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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED
SEPTEMBER 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)
<TABLE>
<S> <C>
DELAWARE 77-0143293
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
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.
[X] Yes [ ] No
As of October 31, 1998, the registrant had outstanding 12,327,541 shares of
Common Stock.
Item 1 of this Form 10-Q/A contains restated financial statements for the
three and six month periods ended September 30, 1998 (see Note 2 of Notes to
Restated Condensed Consolidated Financial Statements). Item 2 contains a revised
Management's Discussion and Analysis of Financial Condition and Results of
Operations that gives effect to the restated financial statement amounts set
forth in Item 1 and information as to the Company's liquidity as of the date
this form 10-Q/A is filed.
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OBJECTSHARE, INC.
FORM 10-Q/A
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements................. 2
Condensed Consolidated Balance Sheets as of September 30,
1998 (Unaudited) (Restated -- Note 2) and March 31, 1998.... 2
Condensed Consolidated Statements of Operations (Unaudited)
for the three and six month periods ended September 30, 1998
(Restated -- Note 2) and 1997............................... 3
Condensed Consolidated Statements of Comprehensive Income
(Loss) (Unaudited) for the three and six month periods ended
September 30, 1998 (Restated -- Note 2) and 1997............ 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the six months ended September 30, 1998
(Restated -- Note 2) and 1997............................... 5
Notes to Restated Condensed Consolidated Financial
Statements (Unaudited)...................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders......... 14
ITEM 6. Exhibits and Reports on Form 8-K............................ 14
SIGNATURE............................................................ 15
</TABLE>
1
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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)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
------------- ---------
(UNAUDITED)
(RESTATED--
NOTE 2)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,983 $ 5,134
Marketable securities..................................... -- 600
Accounts receivable, net of allowance of $291 at September
30 and $622 at March 31................................ 2,951 5,166
Inventories............................................... 144 164
Prepaid expenses and other current assets................. 820 819
-------- --------
Total current assets.............................. 6,898 11,883
Property and equipment:
Property and equipment.................................... 6,142 6,051
Less accumulated depreciation............................. (5,141) (4,853)
-------- --------
Net property and equipment............................. 1,001 1,198
Other assets................................................ 547 174
-------- --------
Total assets...................................... $ 8,446 $ 13,255
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 875 $ 1,134
Accrued compensation and related expenses................. 724 1,088
Other accrued liabilities................................. 958 2,492
Deferred revenue.......................................... 2,075 3,215
Accrued restructuring costs............................... 101 534
-------- --------
Total current liabilities......................... 4,733 8,463
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares -- 30,000
Issued and outstanding shares -- 12,328 at September 30
and 12,199 at March 31................................ 12 12
Additional paid-in capital................................ 50,113 49,992
Accumulated deficit....................................... (46,266) (44,998)
Accumulated other comprehensive loss...................... (146) (214)
-------- --------
Total stockholders' equity........................ 3,713 4,792
-------- --------
Total liabilities and stockholders' equity........ $ 8,446 $ 13,255
======== ========
</TABLE>
See accompanying notes.
2
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- -----------------------
1998 1997 1998 1997
----------- ------- ----------- --------
(RESTATED-- (RESTATED--
NOTE 2) NOTE 2)
<S> <C> <C> <C> <C>
Net revenues:
Service...................................... $2,774 $ 3,041 $ 5,059 $ 6,381
License...................................... 1,129 1,711 2,547 3,493
------ ------- ------- --------
Total net revenues............................. 3,903 4,752 7,606 9,874
Cost of net revenues:
Service...................................... 1,283 1,889 2,367 3,853
License...................................... 272 483 445 868
------ ------- ------- --------
Total cost of net revenues..................... 1,555 2,372 2,812 4,721
------ ------- ------- --------
Gross profit................................... 2,348 2,380 4,794 5,153
Operating expenses:
Sales and marketing.......................... 1,346 2,100 3,163 4,665
Research and development..................... 1,022 1,302 2,024 2,843
General and administrative................... 511 1,212 1,231 2,494
Restructuring costs.......................... (31) 2,797 (166) 2,797
------ ------- ------- --------
Total operating expenses....................... 2,848 7,411 6,252 12,799
------ ------- ------- --------
Loss from operations........................... (500) (5,031) (1,458) (7,646)
Interest and other income, net................. 10 62 141 179
------ ------- ------- --------
Loss before provision/(benefit) for income
taxes........................................ (490) (4,969) (1,317) (7,467)
Provision/(benefit) for income taxes........... -- 8 (49) 25
------ ------- ------- --------
Net loss....................................... $ (490) $(4,977) $(1,268) $ (7,492)
====== ======= ======= ========
Basic and diluted net loss per share........... $(0.04) $ (0.42) $ (0.10) $ (0.63)
====== ======= ======= ========
Shares used in computing basic and diluted net
loss per share............................... 12,303 11,925 12,268 11,925
====== ======= ======= ========
</TABLE>
See accompanying notes.
