<PAGE>
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C 20549
_______________________
X Quarterly report pursuant to Section 13 or 15(d)
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of the Securities Exchange Act of 1934 for the
quarterly period ended March 31, 1998 or
___ Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the
transition period from ______________ to ______________.
Commission File Number: 0-20789
OneWave, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 04-3249618
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Arsenal Marketplace, Second Floor, Watertown, Massachusetts 02172
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(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 923-6500
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_______________________
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 ___
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As of May 5, 1998 there were 14,392,040 shares of Common Stock outstanding.
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OneWave, Inc.
Table of Contents
PART I - FINANCIAL INFORMATION Page
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Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1997
and March 31, 1998. 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1997 and 1998. 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1998. 5
Notes to Condensed Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 7
Item 3. Quantitative and Qualitative Disclosures about
Market Risk. 9
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
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OneWave, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
Part I. Financial Information
- -----------------------------
Item 1.Condensed Consolidated Financial Statements.
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------------ ------------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 10,804 $ 13,460
Marketable securities 22,909 19,033
Accounts receivable, net 783 532
Prepaid expenses and other current assets 201 178
------------------ ------------------
Total current assets 34,697 33,203
Property and Equipment, net 1,569 1,381
Other Assets -- 150
------------------ ------------------
Total assets $ 36,266 $ 34,734
================== ==================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 800 $ 715
Other current liabilities 1,570 1,310
Deferred revenue 491 267
------------------ ------------------
Total current liabilities 2,861 2,292
Stockholders' Equity:
Common stock 15 15
Treasury stock (1,657) (1,604)
Additional paid-in capital 58,906 58,884
Accumulated deficit (23,859) (24,853)
------------------ ------------------
Total stockholders' equity 33,405 32,442
Total liabilities and stockholders' equity $ 36,266 $ 34,734
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
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OneWave, Inc.
Condensed Consolidated Statements of Operations
(In thousands except per share data)
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
March 31,
-------------------------------------------
1997 1998
------------------ ------------------
Revenues:
<S> <C> <C>
Consulting and education services $ 1,212 $ 965
Software license and maintenance 300 94
------------------ ------------------
Total revenues 1,512 1,059
Cost of Revenues:
Consulting and education services 1,222 1,156
Software license and maintenance 279 45
------------------ ------------------
Total cost of revenues 1,501 1,201
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Gross profit (loss) 11 (142)
Operating Expenses:
Selling, general and administrative 2,152 867
Research and development 759 424
------------------ ------------------
Total operating expenses 2,911 1,291
------------------ ------------------
Operating loss (2,900) (1,433)
Interest Income, net 514 439
------------------ ------------------
Net loss before taxes (2,386) (994)
Income Tax Expense 15 --
------------------ ------------------
Net loss $(2,401) $ (994)
================== ==================
Basic and Diluted Net Loss per Common
Share $(0.16) $(0.07)
================== ==================
Shares Used in Computing Net Loss per
Common Share 14,979 14,389
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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OneWave, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
March 31,
---------------------------------
1997 1998
-------------- --------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net loss $ (2,401) $ (994)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 350 216
Change in operating assets and liabilities:
Accounts receivable 513 251
Prepaid expenses and other current assets 163 24
Accounts payable (697) (85)
Other current liabilities (319) (261)
Deferred revenue (165) (224)
-------------- --------------
Net cash used in operating activities (2,556) (1,073)
Cash Flows from Investing Activities:
Sales of marketable securities 4,591 3,876
Increase in other assets - (150)
Purchases of property and equipment (53) (28)
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Net cash provided by investing activities 4,538 3,698
Cash Flows from Financing Activities:
Proceeds from common stock issuance for employee stock purchase plan 93 30
Proceeds from exercise of stock options 222 1
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Net cash provided by financing activities 315 31
Net Increase in Cash and Cash Equivalents 2,297 2,656
Cash and Cash Equivalents, beginning of period 12,868 10,804
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Cash and Cash Equivalents, end of period $ 15,165 $ 13,460
============== ==============
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ 15 $ -
============== ==============
Supplemental Disclosure of Noncash Financing Activities:
Issuance of note receivable from executive officer $ (53) $ -
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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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 1998 period are not necessarily
indicative of the results to be achieved for the entire year ending December 31,
1998.
