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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 SEPTEMBER 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.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0143293
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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 October 26, 1999, the registrant had outstanding 12,470,863 shares of
Common Stock.
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OBJECTSHARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999 and March 31, 1999................ 2
Condensed Consolidated Statements of Operations for the three and six months ended
September 30, 1999 and 1998....................................................................... 3
Consolidated Statements of Comprehensive Income (Loss) for the three
and six months ended September 30, 1999 and 1998................................................. 4
Condensed Consolidated Statements of Cash Flows for the six months ended
September 30, 1999 and 1998...................................................................... 5
Notes to Condensed Consolidated Financial Statements.............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................................. 16
SIGNATURE.................................................................................................. 17
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OBJECTSHARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- ---------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 774 $ 1,675
Accounts receivable, net of allowance of
$179 at September 30 and $205 at March 31 1,881 3,988
Inventories 24
Other current assets 129 413
-------- --------
Total current assets 2,784 6,100
Property and equipment:
Property and equipment 3,893 6,345
Less accumulated depreciation (3,396) (5,392)
-------- --------
Net property and equipment 497 953
Deposits and other assets 149 148
Capitalized Software 522
Less Accumulated Amortization (11)
-------- --------
511
-------- --------
Total assets $ 3,430 $ 7,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 734 $ 1,309
Accrued compensation and related expenses 328 893
Note payable 40
Capital Lease Obligation-Short Term 59 63
Other accrued liabilities 851 1,593
Deferred revenue 175 2,587
Line of credit 481 1,000
-------- --------
Total current liabilities 2,628 7,485
Commitments and contingencies
Capital Lease Obligation-Long Term 76 103
Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares - 30,000
Issued and outstanding shares -
12,471 at September 30 and
12,383 at March 31 12 12
Additional paid-in capital 50,239 50,160
Accumulated deficit (49,307) (49,837)
Accumulated other comprehensive loss (218) (211)
-------- --------
Total stockholders' equity 726 124
-------- --------
Total liabilities and
stockholders' equity $ 3,430 $ 7,712
======== ========
</TABLE>
See accompanying notes.
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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,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
Service $ 1,865 $ 2,774 $ 4,074 $ 5,059
License 455 1,129 1,464 2,547
-------- -------- -------- --------
Total net revenues 2,320 3,903 5,538 7,606
Cost of net revenues:
Service 1,113 1,283 2,586 2,367
License 160 272 543 445
-------- -------- -------- --------
Total cost of net revenues 1,273 1,555 3,129 2,812
-------- -------- -------- --------
Gross profit 1,047 2,348 2,409 4,794
Operating expenses:
Sales and marketing 962 1,346 2,466 3,163
Research and development 302 1,022 824 2,024
General and administrative 725 511 1,691 1,231
Restructuring (31) (166)
-------- -------- -------- --------
Total operating expenses 1,989 2,848 4,981 6,252
-------- -------- -------- --------
Net income/(loss) from operations (942) (500) (2,572) (1,458)
Interest and other income (expense), net 2,649 10 3,102 141
-------- -------- -------- --------
Income/(loss) before income taxes 1,707 (490) 530 (1,317)
Provision for income taxes (49)
-------- -------- -------- --------
Net income/(loss) 1,707 (490) 530 (1,268)
======== ======== ======== ========
Basic and diluted net income/(loss) per share $ 0.14 $ (0.04) $ 0.04 $ (0.10)
Shares used in computing basic and diluted
net income/(loss) per share 12,468 12,303 12,441 12,268
======== ======== ======== ========
</TABLE>
See accompanying notes
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OBJECTSHARE, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months For the six months
ended September 30, ended September 30,
-------------------- -------------------
1999 1998 1999 1998
------ ----- ----- -------
<S> <C> <C> <C> <C>
Net income $1,707 $(490) 530 $(1,268)
------ ----- ----- -------
Other comprehensive income, net of tax:
Foreign currency translation adjustment 6 60 (7) 68
------ ----- ----- -------
Comprehensive income (loss) $1,713 $(430) $ 527 $(1,200)
====== ===== ===== =======
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months
ended September 30