3
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
----------- ------- ----------- -------
(RESTATED-- (RESTATED--
NOTE 2) NOTE 2)
<S> <C> <C> <C> <C>
Net loss........................................ $(490) $(4,977) $(1,268) $(7,492)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment.... 60 (5) 68 (9)
----- ------- ------- -------
Comprehensive loss.............................. $(430) $(4,982) $(1,200) $(7,501)
===== ======= ======= =======
</TABLE>
See accompanying notes.
4
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
----------------------
1998 1997
----------- -------
(RESTATED--
NOTE 2)
<S> <C> <C>
Operating activities:
Net loss.................................................... $(1,268) $(7,492)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 313 1,167
Changes in operating assets and liabilities:
Accounts receivable.................................... 2,215 2,259
Inventories............................................ 20 63
Prepaid expenses and other current assets.............. (1) 303
Accounts payable and accrued liabilities............... (2,157) (1,181)
Accrued restructuring costs............................ (433) 1,326
Deferred revenue....................................... (1,140) (1,362)
------- -------
Net cash used in operating activities....................... (2,451) (4,917)
Investment activities:
Capitalized software........................................ (400) --
Decrease in other assets.................................... 2 18
Purchases of property and equipment......................... (91) (50)
Maturities of marketable securities......................... 600 --
------- -------
Net cash provided by (used in) investing activities......... 111 (32)
Financing activities:
Proceeds from issuance of common stock...................... 121 19
------- -------
Net cash provided by financing activities................... 121 19
Effect of exchange rate changes on cash and cash
equivalents............................................... 68 (9)
------- -------
Net decrease in cash and cash equivalents................... (2,151) (4,939)
Cash and cash equivalents at beginning of period............ 5,134 7,418
------- -------
Cash and cash equivalents at end of period.................. $ 2,983 $ 2,479
======= =======
</TABLE>
See accompanying notes.
5
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OBJECTSHARE, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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 consolidated 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 consolidated financial statements and include all adjustments
(consisting only of normal recurring adjustments, except for the restatement
adjustments discussed in Note 2) necessary for a fair presentation of the
financial position and results of the operations for interim periods presented.
The operating results for the six months ended September 30, 1998 are not
necessarily indicative of the results for any future period.
2. RESTATEMENT
On February 17, 1999, the Company reported that in preparing its condensed
consolidated financial statements for the quarter and nine month period ended
December 31, 1998, the Company identified accounting issues in the condensed
financial statements contained in its previously filed Form 10-Qs for the
quarters ended June 30 and September 30, 1998. Such issues primarily related to
the recognition of software license revenue and the capitalization of software
development costs. The accompanying restated condensed consolidated statement of
operations reflects the following adjustments: reductions of software license
revenue of $152,000 and $916,000; additional software development expense of
$182,000 and $267,000 for costs that were originally capitalized; and other net
adjustments of $166,000 and $124,000 in each case for the three and six month
periods ended September 30, 1998, respectively. As a result, the Company's net
loss is $490,000 and $1,268,000 rather than net income of $10,000 and $39,000
originally reported for the three and six month periods ended September 30,
1998, respectively.
3. 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 loss per share for financial statement purposes.
Basic net loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding.
Diluted net loss per share includes the effect of the potential shares
outstanding, including dilutive stock options and warrants using the treasury
stock method.
4. 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.
5. RESTRUCTURING COSTS
The Company has recorded restructuring costs in prior years, the reserve
balance at the beginning of fiscal 1999 was $534,000. During the six months
ended September 30, 1998, the Company made payments of
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OBJECTSHARE, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 -- (CONTINUED)
(UNAUDITED)
$267,000 and recorded a return to operations of reserves of $166,000 provided in
prior years for events that were completed in the current period. The Company
expects to utilize the remaining reserve in fiscal 1999.
