<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 June 30, 1998 or
___ Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the
transition period from ______________ to ______________.
Commission File Number: 0-20789
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
--- ---
As of July 31,1998 there were 14,394,570 shares of Common Stock outstanding.
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OneWave, Inc.
Table of Contents
<TABLE>
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1997
and June 30,1998. 3
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1997 and 1998 and the six months
ended June 30, 1997 and 1998. 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 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 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Default Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
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, June, 30,
1997 1998
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(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 10,804 $ 18,226
Marketable securities 22,909 13,090
Accounts receivable, net 783 932
Prepaid expenses and other current assets 201 125
-------- --------
Total current assets 34,697 32,373
Property and Equipment, net 1,569 1,169
Other Assets -- 150
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Total assets $ 36,266 $ 32,692
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 800 $ 855
Other current liabilities 1,570 1,404
Deferred revenue 491 128
-------- --------
Total current liabilities 2,861 2,387
Stockholders' Equity:
Common stock 15 15
Additional paid-in capital 58,906 58,884
Accumulated deficit (23,859) (25,994)
Treasury stock (1,657) (1,600)
-------- --------
Total stockholders' equity 33,405 31,305
Total liabilities and stockholders' equity $ 36,266 $ 33,692
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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OneWave, Inc.
Condensed Consolidated Statements of Operations
(In thousands except per share data)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1997 1998 1997 1998
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues
Consulting and education services $ 669 $ 964 $ 1,881 $ 1,929
Software license and maintenance 248 85 548 179
------- ------- ------- -------
Total revenues 917 1,049 2,429 2,108
Cost of Revenues:
Consulting and education services 950 1,333 2,172 2,490
Software license and maintenance 239 - 518 45
------- ------- ------- -------
Total cost of revenues 1,189 1,333 2,690 2,535
------- ------- ------- -------
Gross profit (272) (284) (261) (427)
Operating Expenses:
Selling, general and administrative 1,757 1,282 3,909 2,148
Research and development 728 - 1,487 424
Restructuring charge 1,782 - 1,782 -
Compensation to former chief
executive officer 227 - 227 -
------- ------- ------- -------
Total operating expenses 4,494 1,282 7,405 2,572
------- ------- ------- -------
Operating loss (4,766) (1,566) (7,666) (2,999)
Interest Income (Expense), net 472 425 986 864
------- ------- ------- -------
Net loss before taxes (4,294) (1,141) (6,680) (2,135)
Income Tax Expense - - 15 -
------- ------- ------- -------
Net loss $(4,294) $(1,141) $(6,695) $(2,135)
======= ======= ======= =======
Basic and Diluted Net Loss per Common Share $ (0.29) $ (0.08) $ (0.45) $ (0.15)
======= ======= ======= =======
Shares Used in Computing Net Loss per
Common Share 14,734 14,394 14,856 14,392
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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OneWave, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Unaudited
Six Months Ended
June 30,
---------------------
1997 1998
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<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(6,695) $(2,135)
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation expense to former chief
executive officer 227 -
Non-cash restructuring charge 1,539 -
Depreciation and amortization 691 431
Change in operating assets and liabilities:
Accounts receivable 1,439 (148)
Prepaid expenses and other current assets 179 76
Due from affiliates 55 -
Accounts payable (623) 55
Other current liabilities (377) (167)
Deferred revenue (56) (362)
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Net cash used in operating activities (3,621) (2,250)
Cash Flows from Investing Activities:
Sales of marketable securities, net 9,940 9,819
Loan to former chief executive officer (2,507) -
Increase in other assets - (150)
Purchases of property and equipment (200) (32)
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Net cash provided by investing activities 7,233 9,637
Cash Flows from Financing Activities:
Proceeds from common stock issuance for
employee stock purchase plan 93 30
Proceeds from exercise of stock options 294 5
------- -------
Net cash provided by financing activities 387 35
Net Increase in Cash and Cash Equivalents 3,999 7,422
Cash and Cash Equivalents, beginning of period 12,868 10,804
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Cash and Cash Equivalents, end of period $16,867 $18,226
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 6 $ -
======= =======
Cash paid for income taxes $ 15 $ -
======= =======
Supplemental Disclosure of Noncash Financing
Activities:
Issuance of note receivable from former chief
executive officer $ (53) $ -
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed 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, 1997
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 periods 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, an officer of the Company issued a promissory note in the
amount of $150,000 to 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 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 increased $132,000 to $1,049,000 for the three months ended June
30, 1998 from $917,000 for the comparable quarter in 1997. The increase was due
primarily to increases in sales of the Company's consulting services over the
comparable quarter in 1997. For the three months ended June 30, 1998,
consulting and education services revenues represented 92% of total revenues
with the remaining 8% from software license and maintenance, compared with 73%
and 27%, respectively for the comparable prior year period.
