OMNIS TECHNOLOGY CORP
Filing Type: 10-QSB
Description: Quarterly Report
Filing Date: November 6, 2000
Period End: September 30, 2000
Primary Exchange: NASDAQ - Small Cap Market
Ticker: OMNS
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter period ended September 30, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Exchange Act
For the transition period from _________ to _________
Commission File number 0-16449
OMNIS TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-3046892
(State of incorporation) (IRS Employer Identification No.)
981 Industrial Road, Building B
San Carlos, CA 94070
(Address of principal executive offices)
(650) 632-7100
(Registrant's telephone number)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 October 20, 2000, there were 10,277,832 shares of registrant's Common
Stock, $.10 par value, outstanding.
<PAGE>
OMNIS TECHNOLOGY CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements: 1
Condensed Consolidated Balance Sheets - 1
September 30, 2000 and March 31, 2000
Condensed Consolidated Statements of Operations - 2
Three and Six Months ended September 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows - 3
Six Months ended September 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial 6
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities 34
Item 3. Defaults upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
Signatures 35
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
OMNIS TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
September 30, 2000 March 31, 2000
------------------ --------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 621,000 $ 1,238,000
Trade accounts receivable, less allowance for
doubtful accounts and returns of $107,000 and
$179,000 at June 30 and March 31,
respectively 818,000 594,000
Inventory 14,000 26,000
Other current assets 194,000 397,000
------------ ------------
Total current assets 1,647,000 2,255,000
------------ ------------
Property, furniture and equipment, net 912,000 923,000
Intangibles 1,434,000
------------ ------------
Total assets $ 3,993,000 $ 3,178,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Note payable $ 2,000 56,000
Note payable to stockholder 3,144,000 2,028,000
Accounts payable 620,000 460,000
Accrued liabilities 928,000 591,000
Deferred revenue 300,000 206,000
------------ ------------
Total current liabilities 4,994,000 3,341,000
------------ ------------
Long-term debt 1,003,000 --
------------ ------------
Total liabilities 5,997,000 3,341,000
------------ ------------
Stockholders' deficiency:
Preferred stock 300,000 300,000
Common stock 1,026,000 1,004,000
Paid-in capital 51,349,000 50,374,000
Deferred compensation (1,507,000) (2,045,000)
Accumulated deficit (53,477,000) (50,082,000)
Accumulated other comprehensive income 305,000 286,000
------------ ------------
Total stockholders' deficiency (2,004,000) (163,000)
------------ ------------
Total liabilities and stockholders' deficiency $ 3,993,000 $ 3,178,000
============ ============
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
1
<PAGE>
<TABLE>
OMNIS TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues:
Products $ 851,000 $ 948,000 $ 1,665,000 $ 2,052,000
Services 235,000 236,000 407,000 504,000
------------ ------------ ------------ ------------
Total net revenues 1,086,000 1,184,000 2,072,000 2,556,000
Costs and expenses:
Cost of product revenues 11,000 27,000 45,000 67,000
Cost of service revenues 146,000 44,000 378,000 98,000
Sales and marketing 1,164,000 569,000 2,529,000 1,099,000
Research and development 531,000 521,000 1,110,000 906,000
General and administrative 596,000 1,109,000 1,301,000 1,352,000
------------ ------------ ------------ ------------
Total costs and expenses 2,448,000 2,270,000 5,363,000 3,522,000
------------ ------------ ------------ ------------
Operating loss (1,362,000) (1,086,000) (3,291,000) (966,000)
------------ ------------ ------------ ------------
Other income (expense):
Interest income 7,000 2,000 22,000 4,000
Interest expense and other, net (65,000) (3,000) (126,000) (10,000)
------------ ------------ ------------ ------------
(58,000) (1,000) (104,000) (6,000)
------------ ------------ ------------ ------------
Loss before income taxes (1,420,000) (1,087,000) (3,395,000) (972,000)
Income tax expense 1,000 0 0 4,000
------------ ------------ ------------ ------------
Net loss ($ 1,421,000) $ (1,087,000) $ (3,395,000) $ (976,000)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.14) $ (0.11) $ (0.33) $ (0.10)
============ ============ ============ ============
Weighted average number of common
shares outstanding 10,247,047 9,683,348 10,185,536 9,681,589
============ ============ ============ ============
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
OMNIS TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months Ended
September 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,395,000) $ (976,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense 151,000 183,000
Non cash compensation 538,000 555,000
Change in assets and liabilities:
Trade accounts receivable (224,000) 33,000
Inventory 12,000 (10,000)
Loss on disposal of property -- 1,000
Other assets 203,000 268,000
Accounts payable and accrued liabilities 497,000 33,000
Deferred revenues 94,000 54,000
----------- -----------
Net cash provided by (used in) operating activities (2,124,000) 141,000
----------- -----------
Cash flows from investing activities:
Purchases of property, furniture and equipment (206,000) (70,000)
Acquisition of software assets (534,000) --
Proceeds from sale of fixed assets -- 1,000
----------- -----------
Net cash used in investing activities (740,000) (69,000)
----------- -----------
Cash flows from financing activities:
Proceeds from incentive stock option exercise 110,000 2,000
Proceeds from stock issuance -- 39,000
Additions of debt 2,107,000 121,000
Repayments of debt (54,000) (72,000)
----------- -----------
Net cash provided by financing activities 2,163,000 90,000
----------- -----------
Effect of exchange rate changes on cash 84,000 (70,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents (617,000) 92,000
Cash and cash equivalents at beginning of period 1,238,000 271,000
----------- -----------
Cash and cash equivalents at end of period $ 621,000 $ 363,000
=========== ===========
Supplemental non-cash disclosure:
Issuance of common stock for software system $ 900,000 --
=========== ===========
</TABLE>
3
<PAGE>
OMNIS TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring items, which in the
opinion of management are necessary to fairly state the Company's financial
position, the results of its operations and the changes in its financial
position for the periods presented. These financial statements should be
read in conjunction with the Company's audited financial statements for the
year ended March 31, 2000. The results of operations for the period ended
September 30, 2000 are not necessarily indicative of results to be expected
for any other interim period or the fiscal year ending March 31, 2001.
2. The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (SFAS 128). SFAS 128 requires a dual presentation
of basic and diluted EPS. Basic EPS excludes dilution and is computed by
dividing net income (loss) by the weighted average of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities and other contracts to issue stock were
exercised or converted into common stock, unless the effect of such
securities would be anti-dilutive. As of September 30, 2000, the Company
had 1,690,910 potentially dilutive securities outstanding.
Six Months Ended
September 30
----------------------------
2000 1999
---- ----
Revenue by geographic region (1):
Revenue from North America $ 793,000 $ 961,000
Revenue from Europe 1,279,000 1,595,000
Total $ 2,072,000 $ 2,556,000
=========== ===========
Operating loss by geographic region (1):
From North America $(2,963,000) $ (752,000)
From Europe (328,000) (214,000)
Total $(3,291,000) $ (966,000)
=========== ===========
(1) Revenues are broken out geographically by ship from location.
4
<PAGE>
<TABLE>
COMPREHENSIVE INCOME (LOSS)
Comprehensive income includes changes in the balance of items that are reported
directly in a separate component of stockholders' equity on the condensed
consolidated balance sheets. The reconciliation of net loss to comprehensive
loss is as follows.
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss: $(1,421,000) $(1,087,000) $(3,395,000) $ (976,000)
Other comprehensive (loss) gain
Foreign currency translation
adjustments 69,000 (20,000) 19,000 (57,000)
----------- ----------- ----------- -----------
Total comprehensive income (loss)
$(1,352,000) $(1,107,000) $(3,376,000) $(1,033,000)
=========== =========== =========== ===========
</TABLE>
INTANGIBLES
Intangibles includes the purchase of a software system which occurred in May
2000. The costs from this software system is amortized over its useful life
estimated to be three years. Also, included is approximately $200,000 in legal
fees related to an acquisition.
LONG TERM DEBT
The debt consists of a loan from a shareholder which is due September 30, 2002
and bears interests at ten percent.
5
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Item 2, as well as other portions of this document, includes
certain forward-looking statements about the Company's business, revenues,
expenditures and operating and capital requirements. In addition,
forward-looking statements may be included in various other Company documents to
be issued concurrently or in the future and in oral or other statements made by
representatives of the Company to investors and others from time to time.
Forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from predicted results. Such risks
include, among others
- the Company's liquidity,
- significant variability in operating results, including variability in
product revenues and gross margins,
- fluctuating demand for new and established products,
- dependence on development of new products,
- increasing expenses for marketing and development of new products,
- historical lack of profitability,
- rapid technological change that affects the ability of the Company to
respond to customer or market demands,
- risks associated with global operations,
- the continued and future acceptance of the Company's products,
- the rate of growth in the industries of the Company's products,
- the presence of competitors with greater technical, marketing and
financials resources, and
- the ability of the Company to successfully expand its operations.
Any of such statements and this discussion should be read in conjunction with
the discussion of "Risk Factors" in this Item 2 and the Company's audited
consolidated financial statements, including the notes thereto, included in its
annual report for the fiscal year ended March 31, 2000, on Form 10-KSB filed
with the Commission on June 29, 2000 and the amended 10-KSB filed with the
Commission on July 31, 2000.
6
<PAGE>
OVERVIEW
The Company, through its operating subsidiaries, Omnis Software Inc., a
California corporation, Omnis Holdings Limited and Omnis Software Limited,
limited liability companies organized under the laws of England, and Omnis
Software GmbH, a German corporation, develops software tools and delivers
consulting services. The Company's products are designed to allow customers to
develop software solutions which can be continuously enhanced to respond to
changing business and technical needs. The Company's products support the full
life cycle of applications and are designed for rapid development and deployment
of sophisticated Web and client/server applications, providing true reuse of
software objects and the ability to integrate objects from disparate programming
languages on a number of different operating system platforms. The Company's
products are used by corporations, system integrators, independent software
vendors, small businesses, and independent consultants to deliver custom
software solutions for a wide range of uses including financial management,
decision support, executive information, sales and marketing, and multi-media
authoring systems. In addition to these products, the Company provides technical
support and training to help plan, analyze, implement, and maintain application
software based on the Company's technology.
The Company was incorporated under the laws of the State of Delaware on
August 5, 1987 pursuant to a reorganization of predecessor companies originally
incorporated under the laws of England in 1983.
Recent Developments
On August 23, 2000 the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with PickAx, Inc., a Delaware corporation
("Pick"), one of the stockholders of Pick, Gilbert Figueroa, and Raining Merger
Sub, Inc. ("Merger Sub"), a Delaware corporation and wholly owned subsidiary of
Omnis. Pursuant to the Merger Agreement (attached hereto as an Exhibit) Merger
Sub, will be merged with and into Pick. Pick as the surviving corporation will
become a wholly-owned subsidiary of Omnis. Shareholder approval is required for
consummation of the merger. A Preliminary Proxy Statement for a special meeting
of the Shareholders was filed with the SEC on October 26, 2000. A revised
Preliminary Proxy Statement will be filed with the SEC on about November 6,
2000. The Company's shareholders will be asked to approve the merger at the
special meeting.
There have numerous changes to the Company's work force and composition
of the Board of Directors.
On September 22, 2000, the Board decided to reduce the Company's
employee work force. Between August 30, 2000 and October 6, 2000 approximately
twenty employees were terminated thereby reducing the work force by
approximately 29%.
On August 14, 2000, Mr. James Dorst resigned as a director of the
Company and Bryan Sparks was elected by the Board of Directors as a director to
fill the vacancy
7
<PAGE>
created by the resignation of Mr. Dorst. On September 22, 2000 Mr. Bryce J.
Burns was appointed as the Chairman of the Board of the Company. On October 16,
2000 Mr. Dorst also resigned as the Chief Operating Officer and Chief Financial
Officer to the Company. The Company has not hired a successor to replace Mr.
Dorst but intends to identify and hire a successor Chief Financial Officer as
soon as practicable.
On August 23, 2000 the Company also obtained $750,000 in additional
loans from three private parties (the "Lenders") pursuant to the terms of a Note
Purchase Agreement. The Company issued three unsecured promissory notes to the
Lenders in connection therewith (the "Notes"). The Notes bear interest at 4% per
annum and shall be automatically converted into shares of common stock of the
Company on the second anniversary of the date of issuance thereof at a
conversion price equal to $6.17 per share. The Notes are also convertible at any
time at the option of the holders thereof at the same conversion price per
share. Subsequently, in September, 2000, the Company borrowed an additional
$250,000 from The Philip and Debra Barrett Charitable Remainder Trust (the
"Trust"). Philip Barrett, a director of the Company, is the trustee and a
beneficiary of the Trust. The Company issued an unsecured promissory note to the
Trust in connection with the loan (the "Barrett Note"). The Barrett Note is due
and payable two years from the date of issuance and bears interest at 10% per
annum. A future credit facility may be difficult to obtain with the Company's
historical operating results. In order to obtain additional funds in the future
for its continued operation, the Company will need to seek additional equity or
debt capital. Other major shareholders have expressed the willingness to provide
additional funds but no legally binding commitment has been made.
On September 22, 2000, the Board of Directors determined that the
Company would seek to raise additional equity capital prior to December 31, 2000
of between $5 Million to $10 Million by means of a private placement of common
stock of the Company at an issue price in the range of $6 per share. There is no
assurance that the Company will be able to raise such additional capital on
commercially reasonable terms, if at all. In addition, the raising of any such
capital would be dilutive to the Company's stockholders.
8
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 1999
Total Net Revenues
Total net revenues for the six months ended September 30, 2000, were
$2,072,000, representing a decrease of 18.9% as compared to total net revenues
of $2,556,000 for the six months ended September 30,1999. This decrease is due
primarily to the reduction in selling price of development kits and runtimes and
the repositioning of the OMNIS Studio product line.
Total net revenues for the three months ended September 30, 2000, were
$1,086,000, representing a decrease of 8% as compared to total net revenues of
$1,184,000 for the three months ended September 30, 1999. The change is due to
the reduction in selling price of development kits and runtimes and the
repositioning of the OMNIS Studio product line.
Product revenues decreased during the six months ended September 30,
2000, to $1,665,000 from $2,052,000 in the six months ended September 30, 1999.
This decrease is due to a reduction in sales price of OMNIS Studio development
kit and license fees to motivate existing customers to upgrade from Omnis as
well as attract new developers.
Product revenues decreased during the three months ended September 30,
2000, to $851,000 from $948,000 in the three months ended September 30, 1999.
This decrease is due to a reduction in sales price of Omnis Studio development
kit and license fees to motivate existing customers to upgrade from Omnis 7 as
well as attract new developers.
Service revenues for the six months ended September 30, 2000 decreased
19.2% to $407,000 from $504,000 for the six months ended September 30, 1999. The
majority of this decrease is due to the Company's decision to phase out its
consulting offerings. Maintenance revenue, which primarily consists of email and
telephone support to the Company's customers, decreased slightly during the
period ending September 30, 2000, due to the decrease in the annual support fee
being charged to customers.
Service revenues for the three months ended September 30, 2000
decreased only by $1,000 to $235,000 from $236,000 for the three months ended
September 30, 1999.
The Company sells its products in U.S. Dollars in North America,
British Pounds Sterling in the United Kingdom and German Deutsche Marks in
Germany. As the Company recognizes revenues and expenses in U.S. Dollars,
British Pounds Sterling, and German Deutsche Marks but reports its financial
results in U.S. Dollars, changes in exchange rates may cause variances in the
Company's period-to-period revenues and results of operations in future periods.
Foreign exchange gains and losses have not been material to the Company's
performance to date.
9
<PAGE>
Cost of Product Revenues.
Cost of product revenues as a percentage of product revenues decreased
from 3.2% in the six months ended September 30, 1999 to 2.7% in the six months
ended September 30, 2000 as a direct result of the decrease in average sales
price of the Company's products.
Cost of product revenues as a percentage of product revenues decreased
slightly from 2.8% in the three months ended September 30, 1999 to 1.3% in the
three months ended September 30, 2000.
Cost of Services Revenues.
Cost of service revenues increased as a percentage of service revenues
from 19.4% in the six months ended September 30, 1999, to 92.76% in the six
months ended September 30, 2000. This is due to the establishment of a technical
support department in the US this year that offers real time telephone support
to its North American customers. Previously, only email support was available
from the engineering office in the United Kingdom.
