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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 DECEMBER 31, 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
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(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 January 21, 2000, the registrant had outstanding 12,470,863 shares of
Common Stock.
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OBJECTSHARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 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 December 31, 1999 and March 31, 1999..................... 3
Condensed Consolidated Statements of Operations for the three and nine months ended
December 31, 1999 and 1998........................................................................... 4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three
and nine months ended December 31, 1999 and 1998 .................................................... 5
Condensed Consolidated Statements of Cash Flows for the nine months ended
December 31, 1999 and 1998 .......................................................................... 6
Notes to Condensed Consolidated Financial Statements ................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................................... 16
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, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
------------ --------
(UNAUDITED) [NOTE 1]
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 780 $ 1,675
Accounts receivable, net of allowance of
$70 at December 31 and $205 at March 31 500 3,988
Inventories 24
Other current assets 24 432
-------- --------
Total current assets 1,304 6,119
Property and equipment:
Property and equipment 3,161 6,345
Less accumulated depreciation (2,882) (5,392)
-------- --------
Net property and equipment 279 953
Deposits and other assets 59 129
Capitalized software 522
Less accumulated amortization (11)
-------- --------
511
-------- --------
Total assets $ 1,642 $ 7,712
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 778 $ 1,309
Accrued compensation and related expenses 122 893
Note payable -- 40
Capital lease obligation-short term 49 63
Other accrued liabilities 385 1,593
Deferred revenue -- 2,587
Line of credit -- 1,000
-------- --------
Total current liabilities 1,334 7,485
Commitments and contingencies
Capital lease obligation-long term 74 103
Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares - 30,000
Issued and outstanding shares -
12,471 at December 31 and
12,383 at March 31 12 12
Additional paid-in capital 50,239 50,160
Accumulated deficit (50,017) (49,772)
Accumulated other comprehensive loss (276)
-------- --------
Total stockholders' equity 234 124
-------- --------
Total liabilities and
stockholders' equity $ 1,642 $ 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 NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
Service $ 823 $ 2,899 $ 4,897 $ 7,958
License 1,083 1,464 3,630
-------- -------- -------- --------
Total net revenues 823 3,982 6,361 11,588
Cost of net revenues:
Service 454 1,813 3,040 4,180
License 317 543 762
-------- -------- -------- --------
Total cost of net revenues 454 2,130 3,583 4,942
-------- -------- -------- --------
Gross profit 369 1,852 2,778 6,646
Operating expenses:
Sales and marketing 328 1,429 2,794 4,592
Research and development 857 824 2,881
General and administrative 943 767 2,634 1,998
Restructuring (166)
-------- -------- -------- --------
Total operating expenses 1,271 3,053 6,252 9,305
-------- -------- -------- --------
Loss from operations (902) (1,201) (3,474) (2,659)
Interest and other income/expense (net) 127 115 3,229 256
-------- -------- -------- --------
Loss before income taxes (775) (1,086) (245) (2,403)
Provision/(benefit) for income taxes 20 (29)
-------- -------- -------- --------
Net loss $ (775) $ (1,106) $ (245) $ (2,374)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.06) $ (0.09) $ (0.02) $ (0.19)
======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share 12,471 12,331 12,451 12,289
======== ======== ======== ========
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
------- ------- ------- -------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss $ (775) $(1,106) $ (245) $(2,374)
------- ------- ------- -------
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustment 218 (4) 276 64
------- ------- ------- -------
Comprehensive income (loss) $ (557) $(1,110) $ 31 $(2,310)
======= ======= ======= =======
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED DECEMBER 31
--------------------
1999 1998
------- -------
<S> <C> <C>
Operating Activities
Net loss $ (245) $(2,374)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 496 477
Gain on sale of assets (3,223)
Changes in operating assets and liabilities:
Accounts receivable, net 2,987 2,002
Inventories 19 99
Other assets 212 467
Accounts payable and accrued liabilities (2,319) (2,454)
Accrued restructuring costs (513)
Deferred revenue (757) (1,119)
------- -------
Net cash used in operating activities (2,830) (3,415)
Investing Activities:
Net disposals of property and equipment (7) (94)
Maturities of marketable securities 600
Capitalized software (767)
Proceeds from Java Transaction 725
Proceeds from Cincom Transaction 425
Proceeds from European Transaction 1,175
Increase in other assets (5)
------- -------
Net cash provided by (used in) investing activities 2,318 (266)
Financing Activities:
Decrease in line of credit (1,000)
Proceeds from receivables financing 595
Proceeds from StarBase line of credit 200
Repayments on StarBase line of credit (200)
Payments on capital lease obligations (43)
Decrease of note payable (3)
Proceeds from issuance of common stock, net of repurchases 79 121
------- -------
Net cash provided by (used in) financing activities (372) 121
------- -------
Effect of exchange rate changes on cash
and cash equivalents (11) 64
------- -------
Net decrease in cash and cash equivalents (895) (3,496)
------- -------
Cash and cash equivalents at beginning of period 1,675 5,134
------- -------
Cash and cash equivalents at end of period $ 780 $ 1,638
======= =======
</TABLE>
See accompanying notes.