--------------------
1999 1998
------- -------
<S> <C> <C>
Operating Activities
- --------------------
Net income/(loss) $ 530 $(1,268)
Adjustments to reconcile net income/(loss) to net cash
used in operating activities:
Depreciation and amortization 376 313
Gain on sale of assets (3,021)
Changes in operating assets and liabilities:
Accounts receivable 2,607 2,215
Inventories 19 20
Other assets 197 (1)
Accounts payable and accrued liabilities (1,607) (2,157)
Accrued restructuring costs (433)
Deferred revenue (663) (1,140)
------- -------
Net cash used in operating activities (1,562) (2,451)
Investing Activities:
- ---------------------
Net purchases of property and equipment (9) (91)
Maturities of marketable securities 600
Capitalized Software (400)
Proceeds from Java Transaction 725
Proceeds from Cincom Transaction 425
Increase in other assets 2
------- -------
Net cash provided by (used in) investing activities 1,141 111
Financing Activities:
- ---------------------
Increase in line of credit (519)
Payments on capital lease obligations (30)
Decrease of note payable (3)
Proceeds from issuance of common stock, net of repurchases 79 121
------- -------
Net cash provided by financing activities (473) 121
------- -------
Effect of exchange rate changes on cash
and cash equivalents (7) 68
------- -------
Net decrease in cash and cash equivalents (901) (2,151)
------- -------
Cash and cash equivalents at beginning of period 1,675 5,134
------- -------
Cash and cash equivalents at end of period $ 774 $ 2,983
======= =======
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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 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 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 six months ended September 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 recorded restructuring costs in the second quarter of fiscal
1998 and in the third and fourth quarters of fiscal 1997. During the six months
ended September 30, 1998, the Company made payments of $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 utilized the remaining
reserve during 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 (CONTINUED)
SEPTEMBER 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 had a credit agreement with a commercial bank that provided 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 provided
letters of credit subject to certain condition for borrowings up to a maximum
amount of $500,000. Maximum aggregate borrowings under the credit agreement are
$5,000,000. The credit agreement was to expire on December 9, 1999. Interest
accrued at prime plus a variable percentage, adjusted monthly, ranging from
0.75% to 1.75% (9.0% at September 30, 1999). At September 30, 1999, borrowings
under the line of credit and letters of credit were $481,000. The credit
agreement was secured by all the Company's assets including intellectual
property. At September 30, 1999, the Company was in violation of certain
financial covenants.
On October 28, 1999 the Company paid off substantially all of the
indebtedness under the above credit agreement using the proceeds from the sale
of certain receivables to the bank under an Accounts Receivable Purchase
Agreement. There will be no more advances under the above Credit Agreement. The
Receivable Purchase Agreement provides the facility to sell up to $1,000,000 of
eligible receivables to the bank. The bank will pay 80% of the face value upon
the sale and the balance after subsequent collection by the bank. The Company
remains contingently liable for the collection of these receivables. The
Company's obligations are secured by all of the Company's assets. Fees include
an administrative fee of 0.5% of the amount sold and 1.5% per month on the
uncollected balance of the receivables sold.
9. DISPOSITIONS OF ASSETS
On August 30, 1999, the Company completed the sale of certain rights and
assets to Cincom Systems, Inc. ("Cincom"), in exchange for approximately
$425,000 in cash, the assumption of certain liabilities, and guaranteed
royalties of approximately $500,000. The Rights and Assets consisted of, among
other things, the Registrant's proprietary computer software known generally as
Smalltalk, and other intellectual property rights of the Registrant related to
such software and certain personal property. Pursuant to this transaction,
Cincom will license back to the Registrant the rights to continue to use the
software for training and consulting purposes and to sell the Smalltalk product
line. In addition Cincom assumed the future obligations under certain other
agreements. The liabilities assumed by Cincom included ongoing maintenance and
support, certain capital leases, and accrued vacation and others, which were
recorded on the books of the Company at approximately $2,100,000. The actual
cost to perform these obligations may be less than the amounts recorded. The
sale of these assets resulted in a gain of $2,538,000 for the Company which is
included in Other Income.
