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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 000-23260
ONEWORLD SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
State of Incorporation: Delaware
IRS identification number: 94-3095680
1144 East Arques Avenue
Sunnyvale, CA 94086-4602
(408) 523-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
Par Value
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The approximate aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the closing price of the Common
Stock reported on the National Association of Securities Dealers, Inc. Automated
Quotation (NASDAQ) National Market was $11,740,350 as of June 25, 1998. (1)
The number of shares of Common Stock outstanding as of June 25, 1998 was
17,162,192
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated on or about July 6,
1998 to be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held August 20, 1998 are incorporated by reference into Part
III. (1)Excludes 827,792 shares of Common Stock held by directors, officers and
affiliates as of June 5, 1998.
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ONEWORLD SYSTEMS, INC. ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED MARCH 31, 1998
INDEX
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PART I
Item 1. Business ................................................................................................. 3
Item 2. Properties ............................................................................................... 10
Item 3. Legal Proceedings ........................................................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders ...................................................... 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .................................... 12
Item 6. Selected Consolidated Financial Data ..................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 13
Item 8. Financial Statements and Supplementary Data .............................................................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..................... 38
PART III
Item 10. Directors and Executive Officers of the Company .......................................................... 38
Item 11. Executive Compensation ................................................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management ........................................... 38
Item 13. Certain Relationships and Related Transactions ........................................................... 38
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K .......................................... 38
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PART I
ITEM 1. BUSINESS
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended March 31,
1998. This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1934, as amended. Actual results could
differ materially from those anticipated in forward-looking statements as a
result of risks identified and the other cautionary disclosures set forth below
and elsewhere in this report.
OneWorld Systems, Inc. ("OneWorld Systems" or the "Company") (founded
in June 1989 as "Global Village Communication, Inc." and incorporated in
Delaware), develops and manufactures products that enhance and simplify wide
area data communications for the small and medium size office market. The
Company's recently introduced OneWorld 5000 communications servers are designed
to be versatile, easy-to-use, cost-effective and expandable solutions that
combine Internet access and routing, remote access, on-line service access, and
fax capabilities.
On March 31, 1998 the Company, then Global Village Communication, Inc.,
announced an agreement (the "Agreement") to sell substantially all of the
Company's assets related to the Company's single user modem product offerings
including accounts receivable, inventory, property and equipment, intellectual
property, and other production and research and development assets (the "Modem
Business") to Boca Research, Inc. ("Boca") and unveiled this new corporate
strategy focusing on wide-area data communications for the small and medium size
office market. The transaction was closed June 18, 1998, and the Company's name
changed to OneWorld Systems, Inc. at that time.
Historical Modem Business
During the fiscal year ended March 31, 1998, the Company was actively
engaged in the Modem Business, where it was a leader in the design, development
and marketing of easy-to-use integrated communications products for personal
computers with Windows, Macintosh, OS/2 and DOS operating systems. The Company's
products enabled mobile, home office and networked computer users in small to
medium sized organizations to access the Internet and information services,
connect to a remote organization's internal network, view personalized Internet
content and communicate efficiently with colleagues, customers and suppliers.
Unit sales volumes and market share of Macintosh compatible computers
have continued to decline over the past year. As a result, during fiscal 1998
the Company's revenues and gross margin from its products for the Apple
Macintosh family of computers declined. In an attempt to offset this decline,
the Company introduced a number of personal-use products compatible with
personal computers utilizing the Windows operating system ("Windows"), including
the industry's first 56 Kbps modem/ethernet PC Card (PCMCIA). However, the
Company was unable to gain sufficient market share in the Windows arena to
offset the revenue decline from its Macintosh products as price cutting, slower
than anticipated market acceptance of the 56 Kbps technologies, and the
inability to fully fund sales and marketing initiatives limited revenue from
these Windows products.
Throughout this period the 56 Kbps technology standard was in a
state of uncertainty, consumers were faced with a choice among multiple
non-interoperable implementations. Though the Company introduced versions of its
56 Kbps modem products that were software upgradeable to the pending ITU
standard at no cost to the end-user, this was insufficient to fully overcome the
confusion in the marketplace. In addition, the Company's financial condition
constrained its ability to increase, or fully fund, its sales and marketing
activities in support of its new 56 Kbps products. As a result, sales of the
Company's new 56 Kbps products were below expectations.
During fiscal 1998, a substantial majority of the Company's revenue
continued to be attributable to sales of its Apple Macintosh compatible modem
products. Continued dependence on the declining Apple market, combined with the
delay in purchases of 56 Kbps modems resulting from confusion over the lack of
an industry standard and the Company's inability to significantly increase its
market share of Windows compatible modem products placed several financial
constraints on the Company that adversely affected its ability to remain
competitive as a stand-alone modem company.
Price decreases during the year caused gross margins to decline. For
example, gross margins in the fourth fiscal quarter of 1997 were 39.4%; by the
third quarter of fiscal 1998, gross margins had declined to 29.8%. The Company
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believed that continued price pressure in the industry, coupled with lower
manufacturing volumes when compared to the Company's competitors, would continue
to cause gross margins from the Company's modem products to decline over time.
Efforts to increase sales of Windows-compatible modems required
significant cash expenditures, both on inventory, and on marketing and sales
programs. The Company was only able to fund these cash expenditures by selling
certain assets, including the sale of the assets of its subsidiary, Global
Village Communication, Ltd., to Mitel (completed in fiscal 1997), the sale of
its investment in GlobalCenter, Inc., and the sale of its investment in
AirMedia, Inc. Despite these dispositions, however, the Company's cash balance
declined from $9.7 million at the end of fiscal 1997 to $5.6 million at the end
of the third quarter of fiscal 1998. At that time, the Company did not have any
material, non-strategic assets that it could sell to continue operating the
business.
Given its deteriorating financial condition, the status of the modem
industry, and the continued dependence on the Macintosh market, the Company
determined that remaining an independent modem company was not financially
viable, would require significant infusions of cash with no assurance of a
return to profitability, and that funding the modem business and the development
and launch of the Company's OneWorld 5000 communications servers were not
simultaneously achievable. This ultimately led to the announcement on March 31,
1998 that the Company would sell its Modem Business to Boca.
As a result of the sale to Boca, which was closed June 18, 1998, the
Company will no longer sell its individual use modems or other individual use
communications systems. More specifically, the sale to Boca includes the
Company's Teleport modems for Windows desktop computers, Teleport modems for
Macintosh desktop computers, PC Card modems for Windows notebook computers, PC
Card and PowerPort modems for Macintosh Powerbook notebook computers, product
sold to Apple on an OEM basis, and OEM versions of Faxworks. These products
represented substantially all of the Company's revenue in fiscal 1998.
New Focus on Communications Servers
In the future, the Company will focus on its new family of
communications server products aimed at the small and medium size market, which
will combine Internet access, routing, remote access, fax server and shared
modem capabilities in a single, easy-to-use product. These products, the
OneWorld Systems 5000 family of communication servers, were launched on June 8,
1998, and are expected to ship in July. The Company's primary source of revenue
in the future will be from the OneWorld 5000 product line. Revenue from these
products is dependent on the successful completion of the development of the
product line. However, the Company may have difficulty completing development,
or resolving any other issues that may arise, in a timely manner, which could
delay the planned launch of the new OneWorld Systems communications server
product line. Commercial acceptance of these products is dependent on certain
factors including the Company's sales and marketing efforts, technical reviews
by third parties, introductions of new technologies or standards, performance of
the Company's VARs, distributors and suppliers and announcements by the
Company's competitors. Many of the Company's future competitors have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
the Company. OneWorld 5000 products will have a significantly higher selling
price than many of the Company's past products and will require the Company
to expand its VAR channel. There can be no assurance that the Company will be
successful in establishing an effective distribution channel for its new
products. There can be no assurance that the Company's newly released products
will be accepted by the marketplace. If the Company's sales of its new products
are below its expectations, the Company's business, financial condition and
results of operations will be materially adversely affected.
