<PAGE>
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C 20549
X Quarterly report pursuant to Section 13 or 15(d)
--- of the Securities Exchange Act of 1934 for the
quarterly period ended March 31, 1997 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: 0-20789
OneWave, Inc.
-------------
(Exact name of registrant as specified in its charter)
Delaware 04-3249618
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Arsenal Marketplace, Second Floor, Watertown, Massachusetts 02172
---------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 923-6500
--------------
--------------------
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 period 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 May 9, 1997 there were 14,992,711 shares of Common Stock outstanding.
<PAGE>
OneWave, Inc.
Table of Contents
Page
PART I - FINANCIAL INFORMATION ----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1996
and March 31, 1997. 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1996 and 1997. 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1997. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Default Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
2
<PAGE>
OneWave, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
Part I. Financial Information
- -----------------------------
Item 1.Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
Audited Unaudited
December 31, March 31,
1996 1997
------------ ----------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 12,868 $ 15,165
Marketable securities 27,181 22,590
Accounts receivable, net 1,784 1,271
Inventories 304 304
Prepaid expenses and other current
assets 747 584
-------- --------
Total current assets 42,884 39,914
Property and Equipment, net 3,009 2,776
Other Assets 257 193
-------- --------
Total assets $ 46,150 $ 42,883
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 1,454 $ 757
Other current liabilities 4,411 4,039
Deferred revenue 548 383
-------- --------
Total current liabilities 6,413 5,179
Stockholders' Equity:
Common stock 15 15
Additional paid-in capital 58,505 58,820
Note receivable from executive officer (2,560) (2,507)
Accumulated deficit (16,223) (18,624)
-------- --------
Total stockholders' equity 39,737 37,704
Total liabilities and stockholders'
equity $ 46,150 $ 42,883
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
OneWave, Inc.
Condensed Consolidated Statements of Operations
(In thousands except per share data)
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
March 31,
----------------------------------------------
1996 1997
---------------- ----------------
<S> <C> <C>
Revenues:
Software license and
maintenance $ 710 $ 300
Consulting and education
services 1,671 1,212
---------------- ----------------
Total revenues 2,381 1,512
Cost of Revenues:
Software license and
maintenance 289 279
Consulting and education
services 974 1,222
---------------- ----------------
Total cost of revenues 1,263 1,501
---------------- ----------------
Gross profit 1,118 11
Operating Expenses:
Selling, general and
administrative 1,701 2,152
Research and development 399 759
Compensation to executive
officer 7,515 -
---------------- ----------------
Total operating
expenses 9,615 2,911
---------------- ----------------
Operating loss (8,497) (2,900)
Interest Income (Expense),
net (18) 514
---------------- ----------------
Net loss before taxes (8,515) (2,386)
Income Tax Expense - 15
---------------- ----------------
Net loss $(8,515) $(2,401)
================ ================
Net Loss per Common and Common
Equivalent Share $(0.65) $(0.16)
================ ================
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding 13,141 14,979
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
OneWave, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1996 1997
------------ -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(8,515) $(2,401)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation expense to executive officer 7,515 -
Deferred compensation expense 31 -
Depreciation and amortization 52 350
Change in operating assets and liabilities:
Accounts receivable 133 513
Inventories 65 -
Prepaid expenses and other current assets (585) 163
Accounts payable 1,578 (697)
Other current liabilities (2,115) (319)
Deferred revenue 39 (165)
------- -------
Net cash used in operating activities (1,802) (2,556)
Cash Flows from Investing Activities:
Sales of marketable securities - 4,591
Purchases of property and equipment (1,261) (53)
------- -------
Net cash (used in) provided by investing
activities (1,261) 4,538
Cash Flows from Financing Activities:
Payments on notes payable to stockholders (1,000) -
Proceeds from common stock issuance for employee stock
purchase plan - 93
Proceeds from secured note payable to a bank 2,000 -
Net proceeds from issuance of preferred stock 6,780 -
Proceeds from exercise of stock options - 222
------- -------
Net cash provided by financing activities 7,780 315
Net Increase in Cash and Cash Equivalents 4,717 2,297
Cash and Cash Equivalents, beginning of period 105 12,868
------- -------
Cash and Cash Equivalents, end of period $ 4,822 $15,165
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 13 $ -
======= =======
Cash paid for income taxes $ - $ 15
======= =======
Supplemental Disclosure of Noncash Financing Activities:
Issuance of note receivable from executive officer $ 2,560 $ (53)
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
OneWave, Inc.