Cost of service revenues increased as a percentage of service revenues
from 18.6% in the three months ended September 30, 1999, to 62% in the three
months ended September 30, 2000. This is due to the establishment of a technical
support department in the US this year that will offer real time telephone
support to its North American customers. Previously, only email support is
available from the engineering office in the United Kingdom.
Selling and Marketing Expenses.
Sales and marketing expenses increased to $2,529,000 for the six months
ended September 30, 2000 as compared to $1,099,000 for the six months ended
September 30, 1999. The increase in sales and marketing expenses was primarily
due to increases in targeted advertising, direct mail programs, trade show
participation and strategic marketing programs with partners.
Sales and marketing expenses increased to $1,164,000 for the three
months ended September 30, 2000 as compared to $569,000 for the three months
ended September 30, 1999. The increase in sales and marketing expenses was
primarily due to increases in targeted advertising, direct mail programs, trade
show participation and strategic marketing programs with partners.
Research and Development Expenses.
Research and development costs increased to $1,110,000 for the six
months ended September 30, 2000, as compared to $906,000 for the six months
ended September 30, 1999, primarily due to an increase of staff at its Research
and Development Center in the United Kingdom. The Company continues to invest in
the development of its newer
10
<PAGE>
product line, OMNIS Studio, aimed at sales opportunities that the Company
believes will expand its installed base of customers.
Research and development costs increased to $531,000 for the three
months ended September 30, 2000, as compared to $521,000 for the three months
ended September 30, 1999, primarily due to an increase of staff at its Research
and Development Center in the United Kingdom. The Company continues to invest in
the development of its newer product line, OMNIS Studio, aimed at sales
opportunities that the Company believes will expand its installed base of
customers.
General and Administrative Expenses.
General and administrative expenses decreased to $1,301,000 for the six
months ended September 30, 2000, as compared to $1,352,000 for the six months
ended September 30,1999. General and administrative expense for the six months
ended September 30, 2000 included the recognition of non-cash compensation
expense of $538,000 that resulted from the issuance of certain options at below
fair market value, offset by reductions in head count in the quarter ended
September 30, 2000.
General and administrative expenses decreased to $596,000 for the three
months ended September 30, 2000, as compared to $1,109,000 for the three months
ended September 30, 1999. General and administrative expense for the three
months ended September 30, 2000 included the recognition of non-cash
compensation expense of $269,000 that resulted from the issuance of certain
options at below fair market value. During the three months ended September 30,
1999, non-cash compensation expense of $555,000 was recognized.
Other Income (Expense), Net.
Other income (expense) is comprised primarily of interest income earned
on cash and cash equivalents, interest expense, and any gain or loss on foreign
currency transactions. Interest income increased to $7,000 for the three months
ended September 30, 2000, from $2,000 for the three months ended September 30,
1999, primarily due to higher average balances of cash and cash equivalents.
Interest expense increased to $65,000 for the three months ended
September 30, 2000, from $3,000 for the three months ended September 30, 1999
primarily due to the $3.0 million promissory note obtained from a significant
stockholder and an aggregate of $1.0 million promissory notes obtained from
others.
Inflation.
The Company believes that inflation has not had a material impact on
the Company's operating results to date and does not expect inflation to have a
material impact on the Company's operating results in fiscal year 2001.
11
<PAGE>
RISK FACTORS
Quarterly Fluctuations.
The Company has experienced significant quarterly fluctuations in
operating results and anticipates such fluctuations in the future. The Company
generally ships orders as received and, as a result, typically has little or no
backlog. Quarterly revenues and operating results, therefore, depend on the
volume and timing of orders received during the quarter, which are difficult to
forecast. Furthermore, the Company has typically sold to large corporate
enterprises, significant partners, and distributors which often purchase in
significant quantities, and therefore, the timing of the receipt of such orders
could cause significant fluctuations in operating results. Historically, the
Company has often recognized a substantial portion of its license revenues in
the last month of the quarter. Service revenues tend to fluctuate as consulting
projects, which may continue over several quarters, are undertaken or completed.
Operating results may also fluctuate due to factors such as the demand for the
Company's products, the size and timing of customer orders, changes in the
proportion of revenues attributable to licenses and service fees, commencement
or conclusion of significant consulting projects, changes in pricing policies by
the Company or its competitors, the number, timing, and significance of product
enhancements and new product announcements by the Company and its competitors,
the ability of the Company to develop, introduce, and market new and enhanced
versions of the Company's products on a timely basis, changes in the level of
operating expenses, changes in the Company's sales incentive plans, budgeting
cycles of its customers, customer order deferrals in anticipation of
enhancements or new products offered by the Company or its competitors,
nonrenewal of maintenance agreements, product life cycles, software bugs and
other product quality problems, personnel changes, changes in the Company's
strategy, the level of international expansion, seasonal trends and general
domestic and international economic and political conditions, among others.
Accordingly, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance.
Expense Levels.
The Company's expense levels are based, in significant part, on the
Company's expectations as to future revenues and are therefore relatively fixed
in the short term. If revenue levels fall below expectations, net income is
likely to be disproportionately adversely affected because a proportionately
smaller amount of the Company's expenses vary with its revenues. There can be no
assurance that the Company will be able to achieve profitability on a quarterly
or annual basis in the future. Due to all the foregoing factors, it is likely
that in some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.
12
<PAGE>
Future Operating Results.
The Company's future operating results will depend, to a considerable
extent, on its ability to rapidly and continuously develop new products that
offer its customers enhanced performance at competitive prices. Inherent in this
process are a number of risks. The development of new, enhanced software
products is a complex and uncertain process requiring high levels of innovation
from the Company's designers as well as accurate anticipation of customer and
technical trends by the marketing staff.
The Company's operating results will also be affected by the volume,
mix, and timing of orders received during a period and by conditions in the
industries that it serves as well as the general economy. Additionally, the
Company operates on a global basis with offices or distributors in Europe, and
Asia, as well as North America. Changes in the economies, trade policies, and
fluctuations in interest or exchange rates may have an impact on its future
financial results. Also, as the Company continues to operate more globally,
seasonality may become an increasing factor in its financial performance.
The Company's products are typically used to develop applications that
are critical to a corporate customer's business and the purchase of the
Company's products is often part of a customer's larger business process,
reengineering initiative, or implementation of client/server or web-based
computing. As a result, the license and implementation of the Company's software
products generally involves a significant commitment of management attention and
resources by prospective customers. Accordingly, the Company's sales process is
often subject to delays associated with a long approval process that typically
accompanies significant initiatives or capital expenditures. For these and other
reasons, the sales cycle associated with the license of the Company's products
is often lengthy and subject to a number of significant delays over which the
Company has little or no control. There can be no assurance that the Company
will not experience these and additional delays in the future. Therefore, the
Company believes that its quarterly operating results are likely to vary
significantly in the future.
The development and introduction of new or enhanced products also
requires the Company to manage the transition from older, displaced products in
order to minimize disruptions in customer ordering patterns and excessive levels
of older product inventory and to ensure that adequate supplies of new products
can be delivered to meet customer demand. Because the Company is continuously
engaged in this product development and transition process, its operating
results may be subject to considerable fluctuations, particularly when measured
on a quarterly basis.
Liquidity and Capital Resources.
For the six months ended September 30, 2000, the net operating use of
cash was fueled by a net loss of $3,395,000, a change in net current assets of
$582,000, depreciation and amortization expense of $151,000 and the amortization
of non-cash compensation expense of $538,000. Net cash used by investing
activities was used to purchase $206,000 in furniture and computer equipment and
$543,000 for expenses
13
<PAGE>
related to the acquisition of software assets to enhance the Omnis product line
for a net use of $140,000. Cash flows from financing activities were provided by
$2,107,000 additional borrowings under the Astoria Note noted above, $900,000 in
proceeds from the issuance of common stock and $110,000 from the exercise of
stock options offset by $54,000 repayment of debt. These total changes combined
with a $84,000 cash provided from the effect of exchange rates for six month
period contributed to a net decrease in cash for the period of $617,000.