With the reliance on revenue from future products and the Company's
projected expense levels, the Company does not expect to be profitable in the
short-term. In addition, the Company may face pricing pressure, which could lead
to reductions in the average sales prices for the Company's products and could
have a material adverse effect on gross margins. There is no assurance that the
Company will ever achieve profitability.
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Though the Company continually seeks to further enhance its product
offerings and to develop new products, there can be no assurance that these
development efforts will result in enhanced or new products being introduced on
a timely basis, or that any such product enhancements or new products will
achieve market acceptance. In addition, the announcement by the Company of new
products with the potential to replace current products may cause customers to
defer purchasing the Company's current products which could have a material
adverse effect on the Company's results of operations. While the Company writes
off inventory that it considers to be excessive or obsolete, there can by no
assurance that the Company's recorded allowances for such write-offs and returns
will be adequate, and a material increase in such write-offs and returns over
Company expectations would have a material adverse effect on the Company's
results of operations.
TECHNOLOGY AND PRODUCTS
During fiscal 1998, the Company produced modems, telecommunications
servers, and proprietary communications software for two customer groups of the
communications marketplace: individual users and network users. The Company's
individual-use system products included TelePort modems for Macintosh and
Windows desktop computer users, PowerPort modems for Macintosh PowerBook
computer users and PC Card (PCMCIA) modems for Macintosh PowerBook and Windows
notebook users. On June 18, 1998, the Company sold all of these individual use
system products to Boca. The Company no longer sells any of these products.
The Company's line of network products includes the recently introduced
OneWorld 5000 communications server family as well as FaxWorks NT and FaxWorks
Pro LAN software providing fax services to office workgroups utilizing
Windows NT, Windows 3.1, and OS/2 operating systems. The OneWorld series of
communications server systems for Macintosh provides shared fax, dial-out
modem, and remote network access capabilities to small workgroups.
The Company's core software technologies, FaxWorks communications
software for Windows, OS/2 and DOS operating systems, GlobalFax communications
software for Macintosh systems, and embedded software underlying the Company's
server systems, provide a consistent, user-friendly interface across individual
and network product lines. For Windows, the Company also provides integrated
communication software to original equipment manufacturers (OEMs). Certain
rights to OEM versions of FaxWorks and to GlobalFax were transferred to Boca on
June 18, 1998. The Company retains the right to utilize these software products
(and associated trademarks) in conjunction with the Company's network products,
royalty free.
NETWORK SERVERS FOR MULTIPLE USERS
The OneWorld line of network products includes the recently announced
OneWorld 5000 family of communications servers which are specifically designed
for the small and medium size office. Leveraging the Company's heritage and
experience, the OneWorld 5000 family integrates hardware, server software and
client software elements into a complete hardware/software solution. These
communications servers will provide versatile, easy-to-use, cost-effective and
expandable solutions that will meet a small office's growing communications
needs and modest budget.
The OneWorld Systems family of communications servers will provide the
major data communications functions required by small businesses, including
sending and receiving faxes; Internet access and routing so that the entire
office has access to the Internet (not just one PC in the office); modem pooling
so that the entire office can share modems and access on-line services from any
desk at anytime; and remote access so that employees can dial into the office
network from home or on the road. In addition, the OneWorld 5000 family of
communications servers will be among the first to offer all these capabilities
simultaneously to both Windows and Macintosh users.
These products are designed to be simple for the small office to
administer and manage. A Wizard, software designed to simplify installation and
configuration, is being developed to guide the small office manager through the
process of setting up all the communications functions. A single graphical
administration program will allow the network administrator to easily manage the
various communications functions and user profiles from any PC on the network.
In addition, client software is based on the Company's award-winning software,
including GlobalFax and FaxWorks, known to many users for their ease-of-use.
To address the budgetary concerns of the small office, the OneWorld
Systems products will enable offices to purchase a suite of data communications
functions in one multi-function product for a fraction of the price of a
collection of single-function products.
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Phone line allocation will be handled by "Dynamic Port Allocation," a
proprietary technology developed by the Company so that every telephone port is
available for every function and can be assigned by the server on demand, and on
the fly, with no user or network administrator intervention required. For
example, employees can fax by day, and use remote access by night, taking full
advantage of the phone lines installed. In contrast to a collection of single
function servers, each with their own dedicated phone lines, the result is the
need for fewer phone lines and reduced monthly telecommunications costs, one of
the largest expenses for small and medium sized businesses.
Future growth and expansion has been designed into the OneWorld 5000
communications servers. Additional ports can be added as a small office grows.
Functionality can be added as offices need it without the extra expense of a
new, separate product. As a small office grows, new communications capabilities
can be added, which could include ISDN, frame relay, T1 or DSL, for example. New
functions such as firewalls and support for Virtual Private Networks (VPNs), and
other new capabilities will be available in the future. Multiple OneWorld 5000
communications servers can be added to different departments or banded together
for higher capacity. OneWorld 5000 communications servers can be expanded as
needed, thereby protecting the investment of the small business.
For small and medium-sized organizations, the Company also offers
FaxWorks Pro LAN and FaxWorks Server NT, fax server software for use in Windows,
OS/2, and Windows NT environments. FaxWorks integrates advanced fax software
features into a single user interface, allowing users to send and receive faxes
directly from their computer on the network.
The Company's existing OneWorld 100 communications servers for
Macintosh provide complete, easy-to-use communication solutions for Macintosh
network based workgroups. The OneWorld Combo server features fax, remote access,
and network modem capabilities, giving each user on a Macintosh network the
ability to send and receive faxes and dial out to on-line services or bulletin
board systems. OneWorld Combo is also a complete Apple Remote Access 1.0/2.0
server that allows offsite Macintosh users to connect to their company network
from virtually any location. OneWorld Fax includes both fax and network modem
capabilities, and OneWorld Network Modem provides network modem capabilities.
All servers can be upgraded to add additional capabilities.
The following table shows the Company's major network products:
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NETWORK SERVERS FOR MULTIPLE USERS
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ONEWORLD 5000 FAMILY OF COMMUNICATIONS SERVERS (ANNOUNCED)
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OneWorld 5000 Remote Access Server
(Remote access, Internet routing and network modem with four 56 Kbps modems)
OneWorld 5000 Fax Server
(Network fax server and network modem with four 56 Kbps modems)
OneWorld 5000 Suite Server
(all capabilities of the Remote Access and Fax Servers with four 56 Kbps modems)
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INTEGRATED COMMUNICATIONS SOFTWARE
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FaxWorks Pro LAN for Windows
FaxWorks Pro for OS/2
FaxWorks Pro LAN for OS/2
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ONEWORLD 100 COMMUNICATIONS SERVERS FOR MACINTOSH
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OneWorld Network Modem
(network modem server for Ethernet and LocalTalk networks)
OneWorld Fax
(network fax modem server for Ethernet and LocalTalk networks)
OneWorld Combo
(network modem, fax, and ARA 1.0/2.0 server for Ethernet and LocalTalk networks)
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SALES AND MARKETING
SALES. Consistent with modem industry practice, the Company distributed its
modem products through a worldwide system of distributors, dealers, system
integrators, OEMs and mail order houses. The Company's two largest customers
accounted
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for approximately 28% and 18%, respectively, of the Company's net revenue in
fiscal 1998. The Company's largest customer accounted for approximately 21% of
net revenue in fiscal 1997.
International sales represented approximately 15%, 15%, and 19% of the
Company's net revenue in fiscal 1998, 1997, and 1996, respectively. In addition
to domestic sales, the Company will initially sell its new server products in
Canada, and may in the future sell these products in additional countries.