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OBJECTSHARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of the operations for the interim periods presented. The
operating results for the nine months ended December 31, 1999 are not
necessarily indicative of the results expected for the full fiscal year ending
March 31, 2000.
The balance sheet at March 31, 1999 has been derived from the audited
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
As described below (Note 6 - "Disposition of Assets"), the Company disposed
of its European subsidiaries during November, 1999. At December 31, 1999, the
Company has one subsidiary, a foreign sales corporation.
2. EARNINGS (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net 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 first and second
quarters of fiscal 1999, 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 such periods. In the third quarter of fiscal 1999, the
Company made payments of $80,000 related to severance costs and reduced its
reserve by such amount. The Company utilized the remaining reserve during fiscal
1999.
5. FINANCING AGREEMENTS
At March 31, 1999, 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. This line was
terminated in November 1999.
On October 28, 1999, the Company repaid 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. The
Accounts 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
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the bank. The Company remains contingently liable for the collection of these
receivables. The Company's obligations are secured by substantially 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. During
the quarter ended December 31, 1999, the Company incurred total interest and
related fees of $10,000. At December 31, 1999, the Company was contingently
liable for $25,000 related to receivables sold to the bank that remained
uncollected by the bank as of that date. This amount was received by the bank
during January 2000. In connection with this contingent liability $7,000 of cash
was held in a restricted account at the bank at December 31, 1999.
In connection with the proposed merger [Note 8 - "Pending Merger"] 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 and repaid it
from the proceeds of the Valtech transaction [Note 6 - "Disposition of Assets"]
in December 1999.
6. DISPOSITIONS OF ASSETS
On November 24, 1999, the Company completed the sale of all of the stock of
ObjectShare, GmbH, a German corporation, and ObjectShare (U.K.) Limited, an
English corporation (collectively, the "Subsidiaries"), to Valtech S.A. a French
societe anonyme and its wholly-owned subsidiary Valtech Limited, respectively,
in exchange for total consideration of (a) approximately $1,600,000 in cash and
(b) the cancellation of certain intercompany indebtedness owed by the
Subsidiaries to ObjectShare Inc. As a result of this transaction, the Company
has no operations in Europe, with its remaining operations consisting primarily
of providing training and consulting services in the United States. The sale of
these subsidiaries resulted in a gain of $254,000 for the Company which is
included in Other Income for the three and nine months ended December 31, 1999.
Other Income for the three months ended December 31, 1999 also includes certain
additional expenses related to the previous transactions below. These financial
statements include the results of operations for these subsidiaries through the
date of sale.
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 $2,486,000 for the Company which is
included in Other Income for the nine months ended December 31, 1999.
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 for the nine months
ended December 31, 1999.
As a result of the above transactions, the Company's remaining operations
consist primarily of providing training and consulting services in the United
States.
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7. SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended December 31, 1999, the Company paid cash of $36
thousand for interest. There were no payments for interest during the same
period in the prior year.
8. PENDING MERGER
On November 4, 1999, the Company signed a definitive agreement to merge with
StarBase Corporation ("StarBase"). Under the merger, 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, among other things, 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
[Note 5 - "Financing Agreements"].