7
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OBJECTSHARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999
(UNAUDITED)
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 which is included in Other Income.
As a result of these transactions, the Company's remaining operations
consist primarily of providing training and consulting services.
10. SUBSEQUENT EVENT
On November 4, 1999, The Company signed a definitive agreement to merge with
StarBase Corporation ("StarBase"). StarBase will issue its stock in exchange for
the Company's stock at an anticipated enterprise value of $7.5 million, with a
minimum of $6.15 million and a maximum of $8.85 million based upon the average
trading price of StarBase stock prior to the closing. The transaction, which is
subject to shareholders' approval and certain other conditions, is expected to
be completed in early 2000. In addition, StarBase has provided the Company a
$500,000 line of credit. This line bears interest at prime plus 0.75%, is
secured by all assets of the Company, and matures on October 31, 2000 subject to
earlier maturity based upon specified events. On November 5, 1999 the Company
borrowed $200,000 under this line.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
ObjectShare, Inc. provides a comprehensive range of training and consulting
services supporting object-oriented application developments for use in
distributed client/server/web applications.
Prior to September 1999, the Company also sold software and related support.
The Company's primary products were 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. As of
August 30, 1999 the Company sold this portion of the business (see Cincom
Transaction below).
FACTORS WHICH MAY AFFECT FUTURE RESULTS
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.
CINCOM TRANSACTION
On August 30, 1999, the Company completed the sale of certain rights and
assets to Cincom Systems, Inc. ("Cincom"), in exchange for approximately
$425,000 in cash, the assumption of certain liabilities, and guaranteed
royalties of approximately $500,000. The Rights and Assets consisted of, among
other things, the Registrant's proprietary computer software known generally as
Smalltalk, and other intellectual property rights of the Registrant related to
such software and certain personal property. Pursuant to this transaction,
Cincom will license back to the Registrant the rights to continue to use the
software for training and consulting purposes and to sell the Smalltalk product
line. In addition Cincom assumed the future obligations under certain other
agreements. The liabilities assumed by Cincom included ongoing maintenance and
support, certain capital leases, and accrued vacation and others, which were
recorded on the books of the Company at approximately $2,100,000. The actual
cost to perform these obligations may be less than the amounts recorded. The
sale of these assets resulted in a gain of $2,538,000 for the Company which is
included in Other Income.
JAVA TRANSACTION
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 of, 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 which is included in Other Income.
As a result of these transactions, the Company's remaining operations
consist primarily of providing training and consulting services.
DECREASED ACCEPTANCE OF SMALLTALK
The Company's training and consulting services are largely based on Object
Oriented analysis, design and development programming languages, which includes
both Java and Smalltalk. Previously these services were based primarily on
Smalltalk which was 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
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application development. Corporate users' reluctance to invest in Smalltalk was
further compounded by the Company's declining sales and recurring operating
losses from fiscal 1996 through fiscal 1999.
NEED FOR CONTINUED ACCEPTANCE OF OBJECT-ORIENTED TECHNOLOGY
The Company currently derives substantially all of its revenue from
consulting and training services focused on object-oriented application
development environments 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
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 technology, there can be no assurance
that they will choose products based on the Smalltalk language, such as the
Company's services, 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.
NEED FOR CONTINUED ACCEPTANCE OF THE COMPANY'S LEGACY
The Company has built its training and consulting practice based in part on
its expertise as a developer of Smalltalk and related tools. There can be no
assurance that, now that the Company is no longer a developer, the marketplace
may not choose a competitor who is also a developer to provide training and
consulting services.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. Service revenues tend
to fluctuate as consulting projects, which may continue over several quarters,
are undertaken or completed. Training revenues may fluctuate as there are
normally periods of time between classes for preparation and development of new
courseware. 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. For reasons
discussed above, the Company will no longer generate license revenue.