Risks inherent in the Company's future international business
activities generally include unexpected changes in regulatory requirements,
tariffs and other trade barriers, costs and risks of localizing products for
foreign countries, longer accounts receivable payment cycles, difficulties in
managing international distributors, potentially adverse tax consequences,
repatriation of earnings, the burdens of complying with a wide variety of
foreign laws and changes in demand resulting from fluctuations in exchange
rates. In addition, the laws of certain foreign countries do not provide
protection for the Company's intellectual property to the same extent as do the
laws of the United States.
The Company intends to ship products within a short period after
receipt of an order. Consequently, the Company does not believe that it will
have a material backlog of unfilled orders, and revenues in any quarter will be
substantially dependent on orders booked in that quarter. The Company's expense
levels are based in part on its expectations as to future revenues. Therefore,
the Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. Accordingly, any significant shortfall of
demand in relation to the Company's expectations or any material delay of
customer orders would have an almost immediate adverse effect on the Company's
results of operations. Fluctuations in operating results may also result in
volatility in the price of the Company's Common Stock.
The Company will distribute its new OneWorld 5000 communications servers
through national and regional value added resellers (VARs) and corporate
resellers, particularly those with a focus on serving the small and medium size
office market. The Company intends to increase the number of VARs by launching
VAR recruiting, training and support programs. There can be no assurance that
the Company will be successful in attracting existing or new VARs to distribute
these products, or that the VAR channel will be a successful one for the
OneWorld 5000 product family. Failure to attract these VARs or their inability
to sell the products would cause sales of such products to be below Company
expectations, and the Company's business, financial condition and results of
operations would be materially adversely affected.
The Company is subject to the risk that its inventories may rapidly
become obsolete or that the Company may carry quantities of certain products
that exceed current or projected demand. While the Company has in the past and
intends on continuing to reserve for inventory that it considers to be excess or
obsolete, there can be no assurance that the Company will record allowances for
such write-offs and returns that are adequate, and a material increase in such
write-offs and returns over historical rates could have a material adverse
effect on the Company's results of operations.
MARKETING. The Company complements its sales activities with a range of public
relations and advertising programs designed to stimulate customer demand. The
Company believes that reviews and comments by influential trade press, business
press, market analysts and user group leaders have a pronounced impact on demand
for the Company's products. The Company conducts regular product strategy
briefings and new product previews. Historically, the Company has enjoyed strong
support from the trade press and has received numerous awards for its products.
The Company provides a one-year or three-year warranty on its server
products, which provide for the repair or replacement of products determined to
be defective. Therefore, the Company is exposed to the risk of product returns
from distributors, direct resellers and end-user customers. As part of the sale
of the Modem Business, Boca assumed all future warranty liability for products
(both installed and to be shipped in the future) it purchased from the Company.
COMPETITION
The market for the Company's products is intensely competitive and is
characterized by rapidly changing technology, evolving industry communication
standards and frequent new product introductions. A number of competitors,
including Cisco Systems, Shiva, 3Com, and Castelle, among others, offer products
that compete with one or more of the Company's communications server products.
Other companies in the personal computer industry, such as modem vendors, remote
access server vendors, communication software vendors, fax machine manufacturers
and personal computer manufacturers, could seek to expand their product
offerings by designing and selling products using competitive technology that
could render obsolete or have a material adverse effect on sales of the
Company's future products.
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Many of the Company's competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base, than the Company. In addition, the
market for the Company's server products is characterized by significant price
competition, and the Company expects that it will face increasing pricing
pressures from its current competitors. Accordingly, there can be no assurance
that the Company will be able to provide products that compare favorably with
the products of the Company's competitors or that competitive pressures will not
require the Company to further reduce its prices. Any material reduction in the
price of the Company's products could negatively affect gross profit as a
percentage of net revenue and could require the Company to increase unit sales
in order to maintain net revenue. There can be no assurance, however, that the
Company would be able to increase its unit sales or make up for a short fall.
Any failure to increase unit sales or make up for a short fall in net revenue
would have a material adverse effect on the Company's financial condition and
results of operations.
The Company's OneWorld fax server products compete primarily with
dedicated fax servers, stand-alone fax machines, electronic mail, centralized
fax systems produced by independent manufacturers such as Castelle, 4Sight,
Cypress, and STF, as well as printer vendors, including Apple and NEC, which
offer fax capabilities with some of their products. The Company's OneWorld
Remote Access, Suite, Network Modem and Combo servers compete with the same
products in the fax server category, as well as with remote access server router
and modem pool products produced by competitors such as Cisco Systems, Shiva,
3COM, and others.
PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company has no patents or
patent applications pending. The Company seeks to protect its hardware,
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. The Company seeks to
protect its brand names under trademark and unfair competition laws. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to as great an
extent as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.
The Company believes that, due to the rapid pace of innovation within
the communications software industry, the Company's success in establishing and
maintaining a technological leadership position is likely to depend more upon
the technological and creative skills of its personnel, continued innovation,
its marketing skills and customer support than on the various legal means of
protecting its existing technology.
The Company is aware of products in addition to its own that are
marketed under the trademark "OneWorld". There can be no assurance that
litigation with respect to these trademarks will not be instituted by any third
parties. If any such litigation were successful, the Company could be required
to pay damages and cease all use of a particular trademark. There can be no
assurance that any loss of the right to use a trademark would not reduce sales
of the Company's products. In any event, even if the Company were successful in
any such litigation, the legal and other costs associated with such litigation
could be substantial. As is customary in the Company's industry, the Company
from time to time receives communications from third parties asserting that the
Company's products infringe, or may infringe, the proprietary rights of third
parties or seeking indemnification against such infringement. There can be no
assurance that any such claims would not result in protracted and costly
litigation. The Company anticipates that the duration of its trademarks will be
perpetual.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are primarily focused on
software development, hardware development, and systems integration. The
Company's expenditures for research and development were $9.7 million, $12.0
million and $14.6 million for the fiscal years ended March 31, 1998, 1997 and
1996, respectively. Customer-sponsored research and development was immaterial
during these periods.
The Company believes that its future success will depend on its
ability to enhance its current products, develop new products on a timely and
cost-effective basis that meet changing customer needs and respond to emerging
industry standards and other technological changes. In particular, the Company
must adapt its products to the evolving technological standards of the various
computer platforms and new technical standards resulting from increases in data
transmission speed and wireless communication. Any failure by the Company to
anticipate or respond adequately to changes in technology and customer
preferences or any significant delay in product development or introduction
would have a material adverse effect on the Company's results of operations.
Due in part to the factors described above, the Company is subject to the risk
that its inventories may rapidly become obsolete or that the Company may carry
quantities of certain products that exceed current or projected demand. In
addition, products as complex as those offered by the Company may contain
undetected errors or defects when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products after
commencement of commercial shipments resulting in a delay in market acceptance
or a recall of such products.
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MANUFACTURING AND SUPPLIERS
Historically, the Company purchased fully manufactured and tested units
from a "turnkey" manufacturing subcontractor. The Company will continue to
utilize this manufacturing strategy for its new family of OneWorld 5000
communications servers. The Company believes that there are a number of
alternative contract manufacturers that could produce the Company's products.
However, it could take a significant period of time and result in significant
additional expense to qualify an alternative subcontractor and commence
manufacturing in the event of a reduction or interruption of production.
Therefore, the Company is highly dependent, on a short-term basis, on its
continued relationship with its "turnkey" manufacturing subcontractor and any
reduction, interruption, or termination of this relationship could have a
material adverse effect on the operating results of the Company. Components and
manufacturing services from the Company's suppliers are obtained on an as-needed
basis.
The Company has been, and will continue to be, dependent on sole or
limited source suppliers for certain key components used in its products,
particularly chip sets designed and manufactured by Rockwell International and
Motorola. The Company generally purchases sole or limited source components
pursuant to purchase orders placed from time to time in the ordinary course of
business and has no guaranteed supply arrangements with its sole or limited
source suppliers. Certain component suppliers, such as Rockwell, are also modem
manufacturers and, accordingly, could elect to satisfy their internal supply
requirements rather than the Company's purchase requirements. The Company at
times in the past has experienced delays in product development and difficulties
in manufacturing sufficient product to meet demand due to the inability of
certain suppliers to meet the Company's volume and schedule requirements. There
can be no assurance that the Company's suppliers will be able to meet the
Company's requirements for key components and failure to meet such requirements
in the future could have a material adverse effect on the Company's results of
operations.