2. Computation of Basic and Diluted Net Loss per Common Share
In accordance with the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 128, Earnings Per Share, basic net loss per
share is computed by dividing reported earnings available to common stockholders
by the weighted average common shares outstanding, with no consideration given
for any potentially dilutive securities. Diluted net loss per share is the same
as basic net loss per share because the inclusion of common stock issuable
pursuant to stock options and warrants would be antidilutive.
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
value.
4. Other Assets
In February 1998, the Company issued a promissory note in the amount of $150,000
to an officer of the Company. The promissory note is secured by a perfected,
first priority security interest in 100,000 shares of the Company's common stock
owned by the officer. The promissory note is payable on December 31, 1999. The
promissory note bears interest at a rate of six and one-half percent per annum.
6
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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 15 of the Company's
Annual Report on Form 10-K/A as filed with the Securities and Exchange
Commission on April 30, 1998.
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, Inc. ("OneWave" or the "Company") historically has helped organizations
to build applications that integrate and extend disparate information systems.
In the past, OneWave focused on developing and marketing its application
development products, along with implementation services. Late in the first
quarter of 1998, the Company made a decision to unify its Consulting Services
Group ("CSG") and Software Products Group ("SPG") into a single consulting
services organization focused on delivering business and information technology
solutions on a fixed-priced/fixed-time basis. The Company intends to extend its
current services business to emphasize building cross-enterprise, e-Business
solutions. E-Business encompasses a wide variety of business processes in which
Internet technologies are used to bring together customers, vendors, suppliers
and employees in ways that are generally designed to enhance commerce among
business partners. OneWave intends to utilize innovative methodologies combined
with cutting-edge technical capabilities to conceptualize, design, develop, and
deploy e-Business solutions facilitated by Internet technologies. The Company
believes that this focus will allow OneWave to more effectively leverage its
core competencies to deliver maximum value to its customers through consulting
services centric solutions.
RESULTS OF OPERATIONS:
Revenues:
- --------
Total revenues decreased $453,000 to $1,059,000 for the three months ended March
31, 1998 from $1,512,000 for the comparable quarter in 1997. The decrease was
due to reductions in both consulting and education revenues and software license
and maintenance revenues. Consulting and education services revenues decreased
$247,000 to $965,000 for the three months ended March 31, 1998 from $1,212,000
for the comparable quarter in 1997 as a result of a decrease in the number of
consulting engagements serviced during the first quarter of 1998 relative to the
first quarter of 1997. Additionally, software and maintenance decreased by
$206,000 to $94,000 for the three months ended March 31, 1998 from $300,000 for
the comparable quarter in 1997. The decrease in software and maintenance
revenues is attributed to the phasing out of the Company's software product
offerings. For the three months ended March 31, 1998, consulting and education
services revenues represented 91% of total revenues with the remaining 9% from
software license and maintenance revenues, compared with 80% and 20%,
respectively for the comparable prior year period.
Gross profit:
- ------------
Cost of consulting and education services revenues consists primarily of
consulting and education personnel salaries, related costs and fees to third-
party service providers. Cost of software license and maintenance revenues
consist of the cost of software and maintenance purchased for resale from a
related party, distribution costs and product support costs. For the three
months ended March 31, 1998, total gross profit/(loss) percentage decreased to a
gross loss percentage of 13% from a gross margin of 1% for the comparable prior
year period. For the three months ended March 31, 1998, the gross loss
percentage for consulting and education services revenues was 20% and software
license and maintenance revenue generated a gross margin of 52%. For the
comparable prior year quarter, the gross margin for consulting and education
revenues was a gross loss percentage of 1% and the gross margin for software
license and maintenance
7
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revenues was 7%. The decrease in total gross margin from the comparable prior
year quarter is primarily attributable to lower sales volumes in both CSG and
SPG.
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 decreased to $867,000 for
the three months ended March 31, 1998 from $2,152,000 for the comparable prior
year period, representing 82% and 42% of total revenues, respectively. The total
dollar decrease for the three month period reflects the decrease in the
Company's headcount in the areas of sales, marketing and administration. The
Company expects selling, general and administrative expenses to increase during
1998 as the Company seeks to hire additional sales and marketing personnel.