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 the Nasdaq Stock
Market. Currently the Company is traded on the OTC Bulletin Board under the
symbol "OBJS".
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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 services to keep them current with changing customer needs, technology,
and competitive products. New technologies could render existing products
obsolete. If the Company is unable to enhance its existing consulting and
training skillsets and develop new skillsets in response to changing customer
requirements the Company's business and results of operations will be materially
and adversely affected.
In particular, the market for the Company's services has been adversely
affected by the emergence of Java as the dominant language for developing
web-based client applications. 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 services 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 providing training and consulting services related to
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 also 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, and marketing resources than the Company
The principal competitive factors affecting the market for the Company's
services include the skillsets of the consultants the Company is able to bring
to a project and the timeliness and content of the training courseware. There
can be no assurance 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 disposed of all significant intellectual property during the
quarter in connection with the Cincom transaction (see Cincom transaction above)
DEPENDENCE ON THIRD-PARTY RELATIONSHIPS
In its service offerings, ObjectShare uses certain products and technologies
of various third-party software developers. 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.
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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 generating consulting and training billings 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 these international revenues were
derived from service revenues. Other risks associated with international
operations include tariff regulations and requirements for export licenses,
customer or governmental 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 fiscal 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.
As of October 6, 1999 the Company entered into an Accounts Receivable
Purchase Agreement with a bank. This agreement provides the facility to sell up
to $1,000,000 of eligible receivables to the bank. The bank will pay the Company
80% of the face value upon the sale and the balance after subsequent collection
by the bank. The Company remains contingently liable for the collection of these
receivables. The Company's obligations are secured by all of the Company's
assets. Fees include an administrative fee of 0.5% of the amount sold and 1.5%
per month on the uncollected balance of the receivables sold. See footnote
number 8 to the Company's Condensed Consolidated Financial Statements as to the
Company's prior credit facility.
On November 4, 1999, The Company signed a definitive agreement to merge with
StarBase Corporation ("StarBase"). StarBase will issue its stock in exchange for
the Company's stock at an anticipated enterprise value of $7.5 million, with a
minimum of $6.15 million and a maximum of $8.85 million based upon the average
trading price of StarBase stock prior to the closing. The transaction, which is
subject to shareholders' approval and certain other conditions, is expected to
be completed in early 2000. In addition StarBase has provided the Company a
$500,000 line of credit. This line bears interest at prime plus 0.75%, is
secured by all assets of the Company, and matures on October 31, 2000 subject to
earlier maturity based upon specified events.
12
<PAGE> 14
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
FOR THE THREE MONTHS FOR THE SIX MONTHS OF DOLLAR AMOUNTS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1999 COMPARED TO 1998
-------------------- ------------------- --------------------------
1999 1998 1999 1998 THREE MONTHS SIX MONTHS
---- ---- ---- ---- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Service 80% 71% 74% 67% (33)% (19)%
License 20% 29% 26% 33% (60)% (43)%
---- ---- ---- ---- ----- ----
Total net revenues 100% 100% 100% 100% (41)% (27)%
Cost of net revenues:
Service 48% 33% 47% 31% (13)% 9%
License 7% 7% 10% 6% (41)% 22%
---- ---- ---- ---- ----- ----
Total cost of net revenues 55% 40% 57% 37% (18)% 11%
---- ---- ---- ---- ----- ----
Gross margin 45% 60% 43% 63% (55)% (50)%
Operating expenses:
Sales and marketing 41% 35% 45% 42% (29)% (22)%
Research and development 13% 26% 15% 27% (70)% (59)%
General and administrative 31% 13% 31% 16% 42% 37%
Restructuring 0% (1)% 0% (2) (100)% (100)%
---- ---- ---- ---- ----- ----
Total operating expenses 85% 73% 91% 83% (30)% (20)%
---- ---- ---- ---- ----- ----
Net income/(loss) from operations (41)% (13)% (47)% (19)% 88% (76)%
Interest and other income (expense), net 114% 0% 56% 2% 26390% 2100%
---- ---- ---- ---- ----- ----
Income/(loss) before income taxes 74% (13)% 10% (17)% (448)% 140%
Provision for income taxes 0% 0% 0% (1)% 0% 100%
---- ---- ---- ---- ----- ----
Net income/(loss) 74% (13%) 10% (16)% (448)% (142)%
==== ==== ==== ==== ===== ====
Gross Margin:
License 65% 76% 63% 83% (66)% (56)%
Service 40% 54% 37% 53% (50)% (45)%
</TABLE>
NET REVENUES
Total net revenues for the three and six months ended September 30, 1999
were $2.3 million and $5.5 million, a decrease of 41% and 27% respectively, from
the comparable periods of fiscal 1999.