EMPLOYEES
As of March 31, 1998, the Company employed a total of 181 persons,
including 59 in sales, marketing and customer support, 27 in operations, 67 in
engineering and product development and 28 in finance and administration. The
Company had two employees located in Canada, and one employee in England, and
178 employees located in the United States. After the sale of the Modem Business
the Company will employ approximately 70 persons. None of the Company's
employees are represented by a labor union or are subject to a collective
bargaining agreement. The Company believes that its relations with its employees
are good. The Company's future success depends to a significant extent on its
senior management and other key employees, including key development personnel.
The loss of the services of any of these individuals or group of individuals
could have a material adverse effect on the Company's results of operations. The
Company also believes that its future success will depend in large part on its
ability to attract and retain additional key employees. Competition for such
personnel in the computer industry is intense, and there can be no assurance
that the Company will be successful in attracting and retaining such personnel.
During the year the Company executed Change of Control Severance Agreements with
certain of its executive officers.
9
<PAGE> 10
EXECUTIVE OFFICERS OF THE COMPANY
The current executive officers of the Company and their ages as of
March 31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Neil Selvin 44 President, Chief Executive Officer and Director
Leonard A. Lehmann 43 Chairman of the Board
Marc E. Linden 37 Senior Vice President & Chief Financial Officer
Charles R. Oppenheimer 39 Chief Operating Officer
Marsha Raulston 49 Vice President, Human Resources & Customer Satisfaction
</TABLE>
Neil Selvin has served as President and Chief Executive Officer and
director of the Company since March 1993. From February 1990 to March 1993, he
was Director of Marketing at Apple Computer for the PowerBook product family and
prior to that for Apple's peripherals product line. From 1985 to 1990, Mr.
Selvin was employed by Ampex Corporation, a manufacturer of electronics
products, most recently as Chief Operating Officer of its Video Systems division
and also as business unit general manager and in several marketing management
positions. Prior to joining Ampex Corporation, Mr. Selvin held marketing, sales
and technical management positions at Varian Associates and Apollo Lasers. Mr.
Selvin received a B.A. in physics and mathematics from Pomona College, an M.S.
in physics from Brown University, and an M.B.A. from Harvard Business School.
Leonard A. Lehmann has served as Chairman of the Board of the Company
since its founding in June 1989. From January 1993 to March 1996, Mr. Lehmann
served as Vice President, Advanced Products and evaluated new technologies and
performed strategic planning for the Company. From March 1992 to January 1993,
he served as Vice President, Engineering of the Company. From June 1989 to March
1992, he served as the Company's Chief Executive Officer. Mr. Lehmann was also a
founder of DigiRad Corporation, a medical imaging company, and GreenSpring
Computers, Inc., an industrial computer manufacturer. Mr. Lehmann received a
B.S. in electrical engineering from Cornell University, and an M.S. and a Ph.D.
in electrical engineering from Stanford University.
Marc E. Linden became the Company's Senior Vice President and Chief
Financial Officer in July 1997. Mr. Linden joined the Company in June 1996 as
Vice President of New Business Development. From October 1992 to June 1996, Mr.
Linden was Director of Business Development and Planning of Octel
Communications, a voicemail equipment manufacturer. From 1987 to 1992, he was
employed as a consultant with McKinsey & Co. Mr. Linden received a B.A. in
Economics from the University of California Berkeley, and an M.B.A. from Harvard
Business School.
Charles R. Oppenheimer became the Company's Chief Operating Officer in
June 1998. From July 1997 to May 1998 Mr. Oppenheimer served as Senior Vice
President and General Manager, Products Division. From October 1994 to June 1997
Mr. Oppenheimer served as Vice President and General Manager, Macintosh
Division. He previously served as Vice President, Marketing of the Company
beginning in July 1993. From 1984 to July 1993, Mr. Oppenheimer was employed by
Apple Computer, most recently as Director of System Software Marketing and also
as manager of System Software Marketing and manager of Macintosh Product
Marketing. Mr. Oppenheimer received a B.S. in computer science from Union
College, and an M.B.A. from The Wharton School.
Marsha Raulston became the Company's Vice President, Customer
Satisfaction in January 1994 and, in January 1997, also assumed responsibility
for Human Resources. From October 1991 to January 1994, Ms. Raulston was Vice
President of Customer Service of Intuit, a personal finance software company.
From June 1987 to October 1991, Ms. Raulston served as Corporate Coordinator,
Quality of Work Life at American Airlines, Inc., and, prior to that, she worked
for the Citicorp Diners Club Inc., a credit card issuer. Ms. Raulston holds a
B.A. in psychology from Stephens College in Columbia, Missouri and an M.A. in
sociology from the University of Nottingham in Nottingham, England.
ITEM 2. PROPERTIES
The Company leases approximately 128,000 square feet of office space
for its headquarters in Sunnyvale, California. This facility accommodates
administration, finance, sales, marketing, customer satisfaction, engineering,
and research and development. The lease expires in April 2000 and the monthly
rent is approximately $106,000. Approximately 64,835 square feet of this office
space is subleased at a monthly income of $116,000.
The Company's manufacturing and distribution operation consists of a
23,940 square foot facility in Plano, Texas. The lease expires in December 2002
and monthly rent is approximately $9,975.
The Company also leases approximately 21,000 square feet of office
space in Marietta, Georgia. The lease expires in January 2000 and the monthly
rent is approximately $18,000. Approximately 16,000 square feet is subleased at
a monthly income of $13,000. Also, the Company leases sales office space at
other facilities, including in the United States, one in England and one in
Canada.
10
<PAGE> 11
Boca, as part of their purchase of the Modem Business, will assume only
the Company's lease in England. The Company believes the space to which it is
committed is adequate for its current needs and that additional space sufficient
to meet the Company's needs for the foreseeable future is available on
commercially reasonable terms. The Company's facilities are subject to a variety
of environmental regulations. The Company has incurred no significant expenses
to date related to complying with these regulations.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Company may be involved in
legal proceedings from time to time. As of the date of this submission, there
are no material proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following required information is filed as part of the report:
The Company has not paid cash dividends on its Common Stock. The
Company's Stock is traded over-the-counter and is quoted on the NASDAQ National
Market under the symbol "OWLD." Prior to the Company's name change, effective
June 18, 1998, the Company's Stock was traded under the symbol "GVIL." The
following table sets forth the range of high and low closing sale prices for the
Common Stock:
<TABLE>
<CAPTION>
Low Sales Price High Sales Price
- --------------------------------------------------------------------------------------
<S> <C> <C>
Fiscal 1998
First Quarter $ 1.44 $ 4.63
Second Quarter 1.69 3.56
Third Quarter 1.00 3.58
Fourth Quarter 0.91 2.72
Fiscal 1997
First Quarter $ 8.25 $ 18.25
Second Quarter 5.88 9.50
Third Quarter 3.00 9.25
Fourth Quarter 1.06 3.56
</TABLE>
On March 31, 1998, there were approximately 351 holders of record of
the Company's Common Stock. This number does not include beneficial owners of
the Common Stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information for the years ended
March 31, 1994 through March 31, 1998 is derived from the Company's consolidated
financial statements, which have been audited by the Company's independent
auditors. The information set forth below is qualified by reference to and
should be read in conjunction with the Financial Statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations," which are included elsewhere in this report.