Total revenues decreased $321,000 to $2,108,000 for the six months ended June
30, 1998 from $2,429,000 for the comparable period in 1997. The decrease was
due primarily to the Company's transition from an organization focused on the
development and subsequent sale of software products to an e-Business consulting
services organization. Consulting and education services increased by $48,000
to $1,929,000 for the six months ended June 30, 1998 from $1,881,000 for the
comparable quarter in 1997. For the six months ended June 30, 1998, consulting
and education services revenues represented 92% of total revenues with the
remaining 8% from software license and maintenance compared with 77% and 23%,
respectively, for the comparable prior year period.
Gross profit:
- -------------
The cost of consulting and education services consists primarily of consulting
and education personnel salaries, related costs and fees to third party service
providers. Cost of software license and maintenance revenues consists of the
cost of software and maintenance purchased for resale from a former related
party, distribution costs and product support costs.
7
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For the three months ended June 30, 1998, the gross loss percentage for
consulting and education services revenues was 38% and software license and
maintenance generated a gross margin of 100% of revenues. For the comparable
prior year quarter, the gross loss percentage for consulting and education
services revenues was 42% and the gross margin for software license and
maintenance was 4%. The improvement in the Company's gross margin for consulting
and education services revenues compared to the comparable prior year period is
primarily attributable to increased sales volume. The increase in gross margin
for software license and maintenance from the comparable prior year quarter is
primarily attributable to the reduction in costs associated with the support of
the Company's prior software product offerings. Support for these products has
substantially concluded and as a result, no material costs have been associated
with these related revenues.
For the six months ended June 30, 1998, the gross margin for consulting and
education services revenues and software license and maintenance was a loss of
29% and a profit of 75%, respectively. For the comparable prior year six-month
period, the gross loss percentage for consulting and education services revenues
and software license and maintenance was a loss of 15% and a profit of 5%,
respectively. The increase of the Company's gross loss percentage for consulting
services is primarily attributable to an increase in costs associated with the
headcount during the six-month period ended June 30, 1998 relative to the
comparable period in 1997. The increase in gross margin for software license
and maintenance from the comparable prior year six month period is attributable
to a decrease in cost associated with servicing the maintenance contracts and
the distribution of the Company's software products. During the six months
ended June 30, 1998, the Company discontinued its sales and marketing efforts
related to its software products. Accordingly, the distribution and support
costs have been significantly reduced.
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 $1,282,000
for the three months ended June 30, 1998 from $1,757,000 for the comparable
prior year period, representing 122% and 192% of total revenues, respectively.
Selling, general and administrative expenses decreased to $2,148,000 for the six
months ended June 30, 1998 from $3,909,000 for the comparable prior year period,
representing 102% and 161% of total revenues, respectively. The total dollar
decrease for the three and six month periods reflects the Company's effort to
maintain operating costs in line with the current business needs. Particularly,
there have been decreases in headcount as well as a decrease in the Company's
expenditure related to marketing and advertising programs as a result of the
discontinuance of the sales and marketing efforts associated with the Company's
software products.