At September 30, 2000, the Company's principal sources of liquidity
consisted of cash and cash equivalents of $621,000. The Company's working
capital position was a deficit of $1,086,000 at March 31, 2000 and a deficit of
$2,347,000 at June 30, 2000 compared to a deficit of $3,347,000 at September 30,
2000.
On September 22, 2000, the Board of Directors determined that the
Company would seek to raise additional equity capital prior to December 31, 2000
of between $5 Million to $10 Million by means of a private placement of common
stock of the Company at an issue price in the range of $6 per share. There is no
assurance that the Company will be able to raise such additional capital on
commercially reasonable terms if at all. In addition, the raising of any such
capital would be dilutive to the Company's stockholders.
The Company does not currently have an established line of credit with
a commercial bank and has funded operations over the past several months by
means of the $3 million working capital facility provided by Astoria Capital
Partners, LP, a California limited partnership ("Astoria"). On August 23, 2000
the Company also obtained $750,000 in additional loans from three private
parties (the "Lenders") pursuant to the terms of a Note Purchase Agreement. The
Company issued three unsecured promissory notes to the Lenders in connection
therewith (the "Notes"). The Notes bear interest at 4% per annum and shall be
automatically converted into shares of common stock of the Company on the second
anniversary of the date of issuance thereof at a conversion price equal to $6.17
per share. The Notes are also convertible at any time at the option of the
holders thereof at the same conversion price per share. Subsequently, in
September, 2000, the Company borrowed an additional $250,000 from The Philip and
Debra Barrett Charitable Remainder Trust (the "Trust"). Philip Barrett, a
director of the Company, is the trustee and a beneficiary of the Trust. The
Company issued an unsecured promissory note to the Trust in connection with the
loan (the "Barrett Note"). The Barrett Note is due and payable two years from
the date of issuance and bears interest at 10% per annum. A future credit
facility may be difficult to obtain with the Company's historical operating
results. In order to obtain additional funds in the future for its continued
operation, the Company will need to seek additional equity or debt capital.
Astoria and other major shareholders have expressed the willingness to provide
additional funds but no legally binding commitment has been made.
Key Personnel and Management.
The success of the Company depends to a significant extent upon a
number of key management and technical personnel, the loss of one or more of
whom could adversely
14
<PAGE>
affect its business. In addition the Company believes that its future success
will depend to a significant extent on its ability to recruit, hire and retain
highly skilled management and employees for product development, sales,
marketing, and customer service. Competition for such personnel in the software
industry is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. Management of the Company
will also be required to manage any growth of the Company in a manner that
requires a significant amount of management time and skill. There can be no
assurance that the Company will be successful in managing any future growth or
that any failure to manage such growth will not have a material adverse effect
on the Company's business, operating results or financial condition.
Intellectual Property.
The Omnis products include technologies developed by the Company. The
Company relies primarily on a combination of trade secret, copyright and
trademark laws and contractual provisions to protect its proprietary rights in
such technologies. There is no assurance that such laws and contractual
provisions will adequately protect the intellectual properties and other
proprietary rights of the Company. The Company has filed a final United States
patent application for certain of its Studio Web Client technologies. The
Company has initiated procedures for preparing and filing additional provisional
and final patent applications as appropriate for its developing technologies.
The Company has not been granted any patents on any of its proprietary
technologies and there is no assurance that any such patents will be granted.
Patent protection may become important in the protection of the commercial
viability of the Company's innovative products and the failure to obtain such
patent protection could have an adverse effect on the commercial viability of
such products. The Company's success therefore may in part depend on its ability
to obtain strong patent protection or licenses to strong patents in the future.
It is not possible to anticipate the breadth or degree of protection that
patents would afford any product of the Company or the underlying technologies.
There can be no assurance that any patents issued or licensed to the Company
will not be successfully challenged in the future or that any Omnis product will
not infringe the patents of third parties. As the number of software products
available in the market increases and the functions and features of these
products further overlap, the Company anticipates that software products may
become increasingly subject to infringement claims. There can be no assurance
that third parties will not assert infringement claims against the Company in
the future with respect to any current or future product. Any such assertion,
whether with or without merit, could require the Company to enter into costly
litigation or royalty arrangements. If required, such royalty arrangements may
not be available on reasonable terms, or at all.
Dependence on Principal Products.
Any factor adversely affecting sales of the Company's principal
products, including but not limited to Omnis Studio and Omnis Studio Web Client,
would have a material adverse effect on the Company. The future financial
performance of the Company will depend in significant part upon the successful
development, introduction and customer acceptance of new or enhanced versions of
its principal products and other
15
<PAGE>
products. There can be no assurance that the Company will be successful in
marketing its principal products or any new or enhanced products the Company may
develop in the future. In addition competitive pressures or other factors may
result in price erosion that could have a material adverse effect on the
Company's results of operation.
International Operations.
Additionally, the Company operates on a global basis with offices or
distributors in Europe and Asia as well as in North America. International
operations are subject to inherent risks, including costs and difficulties in
staffing and managing foreign operations; difficulties in obtaining and managing
local distributors; the costs and difficulties in localizing products into
languages other than English for foreign markets; political or economic
instability, unexpected regulatory changes and fluctuations in interest or
exchange rates in the specific countries in which the Company distributes its
products or in international markets in general; longer receivables collection
periods and greater difficulty in accounts receivable collection; import/export
duties and quotas; reduced protection for intellectual property rights in some
countries; and potentially adverse tax consequences. Also, as the Company
continues to operate more internationally, seasonality may become an increasing
factor in its financial performance. There can be no assurance that these
factors or any combination of these factors will not adversely affect the
international revenues or overall financial performance of the Company.
Delays in Sales and Commitments.
The Company's products are typically used to develop applications that
are critical to a customer's business and the purchase of the Company's products
is often part of a customer's larger business process, reengineering initiative,
or implementation of client/server computing. As a result, the license and
implementation of the Company's software products generally involves a
significant commitment of management attention and resources by prospective
customers. Accordingly, the Company's sales process is often subject to delays
associated with a long approval process that typically accompanies significant
initiatives or capital expenditures. For these and other reasons, the sales
cycle associated with the license of the Company's products is often lengthy and
subject to a number of significant delays over which the Company has little or
no control. There can be no assurance that the Company will not experience these
and additional delays in the future. Therefore, the Company believes that its
quarterly operating results are likely to vary significantly in the future.
Changes in Pricing Structure.
The Company announced a reduction in certain portions of its pricing
structure for fiscal year 2000 and beyond. There is no guarantee that this
reduction in price will lead to increased unit volume or other additional
revenue streams to replace this lost revenue, which could lead to a significant
cash flow strain on the core operations of the Company. Additionally, the
Company is relying on increased revenues related to its new OMNIS Studio product
line, which have not generated revenues as originally projected
16
<PAGE>
by the Company. There is no assurance that this product line will generate the
revenues needed to sustain the Company in coming quarters and beyond. The
Company has committed to decreasing sales conflicts with its partners
particularly in the service revenue area and has already taken a number of steps
in this regard. This has had and will continue to have a negative effect on
service revenues as compared to previous quarters and years. There can be no
guarantee that the Company will be able replace the decreasing service revenues
with new product revenues.
17
<PAGE>
INDUSTRY AND TRENDS
Evolution of Enterprise Computing
The evolution of computing has been characterized by several distinct
stages. In the 1970s, main-frame and minicomputer systems with
character-oriented user terminals emerged as the principal structure for
enterprise computing. This was followed in the 1980s by the introduction of
personal computers and workstations which primarily addressed personal
productivity applications such as word processing and spreadsheets. In the late
1980s, local and enterprise-wide networks connecting these desktop systems
became increasingly prevalent, initially for accessing file storage archives (Me
servers) and electronic mail communications.
Building on this infrastructure, client/server computing emerged as an
important new architecture for corporate computing in the early 1990s. In the
client/server computing model, application software is divided into two
components: a "client" handling functions such as the user interface, local data
storage, manipulation and presentation, and a "server" handling tasks such as
data management and access, storage, and retrieval for multiple clients.
Typically, the client software runs in a single-user desktop system, while the
server operates utilizing a shared mainframe or workstation, and messages
linking client and server are exchanged through connecting networks. These
networks could be either Local Area Networks ("LANs") or Wide Area Networks
("WANs") with the distinction being intuitive; LANs generally connected clients
together with a server within a building or department while WANs typically
utilized dedicated communication lines and linked remote facilities together
over greater distances.