<TABLE>
<CAPTION>
Fiscal years ended March 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
In thousands, except per share data
STATEMENTS OF OPERATIONS DATA (A) (B):
Net revenue $ 46,637 $ 80,021 $ 136,941 $ 90,174 $ 61,468
Income (loss) from operations 6,764 (3,239) 16,154 (42,029) (8,973)
Income (loss) from continuing operations 4,302 (6,206) 12,148 (35,852) (4,709)
Gain (loss) from discontinued operations (408) (1,466) (3,312) (4,029) 1,331
Net income (loss) $ 3,900 $ (7,672) $ 8,836 $ (39,881) $ (3,378)
Basic earnings per share:
Income (loss) from continuing operations $ (0.42) $ 0.73 $ (2.13) $ (0.28)
Net income (loss) $ (0.51) $ 0.53 $ (2.37) $ (0.20)
Shares used in computing income (loss) per share 14,633 16,529 16,844 17,006
Diluted earnings per share:
Income (loss) from continuing operations $ (0.42) $ 0.68 $ (2.13) $ (0.28)
Net income (loss) $ (0.51) $ 0.49 $ (2.37) $ (0.20)
Shares used in computing income (loss) per share 14,633 17,861 16,844 17,006
BALANCE SHEET DATA:
Working capital $ 27,011 $ 28,468 $ 36,402 $ (3,760) $ 233
Total assets 36,407 53,722 72,035 35,200 17,973
Total liabilities 7,269 17,587 24,204 27,850 13,628
Stockholder's equity $ 29,138 $ 36,135 $ 47,831 $ 7,350 $ 4,345
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
The selected consolidated financial data has been derived from, and should be
read in conjunction with, the related Consolidated Financial Statements.
(a) In the second quarter of fiscal 1997, the Company adopted a formal plan
to discontinue the operations of its enterprise network server operation
based in the United Kingdom (formerly, the Company's ISDN Division).
Therefore, operating results for the ISDN Division are classified as
discontinued operations on the Company's Consolidated Statements of
Operations, and prior periods have been restated accordingly.
(b) The Company adopted Statement of Financial Accounting Standards (SFAS)
No.128 "Earnings Per Share" which modifies the computation and
presentation of earnings per share (EPS) in a manner comparable to
international guidelines. The information presented above has been
restated to reflect the adoption of this standard.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
March 31, 1998. This report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ materially from those anticipated in forward-looking statements as a
result of the risks identified and the other cautionary disclosures set forth
below and elsewhere in this report.
OneWorld Systems, Inc. ("OneWorld Systems" or the "Company") (founded
in June 1989 as "Global Village Communication, Inc." and incorporated in
Delaware), develops and manufactures products that enhance and simplify wide
area data communications for the small and medium size office market. The
Company's recently introduced OneWorld 5000 communications servers are designed
to be versatile, easy-to-use, cost-effective and expandable solutions that
combine Internet access and routing, remote access, on-line service access, and
fax capabilities.
On March 31, 1998 the Company, then Global Village Communication, Inc.,
announced an agreement to sell its Modem Business to Boca Research, Inc.
("Boca") and unveiled a new corporate strategy focusing on wide-area data
communications for the small and medium size office. The transaction was closed
June 18, 1998, and the Company's name changed to OneWorld Systems, Inc. at that
time.
Historical Modem Business
During the fiscal year ended March 31, 1998, the Company was actively
engaged in the Modem Business, where it was a leader in the design, development
and marketing of easy-to-use integrated communications products for personal
computers with Windows, Macintosh, OS/2 and DOS operating systems.
Unit sales volumes and market share of Macintosh compatible computers
have continued to decline over the past year. As a result, during fiscal 1998
the Company's revenues and gross margin from its products for the Apple
Macintosh family of computers declined. In an attempt to offset this decline,
during the year, the Company introduced a number of modem products compatible
with personal computers utilizing the Windows operating system. However, the
Company was unable to gain sufficient market share in the Windows arena. During
fiscal 1998, a substantial majority of the Company's revenue continued to be
attributable to sales of its Apple Macintosh compatible modem products. This
continued dependence on this declining market, combined with the delay in
purchases of 56 Kbps modems resulting from confusion over an industry standard
and the Company's inability to significantly increase its market share of
Windows compatible modem products resulted in a deterioration in the Company's
financial condition.
The Company determined that remaining an independent modem company was
not financially viable, would require significant infusions of cash with no
assurance of a return to profitability, and that funding the business and the
development and launch of the Company's OneWorld 5000 communications servers
were not simultaneously achievable. This led to the announcement on March 31,
1998 that the Company would sell its Modem Business to Boca.
As a result of the sale to Boca, which was closed June 18, 1998, the
Company will no longer sell its individual use modems or other individual use
communications systems. These products represented a substantial majority of the
Company's revenue in fiscal 1998.
13
<PAGE> 14
New Focus on Communications Servers
The Company's primary source of revenue in the future will be from the
recently introduced OneWorld 5000 communications server product line. The
Company does not expect to be profitable in the short-term, nor can there be any
assurance that the Company will ever achieve profitability.
The Company's planned launch of its server products is dependent upon
the completion of the development of the product. However, the Company may have
difficulty resolving these issues, or any other issues that may arise, in a
timely manner, which could delay the planned launch of the new OneWorld Systems
communications server product line. Commercial acceptance of these products is
dependent on certain factors including the Company's sales and marketing
efforts, technical reviews by third parties, introductions of new technologies
or standards performance of the Company's distributors and suppliers and
announcements by the Company's competitors. Many of the Company's future
competitors have substantially greater financial, technical, sales, marketing
and other resources, as well as greater name recognition and a larger customer
base, than the Company. OneWorld products will have a significantly higher
selling price than many of the Company's current products and will require the
Company to expand its VAR channel. There can be no assurance that the Company
will be successful in establishing an effective distribution channel for its new
products. As a result, the Company believes that period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as an indication of future performance.
In the past, the industry in which the Company competed was subject to
short product life cycles. As a result, the Company traditionally experienced a
reduction in the average selling prices of its products as the time from product
introduction elapses. The Company was forced to institute significant price
reductions with respect to substantially all of its products. There can be no
assurances that similar pricing pressures will not lead to reductions in average
selling prices of the Company's new servers.
The Company intends to ship products within a short period after
receipt of an order, consequently, the Company does not expect to have a
material backlog of unfilled orders, and revenues in any quarter will be
substantially dependent on orders booked in that quarter. The Company's expense
levels are based in part on its expectations as to future revenues. Therefore,
the Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. Accordingly, any significant shortfall of
demand in relation to the Company's expectations or any material delay of
customer orders would have an almost immediate adverse impact on the Company's
results of operations and liquidity. Fluctuations in operating results may also
result in volatility in the price of the Company's Common Stock.
In addition, announcements by the Company of new products with the
potential to replace current products may cause customers to defer purchasing
the Company's current products which could have a material adverse effect on the
Company's results of operations. As a result of changing technology and market
factors, the Company is subject to the risk that its inventories may rapidly
become obsolete or that the Company may carry quantities of certain products
that exceed current or projected demand. While the Company has written down
inventory that it considers to be excess or obsolete, there can be no assurance
that the Company's write downs will be adequate, and a material increase in such
write-downs and returns over historical rates would have a material adverse
effect on the Company's results of operations and working capital. There can be
no assurance that the Company will be successful in developing new products or
enhancing its current products on a timely basis, or that such new products or
product enhancements will achieve market acceptance.
NET REVENUE
On June 18, 1998, the Company sold its Modem Business to Boca Research.
The Modem Business accounted for substantially all of the Company's revenue
during the last three fiscal years. Consequently, the comparisons below should
not be relied upon as predictors of future performance. Net revenue includes
revenue from gross shipments, licenses and royalties, less reserves for returns
and allowances. Net revenue decreased 31.8% to $61.5 million in fiscal 1998 as
compared to $90.2 million in fiscal 1997 and $137.0 million in fiscal 1996. The
decrease in net revenue for the 1998 fiscal year as compared to the 1997 fiscal
year is primarily attributable to decreased shipments of the Company's TelePort
and PC Card notebook (including PowerPort) modem products. Shipments of these
products were adversely affected by the continued weakness in the market for
Apple Computer products, and end-user confusion surrounding the technology
transition to 56 Kbps modems. Lower unit shipments of Apple computers reduced
demand for the Company's products. In addition, the Company's OEM revenue from
Apple was lower in fiscal 1998 than in fiscal 1997. The fiscal 1997 decrease in
net revenue, as compared to fiscal 1996, was primarily attributable to Apple
Computer's repair program for the Macintosh PowerBook 5300 and 190 models in
that year and reduced shipments of other Macintosh products. The repair program
significantly reduced the number of Apple computers available for the Company's
products.