Service revenues for the three and six months ended September 30, 1999
decreased 33% and 19% respectively, from the comparable periods of fiscal 1999.
In fiscal 1999 the Company had a major consulting project underway.
That project wound down earlier this year. Also the Company only recorded
Service support revenue through August of 1999 as a result of the Cincom
transaction.
License revenues for the three and six months ended September 30, 1999
decreased 60% and 43% respectively, from the comparable periods of fiscal 1999.
With the sale to Cincom (discussed above) the Company no longer has license
sales.
COST OF REVENUES
Cost of service revenues consists primarily of salaries, commissions,
facility expenses, travel-related expenses, and advertising. Costs of service
revenues decreased 13% for the second quarter of fiscal 2000 and increased 9%
for the first six months of fiscal 2000, from the comparable periods 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. During the second quarter
headcount and related expenses decreased to more closely match anticipated
revenue levels. Expenses related to support activities decreased during the
quarter as a result of the Cincom transaction.
13
<PAGE> 15
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 decreased 41% for the
second quarter of fiscal 2000 and increased 22% for the first six months of
fiscal 2000, from the comparable periods of fiscal 1999 due primarily to final
calculations of royalty payments as a result of the Cincom transaction.
OPERATING EXPENSES
Operating expenses, excluding restructuring costs, declined $0.9 million and
$1.3 million respectively for the three and six months ended September 30, 1999
compared to the comparable periods of fiscal year 1999.
Sales and marketing expenses consisting primarily of salaries, commissions,
travel-related expenses, and advertising have declined by 29% and 22% for the
second quarter and year to date compared to the same periods of fiscal 1999. The
decrease is largely due to the reduction in sales, tightened marketing focus and
strategic direction, and reductions in overall marketing expenditures.
Research and development expenses for the first half of fiscal 2000 were
$824 thousand, a decrease of 59% from fiscal 1999. The decrease was due to a
planned reduction in research and related headcount. In August this operation
ceased as part of the Cincom transaction described above.
General and administrative expenses for the three and six months ended
September 30, 1999 increased $214 thousand and $460 thousand over the comparable
periods of fiscal 1999. This increase was largely due to increased reliance on
outside services for the two divestitures during the year, 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) increased due primarily to the gain on
the Cincom sale $2.5 million and the gain on the sale of the Java product line
of $483 thousand.
PROVISION FOR INCOME TAXES
No provision for income taxes has been recorded for fiscal 2000, as the
Company does not anticipate taxable income for the year and has operating loss
carryforwards in excess of the income reported for the first six months of
fiscal 2000. The Company reported losses for the first six months of fiscal
1999. It recorded a foreign tax benefit of $48,000 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. During the six months
ended September 30, 1998, the Company made payments of $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 utilized the remaining
reserve in fiscal 1999.