In the last several years the Internet has become a viable alternative
to dedicated communication lines for the dissemination and collection of
information, with clients accessing data from remote servers using applications
known as "browsers" via the Internet. Virtual Private Networks ("VPNs") where
individual clients can access departmental and enterprise servers have become
commonplace. The existence of this new infrastructure has led to an explosion in
electronic commerce, the development of electronic communities and "Portals" and
password protected corporate "Intranets" for the secure transmission of critical
corporate information.
This evolution continues with the client/server paradigm moving to an
Application Service Provider ("ASP") model, where clients access remote servers
which host the entire application and related data. In essence the classic
"computer room" is being replaced by off-site Internet hosting facilities where
the bulk of the computing is handled in larger more economic computing
facilities. New wireless technologies fit into this movement of computing power
to larger Internet-enabled facilities, with Wireless Access Protocols ("WAPs")
emerging. These new wireless technologies are being designed to allow remote
clients to access and transmit data efficiently without the requirement of a
hard-wired physical connection.
As a result of these watershed changes in the computing environment,
the market for application development tools has grown rapidly as businesses
seek to develop
18
<PAGE>
applications which will address these new paradigms and allow for secure data
transmission across the Internet. At the same time the overall computing
environment is becoming more complex, and businesses are seeking to reduce
application development times and efficiently utilize their software development
resources. As a result, businesses are increasingly seeking software development
tools which allow them to take advantage of the software re-use potential of
object-oriented programming.
Object-Oriented Programming Environments
Software development tools based on object-oriented programming models
are generally recognized as the most efficient solution to enterprise
application development. Object-oriented programming languages aggregate
functions and data into classes and objects. Object-based application
development tools then provide a set of software components and libraries for
the creation and storage and manipulation of objects in the relevant programming
language. This structure enables re-use of the software in the development of
other applications. By contrast traditional non-object or imperative mode
programming models require the developer to "start from scratch" with each new
application, which is extremely inefficient.
Object-oriented programming environments, such as Omnis Studio
software, allow the development of object components that are easy to use,
modify, and re-use so that developers do not need to commit to lengthy and
complex development of applications. This permits businesses to support their
most recent product offerings and corporate positioning by deploying and
modifying applications more rapidly and efficiently.
Browser Technology
Increasingly, businesses also have been using the Internet to reach
more customers and to create an extended virtual "corporation" among their
vendors, partners, and contractors. While Internet browsers will continue to
become more sophisticated, they are likely to remain primarily viewing tools.
Other applications are used to provide the actual customer solutions, with most
of the processing performed on the servers.
In addition to browsers, in the current environment most businesses
need powerful crossware applications (software that supports cross database,
cross platform, cross object and cross component uses) that have the ability to
operate across the Internet with a wide variety of:
-- Platforms (e.g., Windows 95, 98 and 2000, Windows NT, Macintosh and Linux);
-- Databases (e.g., DB2, Oracle, Informix, Sybase and SQL); `
-- Object Types built using the C++ and other programming languages; and
-- Component Formats (e.g., ActiveX from Microsoft Corporation ("Microsoft")
and Java Beans from JavaSoft and others).
19
<PAGE>
Products
Omnis 7(3) has been the Company's main product line for many years and
continues to be a major source of revenue. Omnis Studio is an enhanced
object-oriented product offering with technical features and cross-platform
capabilities which exceed those of Omnis 7(3).
Omnis 7(3)
Omnis 7(3) (the "Classic") is the Company's long standing product fine,
covering the full range of application development and deployment needs from
prototyping through build and release. Omnis 7(3) is a high performance tool for
rapid development of business enterprise applications that has established a
large customer base. With its cross-platform, cross-database capabilities, the
Company expects this product to continue to generate some level of demand among
programmers and developers of client/server software for at least the next 18
months.
Written in C++, the Classic product was widely embraced by the
Company's customers, partners, and VARs. The Company has continued to develop,
support and upgrade Omnis 7(3) , but recently announced its intention to drop
enhancements to the product in the Fall of 2001. Management believes that for
the near-term there continues to be worldwide demand for a low-cost, high
performance procedural application development tool for business enterprise
applications in client/server and Internet environments, but that, in the longer
term, customers would be best served by migrating to the Omnis Studio product.
The Classic product family includes several products: the Omnis 7(3)
development environment, Omnis Change Management System, and Omnis Version
Control System, which together address a wide range of team and application
management tasks, including version tracking and control, change management, and
turnkey build-and-release functionality. The Classic product line also includes
Web enabling functionality that allows users of Omnis 7(3) to adapt their
applications for the Internet. Web Enabler supports leading industry standards,
including SMTP/POP3, FTP, HTTP, TCP/IP, and HTML, along with GIF and JPEG Me
formats. The license fees and pricing for the Classic remain unchanged and
varies with the configuration of the product licensed. List prices range from
$585 to $1,499.
The Classic applications can be deployed with data access services
through the Omnis 7(3) proprietary database or configured with data access
services to leading databases such as DB2, Oracle, Sybase and Informix. When
customers deploy an application, they require a deployment license for each
end-user. The global list prices for the database deployment licenses of Omnis
7(3) generally range from $18 to $165 per user, depending upon quantities
purchased and the distribution channel used.
Omnis Studio
Omnis Studio is the Company's premium product line and was the first
commercially available application development tool which integrated ActiveX and
Java
20
<PAGE>
Beans components. Omnis Studio is an object-oriented rapid application
development tool, offering easy visual assembly of components and objects. Key
features of Omnis Studio include cross-platform support for Windows 95, Windows
98, Windows NT, Windows 2000, MacOS and Linux; local and portable data caching;
a powerful code inspector; a versatile report writer; a multiple-mode debugger;
and support for localization and multilingual implementation. At the time of
this filing Omnis Studio was the only known commercially released rapid
application development tool which runs on all of the foregoing platforms.
Omnis Studio includes two powerful subsystems: the Component Integrator
and the Omnis Studio Web Client. The Component Integrator provides a development
environment where software developers can combine, integrate, optimize, and
extend third-party components such as ActiveX and Java Beans. Because Omnis
Studio understands different object models, developers can work in a single
integration environment using a single interface, regardless of component or
object type.
The Omnis Studio Data Access Manager enables developers to use a single
interface to view, access and manipulate all industry-leading databases. High
performance drivers provide fast and easy access to IBM's DB2 Universal Server,
and databases supplied by Oracle Corporation, Sybase Incorporated, and Informix
Corporation. Most other leading databases, including Microsoft's SQL Server
database, are accessible via ODBC.
The Omnis Studio Version Control System ("VCS") provides application
development teams and application development managers with better control over
developing their crossware applications. The Omnis Studio VCS offers a complete
tool set for version tracking and control, component storage and security, and
build-and-release, so that team managers can easily roll-back changes, split
development, or create custom builds.
The Omnis Studio Web Client was released in April 1999 and provides a
novel way of deploying business solutions on the World Wide Web. Web solutions
are written using Omnis Studio, bringing all the benefits of a 4GL to the
Internet, such as rapid prototyping, easy customization, and straightforward
debugging. With Omnis Studio, web forms are developed using drag and drop
techniques and helpful wizards, and can include controls like dropdown lists,
tabs and sidebars to ease navigation through the solution in a web browser. The
server application is developed using standard Omnis technology. Once developed,
the solution can be efficiently set up. The server runs an Omnis engine that
sits between the web server and the database, and Omnis applications can be
viewed on the Internet using a standard web browser, such as newer versions of
Microsoft Internet Explorer or Netscape Navigator.
Business Strategy
The Company's product development strategy is to continue to develop
sophisticated application development tools to enable businesses to build
mission-critical software applications which have the following characteristics:
21
<PAGE>
o Provide integration with existing systems and execute across a variety of
platforms and databases.
o Allow the extension of the Client/Server model across the Internet into the
ASP and emerging WAP markets.
o Deliver superior object-oriented functionality at a lower cost than any of
its competitors.
o Enable its customers to provide solutions faster than the Company's
competitors.
o Encourage the development of reusable program components and reduce the
cost of solution delivery.