14
<PAGE> 15
Aggregate returns and allowances were approximated 10%, 18% and 6% of
gross revenue for fiscal 1998, 1997 and 1996, respectively. The reduction in the
fiscal 1998 rate is primarily due to an unusually high rate in fiscal 1997
related to returns and reserves associated with several slow moving products.
Revenue reserves and allowances are established for estimated future returns due
to stock balancing and discontinued and non-saleable products based on the
Company's past experience and internal forecasts. There can be no assurance that
the Company's historical experience regarding returns and allowances will
continue or that its projections will prove accurate. If the Company experiences
returns in excess of its reserves, the Company's results of operations could be
materially, adversely effected.
International net revenue decreased to $9.3 million or 15% of net
revenues in fiscal 1998 from $13.3 million or 15% of net revenue in fiscal 1997
and $25.7 million or 19% of net revenues in fiscal 1996. The fiscal 1998
decrease in international revenue is due primarily to continued weakness in the
market for Apple Computer products and the slow transition to 56 Kbps modems.
The fiscal 1997 decrease was primarily attributable to the decrease in the
Company's sales in the Asia region to Apple Japan.
There can be no assurance that the Company will be able to attain
international demand for the its new OneWorld 5000 communications server
products or that the Company's distributors will be able to effectively meet
that demand. Risks inherent in the Company's international business activities
generally include unexpected changes in regulatory requirements, tariffs and
other trade barriers, costs and risks of localizing products for foreign
countries, longer accounts receivable payment cycles, difficulties in managing
international operations and distributors, potentially adverse tax consequences,
repatriation of earnings, the burdens of complying with a wide variety of
foreign laws and changes in demand resulting from fluctuations in exchange
rates. In addition, the laws of certain foreign countries do not provide
protection for the Company's intellectual property to the same extent as do the
laws of the United States.
GROSS PROFIT
On June 18, 1998, the Company sold its Modem Business to Boca Research.
The Modem Business accounted for substantially all of the Company's revenue
during the last three fiscal years. Consequently, the comparisons below should
not be relied upon as predictors of future performance. Cost of revenue
primarily consists of cost of materials, contract manufacturing costs,
manufacturing overhead expenses, royalty payments, and warranty expenses. The
Company's gross profit as a percentage of net revenue increased to 31% in fiscal
1998 from 11% in fiscal 1997. Gross profit as a percentage of net revenue
decreased in fiscal 1997 from 43% in fiscal 1996. The gross profit increase in
fiscal 1998 was primarily attributable to significant inventory reserves for
slow moving products and inventory write-downs recorded in fiscal 1997. The
decline in gross profit in 1997 was primarily attributable to these reserves and
write-downs. Gross profit margins are likely to fluctuate as a result of the
sales mix between higher and lower margin products, the nature and amount of
licensing and royalty income, and changes in distribution channels, as well as
changes in component and production costs, price reductions and reserve
requirements.
RESEARCH AND DEVELOPMENT
On June 18, 1998, the Company sold its Modem Business to Boca Research.
The Modem Business accounted for a significant portion of the Company's expense
structure during the last three fiscal years. Consequently, the comparisons
below should not be relied upon as predictors of future performance. The
Company's research and development ("R&D") expenses decreased to $9.7 million in
fiscal 1998 from $12.0 million in fiscal 1997 and $14.6 million in fiscal 1996.
The decline in fiscal 1998 is primarily the result of a reduction in personnel
costs and increased control of discretionary expenditures. The decrease in
fiscal 1997 was the result of the elimination of R&D expenses associated with
the divestiture of the Company's GlobalCenter subsidiary in that year. Research
and development expenses as a percentage of net revenue were 16%, 13% and 11% in
fiscal 1998, 1997, and 1996, respectively. Development costs incurred in the
research and development of new software products and enhancements to existing
software products are expensed as incurred until technological feasibility has
been established, in compliance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Software to be Sold, Leased, or Otherwise
Marketed." Historically, software development has been substantially completed
concurrently with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized to date.
15
<PAGE> 16
MARKETING AND SALES
On June 18, 1998, the Company sold its Modem Business to Boca Research.
The Modem Business accounted for a significant portion of the Company's expense
structure during the last three fiscal years. Consequently, the comparisons
below should not be relied upon as predictors of future performance. The
Company's marketing and sales expenses decreased to $13.9 million in fiscal 1998
from $28.9 million in fiscal 1997 and increased from $23.0 million in fiscal
1996. Marketing and sales expenses were 23%, 32%, and 17% of net revenue in
fiscal 1998, 1997, and 1996, respectively. Fiscal 1998 marketing and sales costs
declined primarily as a result of reduced advertising and promotion expense and
a reduction in personnel costs. Fiscal 1997 expenses increased, as compared to
fiscal 1996, due to advertising and promotion costs associated with new products
introduced in that year.
GENERAL AND ADMINISTRATIVE
On June 18, 1998, the Company sold its Modem Business to Boca Research.
The Modem Business accounted for a significant portion of the Company's expense
structure during the last three fiscal years. Consequently, the comparisons
below should not be relied upon as predictors of future performance. General and
administrative expenses decreased to $4.4 million in fiscal 1998 from $7.4
million in fiscal 1997, and increased in fiscal 1997 from $5.7 million in fiscal
1996. The decrease in fiscal 1998 expenditures is primarily due to a reduction
in legal, bad debt reserve, telecommunications and certain discretionary
expenditures. The increase in general and administrative expense in fiscal 1997
was primarily due to legal expenses associated with the settlement of two
lawsuits, additional bad debt reserves and other general operating expenses.
General and administrative expenses as a percentage of net revenue were 7%, 8%,
and 4% in fiscal 1998, 1997, and 1996, respectively.
RESTRUCTURING COSTS
On March 31, 1998 the Company announced an agreement to sell its Modem
Business to Boca Research and its intent to refocus the Company around a new
family of server products. The Company recorded a net restructuring charge of
$240,000 to provide for severance costs associated with a reduction in force of
approximately 25 employees. In December 1996, the Company announced a
restructuring plan to streamline its operations, reduce its workforce and enable
the Company to improve its operating results. The Company recorded a
restructuring charge of $1.3 million related primarily to severance costs,
write-offs of fixed assets and lease abandonments.
INVESTMENTS - RELATED GAINS AND LOSSES
AIRMEDIA LIVE, INC. In the second quarter of fiscal 1997, the Company
completed an equity investment in AirMedia, Inc. ("AirMedia") of $4.1 million
The Company accounted for its investment in AirMedia using the cost method of
accounting. In July 1997, the Company sold substantially all its investment in
AirMedia to an existing AirMedia shareholder for approximately $2.0 million in
cash. As a result, the Company recorded a loss of $2.1 million in the second
quarter of fiscal 1998.
GLOBALCENTER, INC. In April 1996, the Company announced that it had
incorporated its Internet Services Division as a standalone business called
GlobalCenter, Inc. At the same time, the Company announced that UUNET
Technologies, Inc. had acquired a 19.9% equity interest in GlobalCenter. At that
time, the Company no longer had the ability to exercise significant control over
GlobalCenter. Accordingly, the Company no longer consolidated the results of
GlobalCenter and began to account for its investment using the equity method of
accounting. As a result of the refinancing and operating performance of
GlobalCenter during the first quarter of fiscal 1997, the Company recorded an
investment loss of $2.2 million, and reduced the book value of its investment to
zero. In December 1996, GlobalCenter entered into a definitive merger agreement
whereby GlobalCenter and Phoenix-based Primenet Services for the Internet, Inc.
merged, reducing the Company's percentage ownership below 10%. Accordingly, in
the third quarter of fiscal 1997, the Company began accounting for its
investment in GlobalCenter using the cost method of accounting. In September
1997, the Company agreed to sell its remaining equity stake in GlobalCenter to
an existing shareholder of GlobalCenter for approximately $3.7 million in cash.
