 were $0.8 million with 26% of the Company's revenues coming from
outside the United States.
14
<PAGE> 15
Cost of revenues
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 2000 increased by 36% from the
comparable period of fiscal 1999. Total headcount was higher in first quarter of
fiscal 2000 compared to first quarter fiscal 1999 in the training, consulting
and technical support departments in anticipation of increased service contracts
that did not come to fruition by the first quarter of fiscal 2000.
Cost of license revenues is primarily comprised of the cost of
production of the Company's products, related royalties and the amortization of
capitalized software costs. Costs associated with license revenues increased
121% from the comparable period of fiscal year 1999, due primarily to new
royalty agreements and the amortization of capitalized software related to
VisualWorks 5i.
Operating expenses
Operating expenses, excluding restructuring costs, declined $547,000
compared to the first quarter of fiscal year 1999.
Sales and marketing expenses consisting primarily of salaries,
commissions, travel-related expenses, and advertising, have declined by 17% and
dropped by $314,000 over the same period of fiscal 1999. Marketing expenses are
now at 8% of revenues. The decrease is largely due to the delayering of
management, tightened marketing focus, and strategic direction, and reductions
in overall marketing expenditures.
Research and development expenses for the first quarter of fiscal 2000
were $523,000, a decrease of 48% from the comparable period of fiscal 1999. The
decrease was due to a reduction in headcount and a reduction in pure research.
General and administrative expenses for the first quarter were
$966,000, an increase of 34% from the comparable period of fiscal 1999. This
increase was largely due to increased reliance on outside services for required
increased disclosure in the annual Form 10K, and the hiring of certain
investment bankers and other professionals to assist in identifying strategic
options and downsizing opportunities.
Interest and other income (expense), net
Interest and other income (expense), which includes foreign exchange
gains of $39,000, was $452,000 in the first quarter of fiscal 1999 compared to
$131,000 in the first quarter of the prior year. The increase is due to a
$483,000 gain recorded on the sale of the Java product line.
Provision for income taxes
The Company recorded losses for the first three months of fiscal 2000
and fiscal 1999. It recorded a foreign tax benefit of $49,000 in fiscal 1999.
Restructuring Costs
The Company recorded restructuring costs in the second quarter of
fiscal 1998 and the third and fourth quarters of fiscal 1997. In 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 utilized the
remaining reserve in fiscal 1999.
15
<PAGE> 16
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. For reasons discussed above, the Company contemplates that its
licensing revenue will continue to decline.
YEAR 2000 COMPLIANCE
Many existing computer systems and applications, and other control
devices, use only two digits to identify a year in the date field, without
considering the impact of the upcoming change in the century. Others do not
correctly process "leap year" dates. As a result, such systems and applications
could fail or create erroneous results unless corrected to process data related
to the year 2000 and beyond. The problems are expected to increase in frequency
and severity as the year 2000 approaches, and are commonly referred to as the
"Year 2000 Problem". The Company relies on its systems, applications and
devices in operating and monitoring all major aspects of its business,
including internal business, infrastructure, networks and telecommunications
equipment. The Company also relies, directly and indirectly, on external systems
of business enterprises such as customers, suppliers, creditors, financial
organizations and governmental entities, both domestic and international, for
accurate exchange of data.
The Company is continuing to assess the impact that the Year 2000
Problem may have on its operations and has identified the following four key
areas of its business that may be affected:
PRODUCTS - the Company has completed Year 2000 compliance testing on
its currently supported products. Based upon the evaluation and testing
completed, the Company believes that its currently supported products are Year
2000 compliant. The Company's testing did not assess compliance of products no
longer supported, products modified by customers or third parties nor did it
assess compliance of products connected to individual customer work
environments.
INTERNAL BUSINESS SYSTEMS - The Year 2000 Problem could affect the
systems, transaction processing computer applications and devices used by the
Company to operate and monitor all major aspects of its business, including
financial systems, infrastructure, networks and telecommunications systems. The
Company has converted all necessary internal systems and believes that all of
the major systems, software applications and related equipment used in
connection with its internal operations are now Year 2000 compliant.
THIRD-PARTY SUPPLIERS - The Company relies, directly and indirectly,
on external systems utilized by its suppliers. The Company has received
confirmation from its suppliers of their Year 2000 compliance; however, there
can be no assurance that these suppliers will resolve any or all Year 2000
Problems with their systems in a timely manner. Any failure of these third
parties to resole their Year 2000 Problems in a timely manner could result in
the material disruption of the business of the Company. Any such disruption
could have a material adverse effect on the Company's business, financial
condition and results of operations.