Notes to Condensed Consolidated Financial Statements
( Unaudited )
1. Basis of Presentation:
The condensed consolidated financial statements included herein are unaudited
and reflect all adjustments, consisting of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair presentation of the
results for the interim periods. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996
as filed with the Securities and Exchange Commission.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates and would impact
future results of operations and cash flows.
The results of operations for the reported 1997 periods are not necessarily
indicative of the results to be achieved for the entire year ending December 31,
1997.
2. Computation of Net Loss Per Common and Common Equivalent Share
For the three months ended March 31, 1997, net loss per common share was
computed based upon the weighted average number of common shares and common
equivalent shares outstanding. In accordance with the Securities and Exchange
Commission Staff Accounting Bulletin No. 83 ( " SAB No. 83" ), all common and
common equivalent shares and other potentially dilutive instruments (including
stock options, redeemable convertible preferred stock and convertible preferred
stock ) issued during the twelve month period prior to the date of the Company's
initial public offering ("IPO") have been included in the calculation of
weighted average common and common equivalent shares outstanding for the period
ended March 31, 1996.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 128, Earnings Per Share. This pronouncement is
effective for fiscal years ending after December 15, 1997. The more significant
changes are the replacement of primary earnings per share with "basic" earnings
per share. Basic earnings per share is computed by dividing reported earnings
available to common stockholders by weighted average shares outstanding, with no
consideration given for any potentially dilutive securities. Fully diluted
earnings per share, now called "diluted" earnings per share, is still required.
As net losses were presented for the 1997 period in the accompanying
consolidated financial statements, the pro forma loss per share, computed under
the new statement, is the same as the loss per share presented. The
computational differences in fully diluted earnings per share under the new
pronouncement would have no impact on loss per share as presented for 1996.
3. Marketable Securities
Marketable securities primarily consist of government bonds and commercial paper
with original maturities at date of purchase beyond three months and less than
twelve months. In accordance with Statement of Financial Accounting Standards
No. 115, the Company classifies its marketable securities as "held-to-maturity"
and therefore reports such assets at amortized cost, which approximates market.
6
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following information should be read in conjunction with the financial
statements and notes thereto and risk factors contained in the section entitled
"Certain Factors That May Affect Future Results" on page 16 of the Company's
Annual Report on Form 10-K dated March 28, 1997.
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Factors that might cause such a
difference are discussed in the section entitled "Certain Factors that may
Affect Future Results" below.
OVERVIEW:
OneWave is an Internet software and services company dedicated to unifying
disparate information systems and building integrated business solutions. In
light of OneWave's experience in the marketplace during the second half of 1996,
the Company has recently adjusted its sales and marketing approach, offering to
provide its customers with a combination of consulting services and software
necessary to deliver a comprehensive solution which addresses the customers'
business problems. While the Company believes that in the long term this change
in approach will result in increased market penetration, in the short term
revenues may be uncertain while the Company makes its transition to the new
approach. It is premature for the Company to determine whether its new approach
to sales will be successful, and the Company's plans and strategies are subject
to change. Further, there can be no assurances that the Company will be able to
obtain, maintain and retain the resources, employees, executives and assets
necessary for the Company to effectively pursue its strategy. The competition
and market for the Company's services and technology are quickly changing, and
may develop in ways not anticipated by the Company.