6. OTHER ASSETS
Other assets consist of the following at:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
------------- ---------
(RESTATED --
NOTE 2)
<S> <C> <C>
Capitalized software, net of accumulated amortization of
$25,000................................................... $375,000 $ --
Deposits.................................................... 154,000 150,000
Other....................................................... 18,000 24,000
-------- --------
Total....................................................... $547,000 $174,000
======== ========
</TABLE>
The company's policy is to capitalize software development costs incurred
subsequent to the time the products reach technological feasibility. Based on
the Company's product development process, technological feasibility is
generally established upon completion of a working model. Amortization of
capitalized software development costs commences when products are available for
general release to customers and is determined using the straight-line method
over the expected useful life of the related products.
7. 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.
8. 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 stockholders' equity
except those resulting from investments by and distributions to stockholders.
9. 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 stockholders 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.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
ObjectShare, Inc. develops and supports object-oriented software
development solutions that allow customers to create distributed, customized
business applications. The Company's range of services includes customer
support, training and consulting as integral components of a complete solution,
as well as a family of products known as application development environments
("ADEs") including VisualWorks Smalltalk and PARTS for Java, a visual
programming environment based on the Java programming language.
Included in the range of services that the Company provides are:
- - Technical and program management consulting services assisting or providing
turn-key solutions in a range of industries, including telecommunications,
banking, insurance, manufacturing, distribution, energy and others, utilizing
object-oriented development technology.
- - Training customer's personnel in object-oriented application software
development and methods utilizing computer-based training tools, curriculum
management and in-depth subject and teaching expertise.
- - ADEs that provide visual programming environments that enable programmers to
develop, deploy and maintain applications ranging from workgroup and
departmental applications to complex enterprise-wide mission-critical
client/server and Web-enabled applications.
On February 17, 1999, the Company reported that in preparing its condensed
consolidated financial statements for the quarter and nine month period ended
December 31, 1998, the Company identified accounting issues in the condensed
financial statements contained in its previously filed Form 10-Qs for the
quarters ended June 30 and September 30, 1998. Such issues primarily related to
the recognition of software license revenue and the capitalization of software
development costs. The accompanying restated condensed consolidated statement of
operations reflect the following adjustments: reductions of software license
revenue of $152,000 and $916,000; additional software development expense of
$182,000 and $267,000 for costs that were originally capitalized; and other net
adjustments of $166,000 and $124,000, in each case for the three and six month
periods ended September 30, 1998, respectively. As a result, the Company's net
loss is $490,000 and $1,268,000 rather than net income of $10,000 and $39,000
originally reported for the three and six month periods ended September 30,
1998, respectively. This amended filing contains the restated financial
information and the related disclosures for the three and six month periods
ended September 30, 1998. The following discussion of quarterly financial
statement information included in this amended filing reflects, where
appropriate, changes as a result of the restatements and information as to the
Company's liquidity as of the date this form 10-Q/A is filed.
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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>
PERCENT CHANGE
PERCENTAGE OF TOTAL NET REVENUES FOR THE 1998 COMPARED TO
----------------------------------------- 1997
THREE MONTHS ENDED SIX MONTHS ENDED ----------------
SEPTEMBER 30, SEPTEMBER 30, THREE SIX
------------------- ------------------ MONTH MONTH
1998 1997 1998 1997 PERIOD PERIOD
---------- ---- ---------- ---- ------ ------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Service............................ 71% 64% 67% 65% (9)% (21)%
License............................ 29 36 33 35 (34) (27)
--- ---- --- ---
Total net revenues................... 100 100 100 100 (18) (23)
Cost of net revenues:
Service............................ 33 40 31 39 (32) (39)
License............................ 7 10 6 9 (44) (49)
--- ---- --- ---
Total cost of net revenues........... 40 50 37 48 (34) (40)
--- ---- --- ---
Gross margin......................... 60 50 63 52 (1) (7)
Operating expenses:
Sales and marketing................ 35 44 42 48 (36) (32)
Research and development........... 26 27 27 29 (22) (29)
General and administrative......... 13 26 16 25 (58) (51)
Restructuring costs................ (1) 59 (2) 28 (101) (106)
--- ---- --- ---
Total operating expenses............. 73 156 83 130 (62) (51)
--- ---- --- ---
Loss from operations................. (13) (106) (20) (78) (90) (81)
Interest and other income, net....... -- 1 2 2 (84) (21)
--- ---- --- ---
Loss before income taxes............. (13) (105) (18) (76) (90) (83)
Provision/(benefit) for income
taxes.............................. -- -- (1) -- (100) (296)
--- ---- --- ---
Net loss............................. (13)% (105)% (17)% (76)% (90) (82)
=== ==== === ===
Gross margin:
Service............................ 54% 38% 53% 40% 29 6
License............................ 76% 72% 83% 75% (30) (20)
</TABLE>
Net revenues
Total net revenues for the second quarter and six months ended September
30, 1998 were $3.9 million and $7.6 million, respectively, a decrease of 18% and
23%, respectively, from the comparable periods of fiscal 1998.