FACTORS AFFECTING FUTURE RESULTS
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. The Company's results
in recent quarters are not necessarily indicative of future results and the
Company believes that period-to-period, or year over year comparisons of its
financial results should not be relied upon as an indicator of future
performance. For reasons discussed above, the Company will no longer generate
license revenue.
14
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had cash and cash equivalents $0.8
million and positive working capital of $0.2 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 used cash in operations of $1,562,000 in the six months ended
September 30, 1999 down from the $2,451,000 used in the six months ended
September 30, 1998. This reflects the reduced sales level of operations and
related reduced payable and royalty levels. 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% (9.0% at September 30, 1999). At September
30, 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.
On October 28, 1999 the Company paid off substantially all of the
indebtedness under the above credit agreement using the proceeds from the sale
of certain receivables to the bank under an Accounts Receivable Purchase
Agreement. There will be no more advances under the above credit agreement. The
Receivable Purchase Agreement provides the facility to sell up to $1,000,000 of
eligible receivables to the bank. The bank will pay 80% of the face value upon
the sale and the balance after subsequent collection by the bank. The Company
remains contingently liable for the collection of these receivables. The
Company's obligations are secured by all of the Company's assets. Fees include
an administrative fee of 0.5% of the amount sold and 1.5% per month on the
uncollected balance of the receivables sold.
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 additional 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.
On November 4, 1999, The Company signed a definitive agreement to merge
with StarBase Corporation ("StarBase"). StarBase will issue its stock in
exchange for the Company's stock at an anticipated enterprise value of $7.5
million, with a minimum of $6.15 million and a maximum of $8.85 million based
upon the average trading price of StarBase stock prior to the closing. The
transaction, which is subject to shareholders' approval and certain other
conditions, is expected to be completed in early 2000. In addition StarBase has
provided the Company a $500,000 line of credit. This line bears interest at
prime plus 0.75%, is secured by all assets of the Company, and matures on
October 31, 2000 subject to earlier maturity based upon specified events. On
November 5, 1999 the Company borrowed $200,000 under this line.
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.
15
<PAGE> 17
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. As discussed above (see Cincom Transaction), the Company no longer
sells or supports software products. Previously, the Company completed Year 2000
compliance testing on its then currently supported products. Based upon the
evaluation and testing completed, the Company believes that its then 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.
The information set forth under this caption "Year 2000 Readiness
Disclosure" relates to the Company's efforts to address the Year 2000 concerns.
Such statements are intended as Year 2000 Statements and Year 2000 Readiness
Disclosures and are subject to the Year 2000 Information Readiness Act.
SUBSEQUENT EVENT
As discussed above under "Future Capital Requirements" on November 4, 1999
the Company signed a definitive agreement to merge with Starbase Corporation.
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 size and timing of customer projects, and the
Company's ability to retain key employees, as well as the other risks discussed
above under "Factors Which May Affect 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.
16
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed below are filed herewith as part of this report.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
Form 8-K dated August 30, 1999 was filed on September 14, 1999 to
report the sale of assets to Cincom under Item II and related
pro-forma financial statements were filed.
17
<PAGE> 19
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: November 12, 1999 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> 20
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
September 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> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 774
<SECURITIES> 0
<RECEIVABLES> 2,060
<ALLOWANCES> (179)
<INVENTORY> 0
<CURRENT-ASSETS> 2,784
<PP&E> 3,893
<DEPRECIATION> (3,396)
<TOTAL-ASSETS> 3,430
<CURRENT-LIABILITIES> 2,628
<BONDS> 0
0
0
<COMMON> 50,251
<OTHER-SE> (49,307)
<TOTAL-LIABILITY-AND-EQUITY> 3,430
<SALES> 2,320
<TOTAL-REVENUES> 2,320
<CGS> 1,273
<TOTAL-COSTS> 1,989
<OTHER-EXPENSES> (2,649)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 1,707
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,707
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,707
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.14
</TABLE>