RESULTS OF OPERATIONS:
Revenues:
- ---------
Total revenues decreased $869,000 to $1,512,000 for the three months ended March
31, 1997 from $2,381,000 for the comparable quarter in 1996. The decrease was
due primarily to reductions in software sales and educational services.
Additionally, sales of third-party software and maintenance decreased by
$401,000 to $26,000 for the three months ended March 31, 1997 from $427,000 for
the comparable quarter in 1996. For the three months ended March 31, 1997,
software license and maintenance revenues represented 20% of total revenues with
the remaining 80% from consulting and education services, compared with 30% and
70%, respectively for the comparable prior year period.
Gross profit:
- -------------
Cost of software license and maintenance revenues consists of the cost of
software and maintenance purchased for resale from a related party, distribution
costs and product support costs. The cost of consulting and education services
consists primarily of consulting and education personnel salaries, related costs
and fees to third-party service providers. For the three months ended March 31,
1997, total gross margin decreased to 1% from 47% for the comparable prior year
period. For the three months ended March 31, 1997, the gross margin for license
and maintenance revenues was 7% and consulting and education services generated
a gross loss percentage of 1% of revenues. For the comparable prior year
quarter, the gross margin for license and maintenance revenues was 59% and the
gross margin for consulting and education services was 42%. The decrease in
total gross margin from the comparable prior year quarter is primarily
attributable to lower sales volume and the transfer of headcount from other
departments within the Company to the consulting services departments as part of
the implementation of the Company's new solutions-led selling strategy. In
general, gross margins from the delivery of services, which comprised a greater
percentage of the Company's revenue mix for the three months ended March 31,
1997 versus the comparable prior year period, are lower than margins from the
licensing of software. The decrease in gross margin for license and maintenance
revenues compared to prior year is primarily attributable to reduced sales
volume and additional costs associated with capitalized software amortization.
The magnitude of the decrease in gross margin for license and maintenance
revenues was mitigated by reduced support costs for the period. The decrease in
gross margin for consulting and education services from the comparable prior
year quarter is primarily attributable to the reduction in educational services
and the transfer of headcount from other departments within the Company to the
consulting services departments.
7
<PAGE>
Selling, General and Administrative Expenses:
- ---------------------------------------------
Selling, general and administrative expenses consist primarily of payroll costs
related to executive management, finance, administration, sales and marketing
personnel, and costs for advertising, marketing and related administrative
support. Selling, general and administrative expenses increased to $2,152,000
for the three months ended March 31, 1997 from $1,701,000 for the comparable
prior year period, representing 142% and 71% of total revenues, respectively.
The total dollar increase for the three month period reflects the Company's
increased efforts within the areas of sales, marketing and distribution.
Particularly, there have been increases in headcount and related staffing
expenditures as well as the introduction of specific marketing and advertising
programs. The Company expects selling, general and administrative expenses to
continue to increase during 1997.
Research and Development Expenses:
- ----------------------------------
Research and development expenses primarily consist of payroll-related costs,
fees to independent contractors and purchases of technology. Research and
development expenses increased to $759,000 for the three months ended March 31,
1997 from $399,000 for the comparable prior year period, representing 50% and
17% of total revenues, respectively. The total dollar increase for the three
month period is attributable to increased headcount and related costs. The
increases reflect the Company's efforts to enhance the functionality of its
products. The Company believes that it will be necessary to make continued
significant expenditures on research and development to remain competitive.