Service revenues for the second quarter and first six months of fiscal 1999
decreased 9% and 21%, respectively, from the comparable periods of fiscal 1998.
Maintenance backlog, tied directly to license sales in previous periods, dropped
33% during the quarter ended September 30, 1998 versus the comparable period
last year, as 1998's results reflected bookings from fiscal 1997 and license
sales are running at far lower rates in fiscal 1999. This was offset by a 12%
increase in training and consulting revenue compared to the second quarter of
fiscal 1998.
License revenues for the second quarter and first six months of fiscal 1999
decreased 34% and 27%, respectively, from the comparable periods of fiscal 1998.
The decline in license revenue reflects a continued weakness in the overall
software development tools market, as well as a continued weakness in demand for
9
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Smalltalk products. Also, the present environment for selling software tools for
custom application development is very difficult and is expected to remain
difficult until at least 2000, as many customers have shifted their IT
(Information Technology) focus to ensuring Y2K (Year 2000) compliance, thus
delaying other development projects until Y2K implementations have been
successfully completed. International license revenues in the second quarter and
first six months of fiscal 1999 were $264,000 and 538,000, respectively, or 23%
and 21%, respectively, of license revenue.
Cost of revenues
Cost of service revenues consists primarily of salaries, facility expenses
and travel-related expenses. Costs of service revenues for the second quarter
and first six months of fiscal 1999 decreased by 32% and 39%, respectively, from
the comparable periods of fiscal 1998, as consultant and training overhead
expenses have been reduced, as a result of the prior year's restructuring. This
cost as a percentage of service revenues in the second quarter and first six
months was 46% and 47%, respectively, compared to 62% and 60%, respectively, in
the comparable periods of fiscal 1998.
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 for the second quarter and first six months of fiscal 1999 decreased
44% and 49%, respectively, from the comparable periods of fiscal year 1998. This
cost as a percentage of license revenues in the second quarter and first six
months of fiscal 1999 was 24% and 17%, respectively, compared to 28% and 25%,
respectively in the comparable periods of fiscal 1998. The gross margins were
higher in the second quarter of fiscal 1999 due to a reduction of royalties and
lower packaging costs.
Operating expenses
Operating expenses for the second quarter and first six months of fiscal
1999, excluding restructuring costs, declined 38% and 36%, respectively, from
the comparable periods of fiscal year 1998.
Sales and marketing expenses consist primarily of salaries, commissions,
facility expenses, travel-related expenses, and advertising. These expenses for
the second quarter and first six months of fiscal 1999 were $1.3 million and
$3.2 million, respectively, representing a decrease of 36% and 32%,
respectively, over the comparable periods of fiscal 1998. The decrease is
largely due to a reduction of personnel and reduction in overall marketing
expenditures.
Research and development expenses for the second quarter and first six
months of fiscal 1999 were $1.0 million and $2.0 million, respectively,
representing a decrease of 22% and 29%, respectively, over the comparable
periods of fiscal 1998. The decrease was due to personnel reductions and the
capitalization of certain software development costs totaling $164,000 and
$400,000 for the second quarter and first six months of fiscal 1999,
respectively, related to the Company's VEOS product. During the first six months
of fiscal 1998, the Company was not working on any software development projects
that qualified for capitalization and as a result, expensed all its development
costs.