The Company's growth strategy is focused on continuing to garner
revenue from its existing customer base, reconnecting with corporate customers
lost during the past several years and at the same time attracting a large
number of new customers. The Company has a very loyal core group of software
developers among its customer base, many of whom have used the Company's
products for several years and who are interested in expanding the number of
applications which are developed using the Company's products. In order to
capitalize on the commitment of existing customers as well as introducing Omnis
Studio to new developers the Company has implemented the following:
o In recognition of the importance of the initial user installation
experience Omnis has significantly improved the ease of installation by
providing a more intuitive interface and by creating Wizards (i.e. our
"Application Builder") to illustrate how quickly meaningful applications
can be created.
o The sales price of an Omnis Studio developers kit has been reduced to
eliminate cost as a barrier to product adoption. Omnis now offers a range
of support programs coupled with moderate runtime license fees. These
support programs are designed to give existing developers a defined path to
migrate from our Classic products to Omnis Studio and to provide new
developers with the help they need to become productive Omnis programmers
as quickly as possible.
o A complete Website redesign to allow for downloading evaluation versions of
Omnis Studio as well as an on-line store allowing the purchase of
development kits directly from our Website. In addition the Company
provides enhanced web-based functionality for our developer community as
well as an on-line database of solutions that our developers offer
potential customers.
o A tactical marketing effort which emphasizes efficient advertising in
targeted developer communities and attendance at appropriate trade shows.
This
22
<PAGE>
provides the Company with exposure to the potential customer base and,
combined with leads generated from downloads; at our website, provides a
database of sales leads that our inside sales team can pursue. The North
American team also prequalifies corporate opportunities for appropriate
follow-up by our North American technical sales team. The Company believes
its Omnis Studio products are easy to use and easy to learn and enable
developers to assemble their applications with drag-and-drop ease via an
elegant and intuitive user interface. The Company believes that the
practical and visual interface of Omnis Studio, along with its component
and web integration, allows developers from many different backgrounds and
skill levels to build more types of applications more quickly and less
expensively by following common rules for assembly.
The license fees for Omnis Studio Developer Kits were substantially
reduced in fiscal year 2000 and generally have a United States list price of
$149. The Company has shifted its revenue model to a support-based program, with
a variety of supported developer programs priced at an annually renewable fee of
$999.
The Company has also instituted special support programs for the North
American market:
o Incubator Partner Program - The Incubator Program is designed to attract
new developers and to provide a migration path for Classic developers to
transition their applications to Omnis Studio. This program provides North
American technical voice support, subsidized training and, upon completion
of training, subsidized runtime licenses for applications which are
developed within the first 12 months of participation in the program. In
addition the program provides access to the Omnis Developer Portal where
developers can share information, code snippets and where additional
wizards are provided as a part of the program.
o Preferred Partner Program - Incubator "graduates" and established Studio
developers can participate in the Preferred Program offering many of the
same benefits of the Incubator Programs with additional functionality In
particular, Preferred Partners have access to more robust Omnis Studio
enhancements and externals, appropriate for the more experienced user.
Omnis Studio applications can be deployed with data access services
through the Omnis Proprietary database (generally suitable for smaller
departmental applications) or configured with data access services to leading
databases (e.g., DB2, Oracle, Sybase and Informix). When customers deploy an
application a deployment license is required for each end-user.
23
<PAGE>
SALES, MARKETING AND DISTRIBUTION
Sales
The Company sells its products in North America primarily through
technical sales representatives who follow-up on qualified leads generated by
the Company's inside sales department. Inside sales leads are generated from
responses to targeting advertising in technical trade media, trade show
attendees, web-site downloads of evaluation copies of Omnis Studio and legacy
customer inquiries. For larger enterprise sales, the Company employs a technical
sales group to meet directly with qualified potential customers. North American
technical account representatives are located throughout the country and inside
sales personnel are located at the corporate offices in San Carlos, California.
The Company sells Omnis Studio directly over the Internet on its Website at
www.omnis.net, as well as through established Internet based software retailers.
Overseas, the Company sells its products primarily through a direct sales force
operating from sales offices in the United Kingdom, Germany, Scandinavia, and
Benelux.
The Company is committed to expanding sales growth by making additional
sales to its current customer base and increasing the number of new customers.
The Incubator and Preferred Partner Programs are designed to enable Omnis to
give its customers the tools they need to build their own businesses as quickly
and successfully as possible. Sales initiatives are focused upon the following
markets:
o Existing customers and legacy opportunities: The Company is committed to
retaining and building its existing and former customer base. In the years
Omnis has been in business many of the Fortune 500 companies have been
Omnis users. It is our aim to return them to the fold, reeducate and
transition Classic developers to Omnis Studio over the next 24 months.
o Linux Marketplace: We are focusing marketing efforts on capturing the new
Linux software developer community. We believe this represents a new wave
of younger developers who will soon be writing significant enterprise
applications. Presently Omnis Studio is the only known commercially
released rapid application development tool that runs on Windows, MacOS and
Linux operating systems.
o Application Service Providers: Management believes that the Company's Web
Client technology can offer significant advantages in the small to medium
sized ASP market. We expect that, as our customers evolve to this newer
model of providing hosted applications solutions, Omnis Studio and Web
Client will be a part of their success.
The Company recognizes that, given all the internal changes of the past
several years, our products have not achieved the market penetration that the
technology deserves. We also recognize that our competitors are generally much
stronger than we
24
<PAGE>
are financially and organizationally. While we plan to focus on the foregoing
markets, we also will be working hard to "Align and Redirect" Omnis Studio in
development environments where Omnis is not presently the preferred tool.
International Distribution
The Company has non-exclusive distributor relationships in over 25
countries as well as an exclusive distribution relationship in France. All of
the Company's exclusive distributors provide primary customer service and
support for their markets. Distributors in Latin America and in the Pacific Rim
are managed from the San Carlos, California office, while distributors in
Europe, Middle East and Africa are managed from the United Kingdom office of the
Company.
The Company believes that in order to increase sales opportunities, it
will be required to expand its international operations. The Company has
committed and continues to commit significant management time and financial
resources to developing direct and indirect international sales and support
channels. There can be no assurance, however, that the Company will be able to
maintain or increase international market demand for its products. To the extent
that the Company is unable to do so in a timely manner, the Company's
international sales will be limited, and the Company's business operating
results and financial condition could be materially and adversely affected.
International operations are subject to inherent risks, including the
impact of possible recessionary environments in economies outside the United
States, additional costs of localizing products for foreign markets, longer
receivables collection periods, greater difficulty in accounts receivable
collection, unexpected changes in regulatory requirements, difficulties and
costs of staffing and managing foreign operations, reduced protection for
intellectual property rights in some countries, potentially adverse tax
consequences, and political and economic instability. There can be no assurance
that the Company or its distributors or resellers will be able to sustain or
increase international revenues from licenses or from maintenance and service,
or that the foregoing factors will not have a material adverse effect on the
Company's future international revenues, and consequently, on the Company's
business, operating results, and financial condition.
Marketing
In fiscal 2000, the Company substantially increased both its Marketing
team and its expenditure on Marketing.
In support of its direct and reseller sales efforts, the Company
conducts numerous marketing programs including print and web media advertising,
direct mail programs, trade show presentations, and strategic marketing programs
with partners. The purpose of these efforts is to build awareness and generate
quality sales prospects that lead to increased market share and revenues.
The Company has also initiated a comprehensive rebranding campaign that
included a complete redesign of its web site and change of corporate identity
giving it a much more professional and substantive feel.
25
<PAGE>
Current initiatives include leveraging the Company's first mover
advantage in the Linux market through partnerships, aggressively promoting the
Company's powerful web application deployment technology, and providing
technical papers and collateral material to support the new developer programs
and pricing infrastructure that were introduced early this year.
Training Services
As part of its global sales efforts, the Company offers professional
training programs to its customers and prospective customers. These classes,
held at various locations throughout the world, emphasize foundation skills (for
the newer developer), advanced classes (for the more experienced developer) and
classes designed to assist existing customers in the migration from 7(3) to
Omnis Studio. Training services are offered as fundamental components of our
Partner Programs as wen as to augment sales efforts. The Company believes that
appropriate training programs in combination with ease of installation and use,
low cost of initial adoption and web-based provision of additional developer
services, will maximize the probability of future success.