Compensation to Executive Officer:
- ----------------------------------
During the three months ended March 31, 1996, certain of the Company's
controlling stockholders sold 960,000 shares of common stock to the Chief
Executive Officer for an aggregate purchase price of $1,440,000, and agreed to
make certain payments to the Chief Executive Officer to secure his services as
the Company's Chief Executive Officer. In accordance with generally accepted
accounting principles, the Company recorded a non-cash expense of $7,515,000
related to these transactions. This non-cash expense consists of: (i)
$5,760,000, which represents the difference between the purchase price paid by
the Chief Executive Officer for the shares of common stock that he purchased and
the fair market value of those shares at that time; (ii) $1,000,000, relating to
a payment received by the Chief Executive Officer from one of the Company's
controlling stockholders; and (iii) $755,000, representing the then current
value of a payment guaranty that such stockholder agreed to make to the Chief
Executive Officer in the event of a decline in the value of certain stock
appreciation rights held by the Chief Executive Officer on capital stock of his
former employer. The financial results for the three months ended March 31,
1997 were not affected by the above transaction and no similar transactions
occurred during the period.
Interest Income (Expense), Net:
- -------------------------------
For the three months ended March 31, 1997, the Company recorded net interest
income of $514,000. The interest income is a result of interest earned on the
net proceeds received by the Company from its initial public offering in July
1996. For the comparable prior year period, the Company recorded net interest
expense of $18,000. The expense was related to interest on notes payable to
stockholders which has been repaid in full by the Company.
Liquidity and Capital Resources:
- --------------------------------
In February 1996, the Company entered into a financing agreement with a bank.
The agreement provides for a revolving line of credit of up to $2,500,000,
subject to certain limitations, and an equipment line of credit up to $500,000
for purchases of new equipment. The revolving line of credit and equipment line
of credit expire on June 30, 1997. The agreement is collateralized by all
assets of the Company. The financing agreement contains certain restrictive
covenants, including among other items, minimum levels of tangible net worth and
net income (loss). At March 31, 1997, the Company was not in compliance with
certain covenants under the facility. The Company had no outstanding balances
under the revolving line of credit or the equipment line of credit at March 31,
1997.
The Company's operating activities utilized cash and cash equivalents of
approximately $2,556,000 for the three month period ended March 31, 1997,
resulting primarily from the net loss for the quarter.
8
<PAGE>
The Company's investing activities, which primarily consisted of the maturity of
certain of the Company's short-term marketable securities, provided cash and
cash equivalents of approximately $4,538,000 for the three month period ended
March 31, 1997.
The Company's financing activities, which consisted of the sale of stock
pursuant to the exercise of employee stock options and the issuance of common
stock for the employee stock purchase plan, provided cash and cash equivalents
of approximately $315,000 for the three month period ended March 31, 1997.
The Company had agreed to loan an executive officer up to $2,560,000 for payment
of his anticipated income tax liability resulting from his purchase of 960,000
shares of the Company's common stock from a significant stockholder for a
purchase price less than its then fair market value. The Company funded
$2,507,000 under the loan agreement in April 1997. The loan will be secured by
a first priority pledge of the purchased shares, will accrue interest at 6.21%
per annum and will be due and payable no later than December 31, 2001. The
Company has no other significant commitments other than obligations under its
operating leases.
The Tax Reform Act of 1986 contains provisions that limit the amount of net
operating loss carryforwards that a company may utilize in any one year in the
event of certain cumulative changes in ownership over a three year period in
excess of 50%, as defined. In the event that the change in the Company's
ownership disclosed in the Current Report on Form 8-K as filed with the
Securities and Exchange Commission on May 6, 1997 takes place as described, the
Company's net operating loss carryforwards would be limited in accordance with
the provisions defined under the Tax Reform Act of 1986. The extent of the
annual limitation has not yet been determined, however management believes it
will significantly impair any such benefit.
The Company currently anticipates that the net proceeds of the IPO and existing
cash balances will be sufficient to meet its anticipated working capital and
capital expenditure requirements through December 31, 1997. Thereafter, the
Company may need to raise additional funds. The Company may in the future seek
to expand its business through possible acquisitions. The Company, however,
has no commitments or agreements with respect to any future acquisition and no
assurances can be given with respect to the likelihood or financial or business
effect, of any future acquisition. Future acquisitions could be financed by
internally generated funds, bank borrowings, public offerings or private
placements of equity or debt securities, or a combination of the foregoing.