FACILITY SYSTEMS - Systems such as heating, sprinklers, test equipment
and security systems at the Company's facilities may also be affected by the
Year 2000 Problem. The Company has contacted its facility owners seeking
assurances of Year 2000 compliance.
COSTS TO ADDRESS YEAR 2000 READINESS - The Company has incurred
approximately $75,000 as of March 31, 1999 to address its Year 2000 issues. The
Company presently estimates that the total cost of addressing its Year 2000
issues will be approximately $85,000. This estimate was derived utilizing
numerous assumptions, including the assumption that the Company has already
identified its most significant Year 2000 issues and that the plans of its
third party suppliers will be fulfilled in a timely manner without cost to the
Company. However, there can be no guarantee that these assumptions are
accurate, and actual results could differ materially from those anticipated.
The Company recognizes the need for developing contingency plans to
address the Year 2000 issues that may pose a significant risk to its ongoing
operations. Such plans and others that may be developed include the
implementation of manual procedures to compensate for system deficiencies.
However, there can be no assurance that any contingency plans evaluated and
potentially implemented by the Company would be adequate to meet the Company's
needs without materially impacting its operations, that any such plan would be
successful or that the Company's results of operations would not be materially
and adversely affected by the delays and inefficiencies inherent in conducting
operations in an alternative manner.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash, cash equivalents and
marketable securities of $1.4 million and negative working capital of $2.2
million compared to $1.7 million of cash and cash equivalents and $1.4 million
of Negative Working Capital as of March 31, 1999.
The Company provided cash from operations of $342,000 in the first
three months of fiscal 2000, which was comprised of decreases in accounts
receivable and other assets, offset by an increase in accounts payable, accrued
liabilities and deferred revenues. The Company has no significant capital
commitments for fiscal 2000.
During December 1998, the Company entered into a $5 million line of
credit with a commercial bank that expires in December 1999. Borrowings under
the line, that are secured by the Company's assets including accounts receivable
and intellectual property, are limited to 70% of eligible accounts receivable
and bear interest at the bank prime rate plus a variable percentage adjusted
monthly, ranging from .75% to 1.75% (9.50% at March 31, 1999). During April 1999
the Company repaid $394,000 of the $1.0 million outstanding at March 31, 1999.
At March 31, 1999, the Company was not in compliance with both the quick ratio
and tangible net worth covenants in the line of credit that require the Company
to meet or exceed a predetermined quick ratio and a tangible net worth minimum
level. The bank has not waived these defaults. As a result, the bank may demand
repayment of the $606 thousand currently borrowed under this line and has the
right to terminate the credit facility. There is no assurance that the Company
will be able to cure the covenant violations or make the repayment if demanded
by the bank, or that it will be able to obtain alternative financing in the
event that the credit agreement is terminated.
It is anticipated that cash on hand and cash flow from operations will
not be sufficient to support the Company's operations during fiscal 2000. The
Company is actively pursuing various sources of capital. However, there is no
assurance the Company will be able to obtain additional capital on terms
acceptable to the Company or at all. Failure to obtain sufficient levels of
additional capital will result in material liquidity problems for the Company.
These matters raise substantial doubt about the Company's ability to continue as
a going concern.
FORWARD-LOOKING STATEMENTS/FUTURE PROSPECTS
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, the size and timing of customer orders, 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 other
risks discussed above 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. The Company
intends that its forward-looking statements be protected by the safe harbors
provided in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
17
<PAGE> 18
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/ EUGENE L. GODA
------------------------------------
Eugene L. Goda
Chief Executive Office, President
and Chairman of the Board and
Chief Financial Officer
18
<PAGE> 19
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, 1999 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-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,437
<SECURITIES> 0
<RECEIVABLES> 2,466
<ALLOWANCES> (436)
<INVENTORY> 13
<CURRENT-ASSETS> 3,808
<PP&E> 6,241
<DEPRECIATION> (5,473)
<TOTAL-ASSETS> 5,166
<CURRENT-LIABILITIES> 5,999
<BONDS> 0
0
0
<COMMON> 50,248
<OTHER-SE> (51,173)
<TOTAL-LIABILITY-AND-EQUITY> 5,166
<SALES> 3,218
<TOTAL-REVENUES> 3,218
<CGS> 1,857
<TOTAL-COSTS> 2,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (1,631)
<INTEREST-EXPENSE> 452
<INCOME-PRETAX> (1,179)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,179)
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
</TABLE>