9. LIQUIDITY
It is anticipated that cash on hand and cash flow from operations will not be
sufficient to support the Company's operations after the anticipated closing of
the proposed merger. In the event the merger with StarBase is not completed the
Company will need to obtain 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.
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 Smalltalk/
Cincom Transaction below).
Prior to November 1999, the Company also conducted business through wholly-
owned European subsidiaries. The Company sold these subsidiaries in November,
1999 (see "European 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.
RECENT SALE TRANSACTIONS
EUROPEAN TRANSACTION
On November 24, 1999, ObjectShare completed the sale of all of the stock of
ObjectShare, Gmbh, a German corporation, and ObjectShare (U.K.) Limited, an
English corporation (collectively, the "Subsidiaries"), to Valtech S.A. a French
societe anonyme and its wholly-owned subsidiary Valtech Limited, respectively,
in exchange for total consideration of (a) approximately $1,600,000 in cash and
(b) the cancellation of certain intercompany indebtedness owed by the
Subsidiaries to ObjectShare. As a result of this transaction, ObjectShare has no
operations in Europe, with its remaining operations consisting primarily of
providing training and consulting services in the United States.
SMALLTALK/CINCOM TRANSACTION
On August 30, 1999, the Company completed the sale of certain rights and
assets ["The 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 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
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liabilities assumed by Cincom included ongoing maintenance and support, certain
capital leases, and accrued vacation and other liabilities, 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 The
Assets resulted in a gain of $2,486,000 for the Company which is included in
Other Income for the nine months ended December 31, 1999.
JAVA/SEAGULL TRANSACTION
On April 8, 1999, the Company completed the sale of certain rights and assets
to Seagull Software Systems, Inc. ["Seagull"] 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: (i) the
Company's propriety computer software application development environments,
including VisualSmalltalk and PARTS for Java, a visual programming environment
based on Java programming language; (ii) products currently in development to
support Enterprise JavaBeans and legacy software system integration; (iii) all
technology, warranties, documentation and other intellectual property rights of
the Company related to such software; (iv) 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 for the
nine months ended December 31, 1999.
As a result of these transactions, the Company's remaining operations consist
primarily of providing training and consulting services in the United States.
DECREASED ACCEPTANCE OF SMALLTALK
ObjectShare'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. The emphasis on Smalltalk was a major factor in
ObjectShare's sales decline in recent years due in large part to corporate
users' reluctance to make new and/or additional investments in Smalltalk-based
applications. This reluctance correlates to the perception that Java has emerged
as the leading programming language for future object-oriented application
development. Corporate users' reluctance to invest in Smalltalk was further
compounded by ObjectShare's declining sales and recurring operating losses from
fiscal 1996 through the third quarter of fiscal 2000.
LOSS OF AND DEPENDENCE ON KEY PERSONNEL
ObjectShare has in the last nine months lost a total of 97 personnel,
primarily due to the sale transactions mentioned above. ObjectShare's future
success depends 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 ObjectShare's business and
results of operations. Competition for qualified personnel is intense and has
recently intensified in ObjectShare's geographic and industry segments. The loss
of key personnel or an inability to hire qualified personnel will adversely
affect ObjectShare's business and results of operations.
NEED FOR CONTINUED ACCEPTANCE OF OBJECT-ORIENTED TECHNOLOGY
ObjectShare 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 ObjectShare's business and
results of operations. In addition, the future success of ObjectShare'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
ObjectShare's services, or that ObjectShare 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
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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 OBJECTSHARE'S LEGACY
ObjectShare 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 ObjectShare is no longer a developer, the marketplace
will not choose a competitor who is also a developer to provide training and
consulting services.
FLUCTUATIONS IN QUARTERLY RESULTS
ObjectShare 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 ObjectShare'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. ObjectShare's results in recent
quarters are not necessarily indicative of future results and ObjectShare
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, ObjectShare will no longer generate license related
or international revenue.
VOLATILITY OF STOCK PRICE
The market for ObjectShare common stock is highly volatile. The trading
price of ObjectShare common stock has been and will likely continue to be
subject to wide fluctuations in response to quarterly variations in
ObjectShare's operating results, announcements of new services provided by
ObjectShare 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 ObjectShare does business, or relating
to ObjectShare specifically, have in the past resulted and could in the future
result in an immediate and adverse effect on the market price of ObjectShare
common stock.