There can be no assurance that additional financing will be available when
needed on terms favorable to the Company or at all.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements and may fluctuate between operating
periods. Certain factors that might cause such differences and fluctuations
include the following: ability to implement and achieve market acceptance of the
Company's solutions based approach to sales, changes in the Company's strategy,
the Company's ability to attract, train and retain qualified personnel, changes
in technology and industry standards, potential fluctuations in quarterly
results, recent introduction of OneWaveTM products, delays in development or
product releases, changes in the market for the Company's products and services,
slowdown in the rate of acceptance of the Company's products, dependence of the
Company's business on the Internet, increased competition, development of
competing products, risk of software defects, reliance on certain strategic
relationships, difficulties in management of growth, dependence on key
personnel, evolving distribution strategy, proprietary technology and the
inherent difficulties in protecting intellectual property, dependence on third-
party technology and exposure for product and services liability, and those
factors which are discussed in the section entitled "Certain Factors That May
Affect Future Results" on page 16 of the Company's Annual Report on Form 10-K
dated March 28, 1997. Upon request, the Company will provide a copy of the
Annual Report without charge.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of operations, the Company is subject to
performance under contracts and has certain legal actions and
contingencies pending. However, in Management's opinion, any such
outstanding matters would not have a material, adverse effect on the
Company's financial position, results of operations or cash flows.
Item 2. Changes in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On January 13, 1997, James Nondorf, the Vice President of New Business
Development, reached a mutual decision with OneWave to resign from the
Company.
On March 20, 1997, Joseph Gruttadauria, the Vice President of
Professional Services, resigned from OneWave to pursue new
opportunities.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement regarding computation of earnings per share
27 Financial Data Schedule
(b) Reports on Form 8-K
None
10
<PAGE>
SIGNATURES
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, thereto duly authorized.
Dated: May 9, 1997
OneWave, Inc.
( Registrant )
___________________________________________
Klaus P. Besier
Chairman and Chief Executive Officer
___________________________________________
Mark J. Gallagher
Principal Financial Officer
11
<PAGE>
ONEWAVE, INC.
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
EXHIBIT 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
MARCH 31, 1996 MARCH 31, 1997
---------------------------------
<S> <C> <C>
Net loss $ 8,515 $ 2,401
Weighted average shares outstanding
during the period (1) 10,737 14,979
Common stock equivalent shares (1) 2,404 -
---------------------------------
Weighted average number of common and
common stock equivalents 13,141 14,979
Net loss per common and common
equivalent share $ (.65) $ (.16)
======= =======
</TABLE>
(1) In accordance with the Securities and Exchange Commission Staff Accounting
Bulletin No.83 ("SAB 83") all common and common equivalent shares and
other potentially dilutive instruments (including stock options,
redeemable convertible preferred stock and convertible preferred stock)
issued during the last twelve month period prior to the date of the IPO
have been included in the calculation as if they were outstanding for the
period ended March 31, 1996.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS IN THE COMPANY'S 3/31/97 10-Q 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> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 15,165
<SECURITIES> 22,590
<RECEIVABLES> 1,419
<ALLOWANCES> 148
<INVENTORY> 304
<CURRENT-ASSETS> 39,914
<PP&E> 3,731
<DEPRECIATION> 955
<TOTAL-ASSETS> 42,883
<CURRENT-LIABILITIES> 5,179
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 37,689
<TOTAL-LIABILITY-AND-EQUITY> 42,883
<SALES> 1,512
<TOTAL-REVENUES> 1,512
<CGS> 1,501
<TOTAL-COSTS> 1,501
<OTHER-EXPENSES> 2,911
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (514)
<INCOME-PRETAX> (2,386)
<INCOME-TAX> 15
<INCOME-CONTINUING> (2,401)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,401)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