Technical Support
Because the Company's products are used by customers to build
applications which may become a critical component of their business operations,
continuing customer technical support services are an important element of the
Company's business strategy. The Company offers customer service programs to
meet customer support requirements. Customers who participate in the Company's
annual support programs receive maintenance releases and associated technical
support and documentation. Recently, the Company has begun to offer real-time
telephone support to its North American customers as well as high-level e-mail
support from its primary engineering offices in the United Kingdom.
The Company's technical support team focuses on problem solving and
resolution in installation and other ongoing technical issues. Technical support
representatives are trained in basic and advanced uses of Omnis products. The
Company operates the technical support function through a consolidated database,
combining customer information from the United States, United Kingdom, and
German support center databases into single database structure, thereby enabling
its worldwide technical support staff to work from the same database and have
simultaneous access to the same information. The global support strategy
includes a worldwide high-level support center in the United Kingdom, which
supports the Company's United States, Canadian and United Kingdom customers and
some of the Company's foreign distributors. These distributors are responsible
for supporting those customers to whom they have sold the Company's products. A
support center in Germany provides support for the Company's direct customers in
Europe and the Company's European based distributors. In addition, the Company
has improved its website to better provide technical support to its customers.
The Company believes its customers are now better able to find answers to many
of their questions quickly and easily on the Company's website.
26
<PAGE>
Customers
The Company has customers in a wide range of industries, including
financial services, pharmaceuticals, manufacturing, telecommunications,
aerospace, defense, and universities. In fiscal year 2000, one customer, Nortel,
accounted for approximately 16.7 percent of total net revenues. No other
customer accounted for more than 10 percent of total net revenues.
As is the case with other participants in the software industry, the
Company generally ships products as orders are received. As a result, the
Company has historically operated with little backlog. Because of this short
cycle between receipt of an order and shipment, the Company does not believe
that its backlog as of any particular date is meaningful.
The Company's customers can be segmented into two general categories:
1. Corporate IT Departments -- The bulk of the Company's revenue has been
generated from sales to information technology departments of large
corporations.
2. Independent Software Vendors ("ISV"), Developers -- ISVs typically have
written their own vertical application software which they sell as a
complete package to end-user customers. This category would also
include Value Added Resellers ("VARs") and software consulting
companies who provide contract programming services to their customers.
The Company's products are designed to enable the development of
applications which operate in traditional client/server environments as well as
across the Internet. Some of the Company's customers have purchased copies of
the Company's products for evaluation purposes. There can be no assurance that
these customers will broadly implement new projects or that they will purchase
additional products from the Company. The Company's future financial performance
will depend on the growth of the Company's sector of the computing market and on
its ability to compete effectively in this market. There can be no assurance
that this market will continue to grow or that the Company Will be able to
respond effectively to customer requirements and competitive offerings in this
market.
As the market evolves, the Company anticipates that competition is
likely to increase from both existing and future market participants, most of
whom are larger companies and have greater financial, technical, marketing,
sales, and distribution resources and a larger installed base of customers than
the Company. There can be no assurance that the Company could compete
effectively with such competitors.
Product Development
Since its inception in the United Kingdom, the Company has benefited
from having a global perspective in terms of partners, customers, technological
outlook and products. The Company's corporate research facilities are based in
England.
27
<PAGE>
The Company believes that developing new products is best accomplished
with a cross-disciplinary approach, combining the talents and perspectives of a
multi-faceted virtual development team that includes developers, customers,
VARs, sales and marketing, technical support, quality assurance, and technical
services. In the course of planning products, the Company's product development
team filters industry trends, ideas from customers and potential customers,
partners and potential partners, feedback from the Company's own sales,
marketing, technical support, and professional services staff, and general
business information and then analyzes the potential risks and benefits of
pursuing a given strategy.
The software industry is characterized by rapid technological advances,
frequent new product introductions, rapid enhancements of existing products
through new releases, and changing customer requirements. The future success of
the Company will largely depend on its ability to enhance its current products
and to successfully develop new products which keep pace with technology trends,
competitive offerings, and evolving customer requirements. In particular, the
Company believes it must continue to enhance the basic functionality of its
products and extend the product line to keep pace with the advances in hardware,
operating systems, programming languages, databases, and Internet-related
technology. Any failure of the Company to anticipate new technology developments
and customer needs or any significant delays in product development and
introduction could result in a loss of competitiveness and revenues. Because of
the complexity of software products, new product introductions may contain
undetected software errors that, despite quality assurance testing by the
Company, are discovered only after a product has been installed and used by
customers. Although the Company has not experienced any material adverse effects
from such errors to date, there can be no assurance that errors will not be
discovered in the future which would cause delays in shipments, loss of revenues
or require significant design changes that could adversely affect the Company's
competitive position and operating results. There can be no assurance that any
of the Company's product development efforts will lead to a commercially viable
product, and the Company is unable to predict whether or when proposed new
products, product enhancements, or product extensions might be released or
whether, when released, they will achieve market acceptance.
The Company markets its products to customers for the development,
deployment, and management of Internet and client/server applications. The
Company's license agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability claims.
It is possible, however, that the limitation of liability provisions contained
in the Company's license agreements may not be effective as a result of existing
or future federal, state or local laws, or ordinances or unfavorable judicial
decisions. Although the Company has not experienced any product liability claims
to date, the sale and support of its products by the Company may entail the risk
of such claims, which are likely to be substantial in fight of the use of its
products in business-critical applications. A successful product liability claim
brought against the Company could have a material adverse effect upon the
Company's business, operating results, and financial condition.
28
<PAGE>
Competition
The applications development tools software market is rapidly changing
and intensely competitive. The Company currently encounters competition from
several direct competitors, including Microsoft Corporation (Visual Basic),
Inprise Corporation (Delphi), Allaire Corporation (Cold Fusion) and Magic
Software Enterprises. In addition, the Company competes indirectly with several
other companies. These include (a) the relational database vendors, such as
Oracle, Sybase and Informix, who provide application development tools primarily
for customers who use their database technology; (b) 4GL application tools
vendors such as Progress Software Corporation and Cognoscente Software
International Incorporated; (c) CASE tools vendors such as Knowledgeware Inc.
and Intersolv Inc.; (d) shrink-wrap database software suppliers such as Lotus,
Microsoft Access, and ACIUS, and (e) developers in Java as competition for the
Omnis web client technology.
The Company believes that its ability to compete depends on factors
both within and outside its control, including the timing and success of new
products developed by the Company and its competitors, product performance and
price, distribution, and customer support. There can be no assurance that the
Company will be able to compete successfully with respect to these factors. In
particular, competitive pressures from existing and new competitors who offer
lower prices or introduce new products, including "native" products that fully
utilize the capabilities of a particular operating platform, could result in
delays in purchase decisions by or loss of sales to potential customers or cause
the Company to institute price reductions, any of which would adversely affect
the Company's results of operations. In particular, software licenses which
permit developers to develop configurable applications and deliver those
applications to end-users, have been and may continue to be subject to
significant pricing pressures which could have an adverse effect on the
Company's business and results of operations. There can be no assurance that the
Company will be able to maintain its price structure or that entry of future
competitors in the Company's current market will not result in pricing pressures
in the future.
Additional competitive factors influencing the market for the Company's
products include product functionality and features, platforms, performance,
vendor and product reputation, product and service quality. These items may also
result in market confusion, delays in purchases, intensified competition, price
restructuring, or price reductions. The Company believes that the broad
functionality of its products, including its cross platform capability and its
important features for group development, application deployment and maintenance
has enabled the Company to compete effectively to date, particularly for
professional development environments in major corporations. The Company's
primary focus on client/server application development tools may be a
disadvantage in competing with vendors who can provide a greater range of
products to customers who wish to deal with a limited number of suppliers (i.e.
Oracle, Sybase, and Informix).
As the web-based market evolves, the Company anticipates that
competition is likely to increase from both existing and future market
participants, most of whom are larger companies and have greater financial,
technical, marketing, sales, and distribution
29
<PAGE>
resources and a larger installed base of customers than the Company. Moreover,
if such competition were to enter the crossware market, which is the principal
market in which the Company participates, the Company might be required to
increase defensive measures to maintain its position in these target markets.
This increased effort could adversely affect operating results due to increased
marketing programs, price declines, longer sales cycles, and increased product
development expenses, among other things. There can be no assurance that the
Company could compete effectively with such new products.