On June 23, 1999, ObjectShare common stock was de-listed from the Nasdaq
Stock Market. Currently ObjectShare common stock is traded on the OTC Bulletin
Board under the symbol "OBJS".
TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for software related training and consulting for
client/server/web computing environments is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
ObjectShare 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 ObjectShare is unable
to enhance its existing consulting and training skillsets and develop new
skillsets in response to changing customer requirements, ObjectShare's business
and results of operations will be materially and adversely affected.
In particular, the market for ObjectShare'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 software. This has caused an increase in competition in
the market for ObjectShare'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 ObjectShare's ability to market its services for
Internet application development.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
ObjectShare disposed of all significant intellectual property during the
quarter ended September 30, 1999 in connection with several recent sale
transactions (see "Recent Sale Transactions").
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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 ObjectShare 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 ObjectShare
believes are important to its existing and future business. These relationships
are non-exclusive and may be discontinued at any time.
MANAGING A CHANGING BUSINESS
Since its inception, ObjectShare has experienced changes in its
operations which have placed significant demands on ObjectShare's
administrative, operational, and financial resources. ObjectShare 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, ObjectShare has implemented a number of
restructurings and reductions in its workforce. As a result, ObjectShare 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 ObjectShare's operations, potentially causing delays in generating consulting
and training billings and the need for ObjectShare to effectively manage
dramatically changing operations.
LOSS OF REVENUES FROM INTERNATIONAL OPERATIONS
Approximately 31%, 31%, and 32% of ObjectShare'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. As mentioned above, ObjectShare no longer has
operations outside the United States. See "Recent Sale Transactions - European
Transaction."
FUTURE CAPITAL REQUIREMENTS
It is anticipated that ObjectShare will need additional funds to support
its operations during fiscal year 2000. The terms of any equity financing may be
dilutive to ObjectShare's stockholders, and the terms of any debt financing are
likely to contain restrictive covenants which limit ObjectShare'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, ObjectShare will experience severe liquidity problems. This
matter raises substantial doubt as to ObjectShare's ability to continue as a
going concern.
In connection with the signing of the merger agreement, StarBase has,
pursuant to a Secured Promissory Note, dated November 3, 1999 (the "Note"),
provided ObjectShare a line of credit of up to $500,000. This credit line bears
interest at a prime plus 0.75%, is secured by all assets of ObjectShare, and
matures on October 31, 2000 subject to earlier maturity based upon specified
events. Under the terms of the Note, StarBase may advance, but is not obligated
to advance, loans to ObjectShare following ObjectShare's sale of its previously
held foreign subsidiaries. These subsidiaries were sold on November 29, 1999.
See "Recent Sale Transactions - European Transactions."
As of October 6, 1999, ObjectShare entered into an Accounts Receivable
Purchase Agreement with a bank. This agreement provides ObjectShare with the
ability to sell up to $1,000,000 of eligible receivables to the bank. The bank
will pay ObjectShare 80% of the face value upon the sale and the balance after
subsequent collection by the bank. ObjectShare remains contingently liable for
the collection of these receivables. At December 31, 1999 this contingent
liability was $25,000. ObjectShare's obligations are secured by all of
ObjectShare'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. This
replaced the prior credit agreement with the same bank.