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 $0 for the three months ended June 30, 1998
from $728,000 for the comparable prior year period, representing 0% and 79% of
total revenues, respectively. The total dollar decrease for the three-month
period is directly attributable to the discontinuance of the Company's software
product development. Research and development expenses decreased to $424,000
for the six months ended June 30, 1998 from $1,487,000 for the comparable prior
year period, representing 20% and 61% of total revenues, respectively. The
total dollar decrease for the six-month period is attributable to the Company's
decision in the first quarter of 1998 to discontinue the Company's software
product development. As a result, much of the resources previously allocated to
the Research and Development group have been either re-deployed or terminated.
Restructuring Charge:
- ---------------------
On June 9, 1997, the Company announced that it had implemented a plan (the
"Plan") to restructure the Company's operations. The Plan included write-offs
and writedowns of certain assets and included accruing the costs related to a
significant reduction in the Company's work force. The implementation of the
Plan resulted in a one-time charge of $1,782,000.
Compensation to former Chief Executive Officer:
- -----------------------------------------------
During 1996, certain of the Company's controlling stockholders sold 960,000
shares of common stock to the former Chief Executive Officer (CEO). In
connection with the shares purchased by the former CEO, the Company agreed to
loan the former CEO up to $2,560,000 for payment of his anticipated income tax
liability resulting from his purchase.
8
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The Company funded $2,507,000 under the loan agreement in April 1997. The loan
was secured by a first priority pledge of the purchased shares. In June 1997,
the former CEO surrendered the purchased shares in satisfaction of the loan. For
the three months ended June 30, 1997, the Company recorded an expense of
$227,000 to reflect the difference between the amount of the loan and the market
value of the shares surrendered to the Company.
Interest Income (Expense), Net:
- -------------------------------
For the three and six months ended June 30, 1998 the Company recorded net
interest income of $425,000 and $864,000, respectively. The interest income is
a result of interest earned on the Company's cash, cash equivalents and
marketable securities. For the comparable prior year periods, the Company
recorded net interest income of $472,000 and $986,000, respectively. Interest
income has decreased from the 1997 periods to the 1998 periods as a result of
the decline in the average combined daily balances of the Company's cash, cash
equivalents and marketable securities.
Liquidity and Capital Resources:
- --------------------------------
The Company's operating activities utilized cash and cash equivalents of
approximately $2,250,000 for the six-month period ended June 30, 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 $9,637,000 for the six-month period ended
June 30, 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 $35,000 for the six month period ended June 30, 1998.
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 for the next twelve months.
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, products and non-
information technologies 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
9
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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.
10
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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
11
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
12
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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: August 13, 1998
OneWave, Inc.
(Registrant)
/s/ David W. Chapman
----------------------------------------
David W. Chapman, duly authorized officer and
Principal Financial Officer
13
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIALS IN THE COMPANY'S JUNE 30, 1998 FORM 10-Q AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 18,226 18,226
<SECURITIES> 13,090 13,090
<RECEIVABLES> 982 982
<ALLOWANCES> 50 50
<INVENTORY> 0 0
<CURRENT-ASSETS> 32,373 32,373
<PP&E> 2,882 2,882
<DEPRECIATION> 1,713 1,713
<TOTAL-ASSETS> 32,692 32,692
<CURRENT-LIABILITIES> 2,387 2,387
<BONDS> 0 0
0 0
0 0
<COMMON> 15 15
<OTHER-SE> 31,290 31,290
<TOTAL-LIABILITY-AND-EQUITY> 33,692 32,692
<SALES> 1,049 2,108
<TOTAL-REVENUES> 1,049 2,108
<CGS> 1,333 2,535
<TOTAL-COSTS> 1,333 2,535
<OTHER-EXPENSES> 1,282 2,572
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 425 864
<INCOME-PRETAX> (1,141) (2,135)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,141) (2,135)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,141) (2,135)
<EPS-PRIMARY> (0.08) (0.15)
<EPS-DILUTED> (0.08) (0.15)
</TABLE>