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 decreased to $424,000 for the three months ended March 31,
1998 from $759,000 for the comparable prior year period, representing 40% and
50% of total revenues, respectively. The total dollar decrease in for the three
month period is attributable to decreases in headcount and related costs. The
Company believes that expenditures associated with research and development will
decline as a percentage of revenue during the remainder of 1998 as the Company's
shifts its focus to providing consulting services.
Interest Income (Expense), Net:
- ------------------------------
For the three months ended March 31, 1998, the Company recorded net interest
income of $439,000. For the comparable prior year period, the Company recorded
net interest income of $514,000. The $75,000 decrease in interest income
between the respective three months ended March 31, 1997 and 1998 is the result
of reductions in the Company's cash and marketable securities balances.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's operating activities utilized cash and cash equivalents of
approximately $1,073,000 for the three month period ended March 31, 1998,
resulting primarily from the net loss for the quarter.
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 $3,697,000 for the three month period ended
March 31, 1998.
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 $30,000 for the three month period ended March 31, 1998.
In February 1998, the Company issued a promissory note in the amount of $150,000
to an officer of the Company. The promissory note is secured by a perfected,
first priority security interest in 100,000 shares of the Company's common stock
owned by the officer. The promissory note is payable on December 31, 1999. The
promissory note bears interest at a rate of six and one-half percent per annum.
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. As a result of 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, as described, the Company believes that its
annual net operating loss deduction will 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, although management believes it will
significantly impair any such benefit.
The Company currently anticipates that at its current rate of expenditures,
existing cash balances will be sufficient to meet its anticipated working
capital and capital expenditure requirements through at least December 31, 1999.
8
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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.
IMPACT OF YEAR 2000 ISSUE:
The Company has reviewed its internal computer systems and products and their
capability of recognizing the year 2000 and years thereafter. The Company
expects that any costs relating to ensuring such systems to be year 2000
compliant will not be material to the financial condition or the results of
operations of the Company.
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: the success of the Company's new business strategy, rapid
changes in the market place, risks related to the management of growth, the
Company's ability to attract, train and retain qualified personnel, the
Company's ability to build its sales staff and re-deploy its employees
previously focused on the Company's software product offerings, development and
promotional expenses related to the introduction of new service, changes in
technology and industry standards, limited operating history, changes in the
market for the Company's services, the rate of acceptance of the Company's
services, dependence of the Company's business on the Internet, increased
competition, changing of pricing policies by the Company or its competitors, the
timing of receipt of orders from major customers, development of Internet and
Intranet products or enhancements by vendors of existing client/server or legacy
software systems that compete with the Company's consulting services, dependence
on key personnel, proprietary technology and the inherent difficulties in
protecting intellectual property, dependence on third-party technology, and
exposure for product and professional services liability. The market price of
the Company's common stock has been, and in the future will likely be, subject
to significant fluctuations in response to variations in quarterly operating
results and other factors, such as announcements of technological innovations or
new products by the Company or its competitors, or other events.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
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
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
10
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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 11, 1998
OneWave, Inc.
(Registrant)
/s/ David W. Chapman
___________________________________________
David W. Chapman
Chief Financial Officer and Principal Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS IN THE COMPANY'S 3/31/98 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,460
<SECURITIES> 19,033
<RECEIVABLES> 582
<ALLOWANCES> 50
<INVENTORY> 0
<CURRENT-ASSETS> 33,203
<PP&E> 2,879
<DEPRECIATION> 1,498
<TOTAL-ASSETS> 34,734
<CURRENT-LIABILITIES> 2,292
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 32,427
<TOTAL-LIABILITY-AND-EQUITY> 34,734
<SALES> 1,059
<TOTAL-REVENUES> 1,059
<CGS> 1,201
<TOTAL-COSTS> 1,201
<OTHER-EXPENSES> 1,291
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (439)
<INCOME-PRETAX> (994)
<INCOME-TAX> 0
<INCOME-CONTINUING> (994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (994)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