12
<PAGE> 13
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 NINE MONTHS OF DOLLAR AMOUNTS
ENDED DECEMBER 31, ENDED DECEMBER 31, 1999 COMPARED TO 1998
-------------------------- -------------------------- -------------------------
1999 1998 1999 1998 THREE MONTHS NINE MONTHS
---- ---- ---- ---- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Service 100% 73% 77% 69% (72)% (38)%
License 0% 27% 23% 31% (100)% (60)%
--- --- --- --- ---- ---
Total net revenues 100% 100% 100% 100% (79)% (45)%
Cost of net revenues:
Service 55% 46% 48% 36% (75)% (27)%
License 0% 8% 9% 7% (100)% (29)%
--- --- --- --- ---- -----
Total cost of net revenues 55% 54% 57% 43% (79)% (27)%
--- --- --- --- ---- -----
Gross margin 45% 46% 43% 57% (80)% (58)%
Operating expenses:
Sales and marketing 40% 36% 44% 39% (77)% (39)%
Research and development 1% 21% 13% 25% (100)% (71)%
General and administrative 113% 19% 41% 17% 23% 31%
Restructuring 0% 0% 0% (1) 0% (100)%
--- --- --- --- ----- -----
Total operating expenses 154% 76% 98% 80% (58)% (33)%
--- --- --- --- ---- -----
Loss from operations (110)% (30)% (55)% (23)% (25)% 31%
Interest and other income
(expense), net 15% 3% 51% 2% 10% 1,176%
--- --- --- --- ---- -----
Loss before income taxes (95)% (27)% (3)% (21)% (29)% (92)%
Provisions (benefit) for
income taxes 0% 1% 0% -- 0% (103)%
--- --- --- --- ---- -----
Net loss (95)% (28%) (3)% (21)% (29)% (91)%
=== === === === ==== =====
Gross Margin:
Service 45% 37% 38% 79% (66)% (51)%
License n/a 71% 63% 47% (100)% (68)%
</TABLE>
NET REVENUES
Total net revenues for the three and nine months ended December 31, 1999 were
$0.8 million and $6.4 million, a decrease of 79% and 45%, respectively, from the
comparable periods of fiscal 1999. This decrease was due primarily to a
declining demand for Smalltalk products and related services, resulting in
corresponding decreases in license and service revenues. Net revenues are
comprised of service revenues and license revenues.
Service revenues for the three and nine months ended December 31, 1999
decreased 72% and 38%, 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 fiscal year. Also, the Company only generated service
support revenue through August of 1999, as a result of the Cincom transaction.
As a percentage of total revenues service revenues increased from 69% to 77% for
the nine months ended December 31, 1999 compared with the prior year period.
This increase in service revenues as a percentage of total net revenue was
driven by the fact that the Company sold all aspects of its business which
produced license revenues. See "Recent Sale Transactions" above.
License revenues for the three and nine months ended December 31, 1999
decreased 100% and 60%, respectively, from the comparable periods of fiscal
1999. With the sales to Cincom and Seagull (see Recent Sale Transactions) the
Company no longer has license sales.
COST OF REVENUES
Cost of net revenues for the nine months ended December 31, 1999 were $3.6
million or 57% of net revenues compared to $4.9 million or 43% of net revenues
for the comparable 1998 period.
Cost of service revenues consists primarily of salaries, commissions,
facility expenses, and travel-related expenses. Costs of service revenues
decreased 75% for the third quarter of fiscal 2000 and decreased 27% for the
first nine 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 and third
quarters headcount and related expenses decreased to more closely match
anticipated revenue levels. Expenses related to support activities decreased
during the nine months as a result of the Cincom transaction.
13
<PAGE> 14
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 100% for the
third quarter of fiscal 2000 and decreased 29% for the first nine months of
fiscal 2000, from the comparable periods of fiscal 1999 due primarily to the
sale of the license activities and final calculations of royalty payments as a
result of the Cincom and Seagull transactions.
OPERATING EXPENSES
Operating expenses, excluding restructuring costs, declined $1.7 million and
$3.1 million, respectively for the three and nine months ended December 31, 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 77% and 39% for the
third quarter and year to date period, respectively, compared to the same
periods of fiscal 1999. The total amount spent decreased as the Company scaled
back its efforts in this area in anticipation of lower sales levels. Total
expense as a percentage of net revenues increased due to the fixed nature of
certain of the costs.
Research and development expenses for the first three quarters of fiscal 2000
were $824 thousand, a decrease of 71% 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 [see "Recent Sales
Transactions"].
General and administrative expenses for the three and nine months ended
December 31, 1999 increased $176 thousand and $636 thousand over the comparable
periods of fiscal 1999. This increase was largely due to increased reliance on
outside services for the three divestitures during the year, for required
increased disclosure in the Annual Report on Form 10-K, and the hiring of
certain investment bankers and other professionals to assist in identifying
strategic options and downsizing opportunities.