General and administrative expenses for the second quarter and first six
months of fiscal 1999 were $511,000 and $1.2 million, respectively, representing
a decrease of 58% and 51%, respectively, over the comparable periods of fiscal
1998. This decrease was largely due to the reduction in workforce, which was
achieved in part through improved cross training of personnel to handle
different operational areas.
Cost controls continue to play an important part in the Company's strategy.
Overall personnel declined from 116 at June 30, 1998 to 112 at September 30,
1998, with growth in consulting and training headcounts being offset with
reductions of administrative and back-office personnel.
Restructuring costs
The Company has recorded restructuring costs in prior years, the reserve
balance at the beginning of fiscal 1999 was $534,000. During the six months
ended September 30, 1998, the Company made payments of
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$267,000 and recorded a return to operations of reserve of $166,000 provided in
prior years for events that were completed in the current period. The Company
expects to utilize the remaining reserve in fiscal 1999.
Interest and other income, net
Interest and other income, which includes foreign exchange losses of
$30,000, was $10,000 in the second quarter of fiscal 1999 compared to $62,000 in
the second quarter of the prior year. For the first six months of fiscal 1999,
interest and other income decreased by $38,000 over the comparable period of
fiscal 1998. This decrease also reflects lower interest income from reduced cash
and marketable securities balances.
Provision for income taxes
The Company recorded losses for the second quarter of fiscal 1999 and 1998.
It recorded a benefit of $49,000 in the first six months of fiscal 1999 for
foreign taxes paid in prior periods compared to provisions for such items of
$8,000 and $25,000 for the second quarter and first six months of fiscal 1998,
respectively.
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 comparisons of its financial results
should not be relied upon as an indicator of future performance.
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
license revenue 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.
Intense competition for qualified technical personnel continues to be a
threat, in particular given the reduced size of the technical staff.
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.
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
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products are Year 2000 compliant. The Company's testing did not assess
compliance of 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 completed its assessment phase and believes that it has identified
substantially all of the major systems, software applications and related
equipment used in connection with its internal operations that must be modified
or upgraded in order to minimize the possibility of a material disruption to its
business. The Company is currently in its remediation phase of modifying and
upgrading all affected systems and expects to complete this phase by the
beginning of the fourth quarter of fiscal year 1999. However, any unforeseen
problems that occur during the testing phase may adversely effect the Company's
Year 2000 readiness.
Third- Party Suppliers -- The Company relies, directly and indirectly, on
external systems utilized by its suppliers. The Company will request
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 resolve 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.
The Company incurred $35,000 as of September 30, 1998 to address its Year
2000 issues. The Company presently estimates that the total cost of addressing
its Year 2000 issues will be approximately $75,000. 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 on going
operations. Such plans could include the implementation of manual procedures to
compensate for system deficiencies. During the remediation phase of the internal
business systems, the Company will be evaluating potential failures and attempt
to develop responses in a timely manner. 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.
Liquidity and Capital Resources
The Company used cash for operations of $2.5 million in the first six
months of fiscal 1999, which was comprised largely of: cash used to fund
operating losses; decreases in accounts payable and accrued liabilities of $2.2
million and deferred revenue of $1.1 million; offset by a decrease in accounts
receivable of $2.2 million. Cash provided by investing was $111,000, consisting
largely of $600,000 from the maturity of short term investments, which was
offset by $91,000 of capital expenditures and capitalized software of $400,000.
Net cash provided by financing activities was $121,000 which was generated from
the issuance of common stock under the Company's Employee Stock Purchase Plan.
The Company has no significant capital commitments for fiscal 1999.
As of September 30, 1998, the Company had cash, cash equivalents and
marketable securities of $3.0 million and working capital of $2.2 million
compared to $5.7 million and $3.4 million, respectively, as of March 31, 1998.
Days sales outstanding decreased from 89 at June 30, 1998 to 75 days at
September 30, 1998.
12
<PAGE> 14
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
are secured by the Company's accounts receivable and intellectual property, are
limited to 70% of eligible accounts receivable and bear interest at the bank
prime rate plus 3/4%. At December 31, 1998, the Company was not in compliance
with a covenant in the line of credit that requires the Company to maintain a
certain level of tangible net worth. As a result, the bank may demand repayment
of $1 million borrowed in January 1999 and has the right to terminate the credit
facility. There is no assurance that the Company will be able to cure the
covenant violation or that it will be able to obtain alternative financing in
the event that the credit agreement is terminated.