Intellectual Properties and Other Proprietary Rights
The Company relies primarily on a combination of trade secret,
copyright, and trademark laws and contractual provisions to protect its
proprietary rights. In addition to trademark and copyright protections, the
Company licenses its products to end users on a "right to use" basis pursuant to
a perpetual license agreement that restricts use of products to a specified
number of users. The Company generally relies on shrink-wrap or "click-wrap"
licenses which become effective when a customer opens the package or downloads
and installs software of its system. Because they are not negotiated with or
signed by the licensees, in order to retain exclusive ownership rights to its
software and technology, the Company generally provides its software in object
code only, with contractual restrictions on copying, disclosure, and
transferability. There can be no assurance that these protections will be
adequate, or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology.
Copyright and other protection for intellectual property may be
unavailable or restricted in certain foreign countries. In addition, shrink-wrap
or click-wrap licenses may be unenforceable under the laws of certain
jurisdictions. Nevertheless, the Company believes that its copyright and license
protections are important. However, because of the rapid pace of technological
change in the computer software industry, factors such as the product knowledge,
ability, and experience of the Company's personnel, brand name recognition,
customer support, and ongoing product maintenance and enhancement may be more
significant in maintaining the Company's competitive advantage.
As the number of software products available in the market increases
and the functions and features of these products further overlap, the Company
anticipates that software products may become increasingly subject to
infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to any
current or future product. Any such assertion, whether with or without merit,
could require the Company to enter into costly litigation or royalty
arrangements. If required, such royalty arrangements may not be available on
reasonable terms, or at all.
The Company has filed a final patent application in the United States
for certain of its Omnis Studio Web Client technologies and has instituted a
procedure for preparing and filing additional provision and final patent
applications as appropriate for its developing technologies. At this time the
Company has not been granted any patents on
30
<PAGE>
any of its proprietary technologies and there is no assurance that any such
patents will be granted. Patent protection may become important in the
protection of the commercial viability of the Company's innovative products and
the failure to obtain such patent protection could have an adverse effect on the
commercial viability of such products. The Company's success therefore may in
part depend on its ability to obtain strong patent protection or licenses to
strong patents in the future. It is not possible to anticipate the breadth or
degree of protection that patents would afford any product of the Company or the
underlying technologies. There can be no assurance that any patents issued or
licensed to the Company will not be successfully challenged in the future or
that any Omnis product will not infringe the patents of third parties.
The level of research and development efforts in areas related to the
Omnis. products makes it possible that third parties will obtain patents or
other proprietary rights that may be necessary or useful to its products. In
recent years the practice of applying for and issuing software patents in the
United States and other jurisdictions has accelerated and the scope and validity
of such patents are frequently in dispute. In cases where third parties are the
first to invent a particular product or technology, it is possible that such
parties would obtain patents that would be sufficiently broad to prevent the
Company from marketing the same or similar products. Although the Company is not
presently aware that any patents necessary to its products have been issued for
which licenses are not available to the Company, it is possible that
applications for such patents have been made or that such patents have been
issued. The scope and validity of such patents, if issued, the extent to which
the Company may desire or need to obtain licenses under such patents, and the
cost and availability of such licenses are currently unknown. There can be no
assurance others may not independently develop or obtain technology similar to
that of the Company.
As the number of software products available in the market increases
and the functions and features of these products further overlap, the Company
anticipates that software products may become increasingly subject to
infringement claims. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to any
current or future product. Any such assertion, whether with or without merit,
could require the Company to enter into expensive litigation or royalty
arrangements. If required, such royalty arrangements may not be available on
reasonable terms, or at all.
Production
The Company uses subcontractors in the United Kingdom to perform its
manufacturing operations, which include duplication and preparation of software
media, documentation, and packaging. The principal materials used in the
manufacture of the Company's products are CD ROMs, boxes, binders, and
multi-color printed materials which the Company obtains from its manufacturers.
The Company utilizes certain of its distributors in some international
markets to localize the products, including conversion of the product and
product documentation to
31
<PAGE>
native languages, where necessary. The production of the resulting localized
product is then handled by the distributor for that market.
The Company requires that quality control tests be performed on all
duplicated disks and finished products. Quality control personnel work in the
United Kingdom operation to help ensure product quality. The Company produces
software and documentation based upon forecasts of monthly sales.
32
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
Compass Litigation. In March 1998 the Company was sued by Compass
Software ("Compass") in the Federal district court for the Eastern District of
Washington claiming damages in the range of $2 Million for software copyright
infringement and related claims. The Company obtained a full dismissal of that
case with prejudice on November 29, 1999, and no appeal was filed by Compass
within the time allowed by law.
In this connection the Company previously had sued Compass in 1994 for
illegally infringing and distributing the Company's software products. This
matter was settled with an agreement that Compass would pay certain amounts and
would not make illegal copies of the Company's software in the future. Compass
failed to pay the promised amounts when due. The Company then obtained a
judgment for breach of contract against Compass. As part of its efforts to
enforce its judgment against Compass, the Company purchased, at a judgment Hen
sale, certain intangible property of Compass including the rights to the 1998
infringement suit brought by Compass ("Execution Sale"). Compass then requested
the applicable trial court to set aside the Execution Sale. The trial court
granted the request and the Company appealed the judgment. The court of appeals
subsequently ruled in favor of the Company and directed the trial court to
determine the amount of fees to be awarded to the Company. That amount has not
yet been determined. The Company also filed a second lawsuit against Compass
alleging additional acts of infringement for periods after 1994. A trial was
conducted in this case before Judge Barbara J. Rothstein of the United States
District court for the Western District of Washington. On July 25, 2000, the
District Court ruled that Compass reproduced and distributed unauthorized copies
of Omnis Software using duplicates of existing serial numbers. The Court awarded
statutory damages to Omnis in the amount of approximately $150,000 in addition
to injunctive relief and attorney fees from Compass. On October 20, 2000 a
mediation hearing was conducted to review the amount of damages to be paid by
Compass to Omnis. At the mediation Compass offered to pay approximately $25,000
in damages. Omnis is currently preparing a motion for judgment to collect the
$150,000 judgment awarded in July, 2000 and for an additional $245,000 in legal
fees.
BTN -- Germany Litigation. The Company entered into a professional development
services agreement with BTN Versandhandel GmbH of Leiferde, Germany for the
development of an Omnis application. The Company developed and delivered a
version of the application to BTN. BTN failed to pay the Company as agreed,
claiming there were flaws in the application and the project was suspended by
the Company awaiting their payment. BTN commenced legal action against the
Company in Germany claiming damages of approximately DM250,000 for failure to
perform under the services agreement. The Company has countersued BTN claiming
the balance owed under the contract of approximately DM60,000. The Company is
defending against the BTN claim and is pursuing its counterclaim against BTN.
33
<PAGE>
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults 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:
3.1 Restated Certificate of Incorporation, as amended and corrected.(1)
3.2 Certificate of Amendment of Certificate of Incorporation dated February
9, 1999(2)
3.3 Certificate of Designations dated March 31, 1999, as corrected.(3)
3.4 Bylaws, as amended.(4)
10.1 Merger Agreement dated as of August 23, 2000 between the Company,
PickAx, Inc., Gilbert Figueroa, and Raining Merger Sub, Inc.
27.1 Financial Data Schedule
(1)Incorporated herein by reference to the Current Report on Form 8-K
filed by the Company with the Commission on June 16, 1998.
(2)Incorporated herein by reference to the Company's Annual Report on
Form 10-KSB/A, as amended, for the fiscal year ended March 31, 1999,
filed by the Company with the Commission on July 29, 1999.
(3)Incorporated herein by reference to the Current Report on Form 8-K
filed by the Company with the Commission on April 15, 1999.
(4)Incorporated herein by reference to the Annual Report on form 10-KSB,
as amended, for the fiscal year ended March 31, 1998, filed by the
Company with the Commission on June 29, 1998.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended September 30, 2000.
34
<PAGE>
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 6, 2000
OMNIS TECHNOLOGY CORPORATION
(Registrant)
/s/ GWYNETH GIBBS
--------------------------
Gwyneth Gibbs, President and Interim Chief
Executive Officer
35