Restructuring costs were recorded in the second quarter of fiscal 1998 and
the third and fourth quarters of fiscal 1997. During the nine months ended
December 31, 1998, the Company made payments of $347,000 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.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense) for the nine months ended December 31,
1999 were $3.2 million or 51% of net revenues, compared with $256 thousand or 2%
of net revenues for the comparable 1998 period. This substantial increase was
due primarily to the $2.5 million gain on the sale related to the
Smalltalk/Cincom transaction, the $483 thousand gain related to the Java/Seagull
transaction and the $254 thousand gain related to the European/Valtech
transaction. See "Recent Sales Transactions."
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 nine months of
fiscal 2000. The Company reported losses and a foreign tax benefit of $29,000
for the first nine months of 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 related or European revenue.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had cash and cash equivalents $0.8
million and negative working capital of $30 thousand compared to $1.7 million of
cash and cash equivalents and $1.4 million of negative working capital as of
March 31, 1999.
14
<PAGE> 15
The Company used cash in operations of $2,830,000 in the nine months ended
December 31, 1999 down from the $3,415,000 used in the nine months ended
December 31, 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 expired in December 1999. On October 28, 1999 the
Company paid off substantially all of the indebtedness under such credit
agreement using the proceeds from the sale of certain receivables to the bank
under an Accounts Receivable Purchase Agreement. The balance was paid off prior
to December 31, 1999. There will be no more advances under such 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. At December 31,
1999 the Company was contingently liable for $25,000 related to receivables sold
to the bank. This amount was received by the bank during January 2000. In
connection with this contingent liability, $7,000 of cash was held in a
restricted account at the bank at December 31, 1999.
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, among other
things, 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 and subsequently
repayed it in December from the proceeds of the Valtech transaction. StarBase is
under no obligation to make additional advances to the Company under such credit
facility.
It is anticipated that cash on hand and cash flow from operations will not be
sufficient to support the Company's operations after the anticipated closing of
the proposed merger. In the event the merger with StarBase is not completed the
Company will need to obtain 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.
YEAR 2000 COMPLIANCE
As of January 31, 2000, ObjectShare has experienced no disruptions or
problems regarding the year 2000 changeover. As part of ObjectShare's Y2K plan,
prior to January 1, 2000, ObjectShare tested and sampled internal systems
consisting primarily of desktop and network computers, and third-party software
utilized in the day-to-day operations of ObjectShare. All sampling and testing
completed by January 1, 2000 indicated all systems were operating as normal.
Through January 31, 2000, all of ObjectShare's internal hardware and software
continue to operate as normal and to-date, all vendors utilized by ObjectShare
in its daily operations are operating normally and have not indicated any Y2K
anomalies.
ObjectShare will continue to monitor and oversee all internal operations and
be in contact with its vendors regarding the upcoming dates (such as February
29, 2000) which are identified as presenting potential Y2K issues. Based upon
the successful transition through the January 1, 2000 rollover period,
ObjectShare does not anticipate any problems to materialize.
ObjectShare's expenditures for the Y2K effort were not material and
ObjectShare does not expect to incur any material costs over the next few months
in regards to Y2K.
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
15
<PAGE> 16
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.
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
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
Form 8-K dated November 24, 1999 was filed on December 8, 1999 to report the
sale of the stock of both ObjectShare Gmbh and ObjectShare (UK) Ltd. to Valtech
under Item 5.
16
<PAGE> 17
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 14, 2000 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
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
18
<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
DECEMBER 31, 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> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 780
<SECURITIES> 0
<RECEIVABLES> 570
<ALLOWANCES> (70)
<INVENTORY> 0
<CURRENT-ASSETS> 1,304
<PP&E> 3,161
<DEPRECIATION> (2,882)
<TOTAL-ASSETS> 1,642
<CURRENT-LIABILITIES> 1,334
<BONDS> 0
0
0
<COMMON> 50,251
<OTHER-SE> (50,017)
<TOTAL-LIABILITY-AND-EQUITY> 1,462
<SALES> 823
<TOTAL-REVENUES> 823
<CGS> 454
<TOTAL-COSTS> 1,271
<OTHER-EXPENSES> (151)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> (775)
<INCOME-TAX> 0
<INCOME-CONTINUING> (775)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (775)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