Management of the Company anticipates implementing certain cost cutting
measures in early March 1999 to attempt to reduce the Company's cost structure
to be commensurate with estimated revenues. Such cost cutting measures could
have the initial effect of increasing expenses for the period during which such
actions are taken. Although management's goal is to reduce losses and,
ultimately, return the Company to profitability, there can be no assurance that
these actions will allow the Company to achieve profitability. After giving
effect to the planned cost cutting measures, management believes that the
Company will have sufficient sources of financing to continue its operations
throughout fiscal 1999 and fiscal 2000. However, due to the uncertainties
inherent in management's plan, there can be no assurance that the Company will
have sufficient sources of financing to attain planned levels of operations.
Ultimately, the Company's long-term success is dependent upon its ability to
successfully execute its strategic plan and achieve sustained profitable
operations.
As of December 31, 1998, the Company's total shareholders' equity was below
the minimum level required to maintain its listing on The NASDAQ National Market
(NASDAQ) and, as a result of the Company reporting that it would restate its
financial statements for the interim periods ended June 30 and September 30,
1998, on February 17, 1999, NASDAQ halted trading of the Company's common stock
pending the receipt and review of certain requested information. Management of
the Company is attempting to resolve these issues; however, there is no
assurance that the Company's common stock will be able to maintain its listing
and/or trade on NASDAQ.
The matters discussed herein could adversely impact employee morale and
customer relations. In the event the Company were to lose employees and/or
customers as a result of such matters, the Company's performance could be
materially adversely affected.
FORWARD-LOOKING STATEMENTS/FUTURE PROSPECTS
This Form 10-Q/A 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 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.
13
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1998 Annual Meeting of Stockholders on September 17,
1998. The stockholders voted as follows:
1. The stockholders elected each of the five nominees for director,
to serve until the next Annual Meeting of Stockholders. The elected
directors are: Eugene Goda (9,663,344 shares for, 256,728 shares withheld),
Jos Henkens (9,583,934 shares for, 336,138 shares withheld), Lester "Buck"
Hill (9,663,294 shares for, 256,778 shares withheld), Sam Inman (9,603,135
shares for, 316,937 shares withheld), and James Sutter (9,523,757 shares
for, 396,315 shares withheld). There were no broker non-votes. These five
directors constitute all of the members of the Board of Directors.
2. The stockholders approved an amendment to the Company's 1993 Stock
Plan to increase by 500,000 the number of shares authorized for issuance
thereunder (9,010,703 shares for, 889,832 shares against, 19,537 shares
abstaining and 0 broker non-votes).
3. The stockholders approved an amendment to the Company's 1993
Employee Stock Purchase Plan to increase by 100,000 the number of shares
available for issuance thereunder (9,626,358 shares for, 274,027 against,
19,687 abstaining and 0 broker non-votes).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A) The exhibit listed below is filed herewith as part of this report.
Exhibit No. 27 -- Financial Data Schedule
B) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended
September 30, 1998.
14
<PAGE> 16
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: February 22, 1999
OBJECTSHARE, INC. a
Delaware Corporation
By: /s/ EUGENE L. GODA
------------------------------------
Eugene L. Goda
President and Chief Executive
Officer
By: /s/ GLENN J. BROWN
------------------------------------
Glenn J. Brown
Vice President and Chief Financial
Officer (on behalf of the Registrant
and as principal financial officer)
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
Ex-27 Financial Data Schedule
</TABLE>
16
<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/A FOR THE PERIOD
ENDING SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,983
<SECURITIES> 0
<RECEIVABLES> 3,242
<ALLOWANCES> (291)
<INVENTORY> 144
<CURRENT-ASSETS> 6,898
<PP&E> 6,142
<DEPRECIATION> (5,141)
<TOTAL-ASSETS> 8,446
<CURRENT-LIABILITIES> 4,733
<BONDS> 0
0
0
<COMMON> 50,125
<OTHER-SE> (46,412)
<TOTAL-LIABILITY-AND-EQUITY> 8,446
<SALES> 3,903
<TOTAL-REVENUES> 3,903
<CGS> 1,555
<TOTAL-COSTS> 2,848
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (500)
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (490)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (490)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