As a result the Company recorded a gain of $3.7 million in the second quarter of
fiscal 1998.
OTHER INCOME
The Company's net other income increased to $2.6 million in fiscal 1998
from $800,000 in fiscal 1997. In fiscal 1997, other income decreased to $800,000
from $1.2 million in fiscal 1996. The increase in other income in fiscal 1998 is
due to a gain of $2.6 million on repayment of a loan made by the Company which
had previously been fully reserved.
16
<PAGE> 17
The dollar decrease in fiscal 1997 is the result of a decrease in interest
income associated with lower cash balances and an increase in interest expense
related to line of credit borrowings at the time.
PROVISION FOR INCOME TAXES
The combined federal, state and foreign effective income tax rates for
continuing operations were 0% in fiscal 1998, 13% in fiscal 1997, and 30% in
fiscal 1996. The fiscal 1998 and 1997 rates differ from the combined statutory
rates primarily due to the establishment of a full valuation allowance against
the deferred tax assets. The Company's increased foreign activities during
fiscal 1996 was the primary cause of the favorable differential from the
combined statutory rates for that period. In addition, the rates also differ
from the combined statutory rates in effect during these periods as a result of
tax exempt interest, available research credits, and in fiscal 1996, the
utilization of foreign sales corporation tax benefits.
DISCONTINUED OPERATIONS
In the second quarter of fiscal 1997, the Company adopted a formal plan
to discontinue its enterprise network server operation based in the United
Kingdom (formerly, the Company's ISDN division). The disposition of the division
has been accounted for as a discontinued operation in accordance with Accounting
Principles Board (APB) Opinion No. 30 and prior period consolidated financial
statements have been restated to reflect the discontinuation of the enterprise
network server operation. The loss from discontinued operations of $1.8 million
and $3.3 million in fiscal years 1997 and 1996, respectively, represents the
operation's operating losses, with no associated tax benefits. The gain
from discontinued operations of $1.3 million in fiscal 1998 (no income
tax effect) is the result of the release of a portion of a reserve established
for contingent liabilities associated with the disposition of the operation,
based on the Company's determination that those particular contingencies had
been resolved. The loss on disposal of discontinued operations of $2.2 million
in fiscal 1997 (no income tax benefit) represents the cost of disposal of the
operation, net of $3.8 million of cash received from the sale of the operation's
assets and a $2.1 million loss from operations from the measurement date to the
disposal date.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investments totaled $3.1 million at
March 31, 1998, representing 17% of total assets. Working capital was $0.2
million at March 31, 1998, and a negative $3.8 million at March 31, 1997, an
increase of $4.0 million. The increase in working capital was primarily due to
the Company's sale of its investments in AirMedia, Inc. and Global Center, Inc.
and the repayment of a loan.
Since its prior fiscal year end, the Company has used approximately
$10.7 million in cash to finance both its continuing and discontinued
operations. At March 31, 1998, the Company's principal source of liquidity was
$3.1 million in cash and an unused line of credit which allows the Company to
borrow up to the lower of $5.0 million or 60% of eligible accounts receivable.
At March 31, 1998, the Company had no borrowings against this bank line of
credit. The Company does not expect fiscal 1999 capital expenditures to exceed
historical levels.
On March 31, 1998 the Company announced, and on June 18, 1998 closed,
the sale of its Modem Business to Boca Research, Inc. At closing, the Company
received $4.0 million in cash and a note receivable, bearing no interest, due in
two installments of $3.0 million each on September 30, 1998 and December 31,
1998. In conjunction with the closing of the transaction, the Company's line of
credit was suspended as the sale included most of the assets securing the line.
The Company is currently negotiating a new line of credit.
The transaction with Boca included the sale of Company products which
accounted for substantially all of the Company's revenue in fiscal 1998. The
Company's primary source of revenue in the future will be its recently
introduced OneWorld 5000 communications server product family. During the past
year, the Company has experienced significant negative cash flows. The Company
does not expect to be profitable in the short-term and expects to continue to
incur significant negative cash flows. However, the Company currently believes
that its existing cash, proceeds from the sale of the Modem Business to Boca,
including the payment of notes received, and revenue for the OneWorld 5000
products should enable the Company to meet its cash requirements for at least
the next twelve months. The preceding sentence is a forward-looking statement,
and actual results could differ materially from those indicated. A delay in
payment or nonpayment of the notes received from Boca, failure to meet the
Company's expectations for revenue and gross profit from its new products,
17
<PAGE> 18
operating expenses in excess of expectations, or other unforeseen expenditures
would have a material adverse impact on the Company's financial condition. The
Company may be required to issue additional debt or equity securities which
could substantially dilute the ownership of existing stockholders. Any shortfall
in funding could result in the Company having to curtail the introduction or
development of new products and its entry into new markets, any of which could
have a material adverse affect on the Company's business, financial condition
and results of operations.
See Note 11 to the Consolidated Financial Statements for an additional
discussion of the impact of the sale of the Modem Business on the Company's
financial position.
YEAR 2000 ISSUES
The Company is aware of the potential issues facing the Company, its
vendors and its customers with respect to the ability for computer software to
function properly in the year 2000. The Company has assessed the impact on its
corporate information system for Year 2000 issues and has a plan to adopt a new
information system that will accommodate dates after 1999. The Company believes
that after conversion to the new software system, the Year 2000 issue will not
pose significant operational problems for its computer system. The financial
impact of making the required systems changes is not expected to be material to
the Company's financial position, results of operation or cash flows. The
Company has been contemplating a decision to move to another information system
for other business reasons and will resolve any Year 2000 issues by making the
conversion.
Additionally, the Company is in the process of reviewing Year 2000
issues with its customers, suppliers and other business partners. There can be
no assurance made at this time, that all the systems of its customers, suppliers
and other business partners will be Year 2000 compliant on a timely basis. If
said systems are not compliant, it could have a material adverse impact on the
Company.
The Company has commenced efforts to ensure that all products that the
Company produces will be fully Year 2000 compliant. While this evaluation is not
yet complete, the Company believes that any costs incurred to bring its products
into compliance will not have a material impact on its financial position,
results of operation or cash flows. There can be no assurances, however, that
non-year 2000 compliant products would not result in the loss of or delay in
market acceptance of the Company's products.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These Statements establish standards for reporting and
displaying comprehensive income and its components; and standards for reporting
financial data of operating segments of enterprises in financial statements. The
adoption of theses Statements is expected to have no impact on the Company's
consolidated financial position, results of operations, or business practices.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(1) CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report....................................................................................20
Consolidated Balance Sheets as of March 31, 1998 and 1997.......................................................21
Consolidated Statements Of Operations for the three years ended March 31, 1998..................................22
Consolidated Statements Of Stockholders' Equity for the three years ended March 31, 1998........................23
Consolidated Statements Of Cash Flow for the three years ended March 31, 1998...................................24
Notes To Consolidated Financial Statements......................................................................25
(2) CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES FOR THE THREE YEARS ENDED MARCH 31, 1998
Schedule II - Consolidated Valuation And Qualifying Accounts....................................................37
</TABLE>
Schedules other than those listed above have been omitted since they are either
not applicable, not required or the information is included elsewhere herein.
19
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
OneWorld Systems, Inc.
We have audited the consolidated financial statements of OneWorld Systems, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of OneWorld Systems,
Inc. and subsidiaries as of March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Mountain View, California
May 18, 1998, except
as to Note 10 which is
as of June 18, 1998
20
<PAGE> 21
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
----------------------
(In thousands, except share data) 1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,097 $ 9,687
Accounts receivable, net 8,160 4,324
Inventories, net 2,351 2,071
Income tax receivable -- 7,665
Other current assets 253 343
-------- --------
Total current assets 13,861 24,090
Property and equipment, net 4,049 6,929
Investment in AirMedia, Inc. -- 4,043
Other assets 63 138
-------- --------
Total assets $ 17,973 $ 35,200
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,625 $ 15,971
Line of credit borrowings -- 4,241
Accrued and other liabilities 6,003 7,638
-------- --------
Total current liabilities 13,628 27,850
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $0.001 par value; 30,000,000 shares authorized;
17,162,771 and 16,929,690 shares issued and outstanding 17 17
Additional paid-in capital 43,246 42,873
Accumulated deficit (38,918) (35,540)
-------- --------
Total stockholders' equity 4,345 7,350
-------- --------
Total liabilities and stockholders' equity $ 17,973 $ 35,200
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
21
<PAGE> 22
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------------
(In thousands, except per share data) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net revenue $ 61,468 $ 90,174 $ 136,941
Cost of revenue 42,204 80,439 77,583
--------- --------- ---------
Gross profit 19,264 9,735 59,358
--------- --------- ---------
Operating expenses:
Research and development 9,727 12,008 14,550
Marketing and sales 13,900 28,900 22,976
General and administrative 4,370 7,367 5,678
Restructuring costs 240 1,298 --
Loss from investment in GlobalCenter, Inc. -- 2,191 --
--------- --------- ---------
Total operating expenses 28,237 51,764 43,204
--------- --------- ---------
Income (loss) from operations (8,973) (42,029) 16,154
--------- --------- ---------
Other income (expense), net:
Gain on sale of investment in GlobalCenter, Inc. 3,691 -- --
Loss on sale of investment in AirMedia, Inc. (2,074) -- --
Interest income 87 411 1,000
Interest expense (154) (248) --
Repayment of loan previously reserved 2,600 -- --
Other income 114 613 154
--------- --------- ---------
Total other income, net 4,264 776 1,154
--------- --------- ---------
Income (loss) before income taxes (4,709) (41,253) 17,308
Provision for income taxes (benefit) -- (5,401) 5,160
--------- --------- ---------
Income (loss) from continuing operations (4,709) (35,852) 12,148
--------- --------- ---------
Discontinued operations:
Loss from discontinued operations -- (1,822) (3,312)
Gain (loss) on disposal of discontinued operations 1,331 (2,207) --
--------- --------- ---------
Income (loss) from discontinued operations 1,331 (4,029) (3,312)
--------- --------- ---------
Net income (loss) $ (3,378) $ (39,881) $ 8,836
--------- --------- ---------
Basic per share data:
Income (loss) per share from continuing operations $ (0.28) $ (2.13) $ 0.73
Income (loss) per share from discontinued operations 0.08 (0.24) (0.20)
--------- --------- ---------
Net income (loss) per share $ (0.20) $ (2.37) $ 0.53
--------- --------- ---------
Diluted per share data:
Income (loss) per share from continuing operations $ (0.28) $ (2.13) $ 0.68
Income (loss) per share from discontinued operations 0.08 (0.24) (0.19)
--------- --------- ---------
Net income (loss) per share $ (0.20) $ (2.37) $ 0.49
--------- --------- ---------
Shares used in basic per share computations 17,006 16,844 16,529
Dilutive effect of stock options -- -- 1,332
--------- --------- ---------
Shares used in diluted per share computations 17,006 16,844 17,861
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
22
<PAGE> 23
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------
(In thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
COMMON STOCK AND PAID-IN CAPITAL
Balance, beginning of year $ 42,890 $ 43,243 $ 40,508
Exercise of stock options 2 575 1,548
Shares issued under Employee Stock Purchase Plan 140 367 539
Stock issuance to settle compensation liability 231 -- --
Treasury shares acquired -- (1,295) (984)
Tax benefits related to stock plans -- -- 1,632
-------- -------- --------
Balance, end of year $ 43,263 $ 42,890 $ 43,243
-------- -------- --------
CUMULATIVE TRANSLATION ADJUSTMENT
Balance, beginning of year $ -- $ 247 $ 122
Foreign currency translation adjustment -- (247) 125
-------- -------- --------
Balance, end of year $ -- $ -- $ 247
-------- -------- --------
RETAINED EARNINGS (ACCUMULATED DEFICIT)
Balance, beginning of year $(35,540) $ 4,341 $ (4,495)
Net income (loss) (3,378) (39,881) 8,836
-------- -------- --------
Balance, end of year $(38,918) $(35,540) $ 4,341
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY $ 4,345 $ 7,350 $ 47,831
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
23
<PAGE> 24
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------
(In thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (3,378) $(39,881) $ 8,836
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,206 3,782 2,879
Loss on disposal of property and equipment 11 220 --
Deferred income taxes -- 3,234 --
(Gain) loss on investments (4,217) 2,191 --
Tax benefits related to stock plans -- -- 1,632
Changes in operating assets and liabilities:
Accounts receivable, net (3,836) 7,913 (1,059)
Inventories (280) 3,627 (1,881)
Income taxes 7,665 (7,665) --
Other current assets 90 1,474 (685)
Accounts payable (8,346) (1,462) 5,968
Accrued and other liabilities (1,578) (174) 742
Income taxes payable -- (335) (1,505)
-------- -------- --------
Net cash provided by (used in) operating activities of:
Continuing operations (10,663) (27,076) 14,927
Discontinued operations (57) 2,977 1,228
-------- -------- --------
Net cash provided by (used in) operating activities (10,720) (24,099) 16,155
-------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sale of (investment in) GlobalCenter, Inc. 3,691 (1,548) --
Repayment of loan from GlobalCenter, Inc. 2,600 -- --
Proceeds from sale of (investment in) AirMedia, Inc. 1,969 (4,043) --
Purchases of property and equipment (450) (1,802) (6,514)
Proceeds from sale of property and equipment 113 71 --
Other assets 75 (386) 93
Purchases of short-term investments -- (23,217) (78,747)
Proceeds from sales and maturities of short-term investments -- 45,036 77,897
-------- -------- --------
Net cash provided by (used in) investing activities 7,998 14,111 (7,271)
-------- -------- --------
FINANCING ACTIVITIES:
Borrowings under line of credit 2,750 8,000 --
Repayments under line of credit (6,991) (3,759) --
Proceeds from issuance of Common Stock, net 373 942 2,086
Repurchases of Common Stock -- (1,161) (984)
-------- -------- --------
Net cash provided by financing activities (3,868) 4,022 1,102
-------- -------- --------
Effect of foreign currency exchange rate changes -- (247) 125
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (6,590) (6,213) 10,111
-------- -------- --------
Cash and cash equivalents at beginning of year 9,687 15,900 5,789
-------- -------- --------
Cash and cash equivalents at end of year $ 3,097 $ 9,687 $ 15,900
-------- -------- --------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 198 $ 211 $ 100
Income taxes $ -- $ -- $ 5,033
Non-cash investing and financing activities:
Non-cash net assets contributed to GlobalCenter, Inc. $ -- $ 643 $ --
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
24
<PAGE> 25
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. OneWorld Systems, Inc. ("OneWorld Systems" or the
"Company") (founded in June 1989 as "Global Village Communication, Inc." and
incorporated in Delaware), develops and manufactures products that enhance and
simplify wide area data communications for the small and medium size office
market. The Company's recently introduced OneWorld 5000 communications servers
are designed to be versatile, easy-to-use, cost-effective and expandable
solutions that combine Internet access and routing, remote access on-line
service access, and fax capabilities.
PRINCIPLES OF CONSOLIDATION. The accompanying Consolidated Financial Statements
include the accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES. The preparation of consolidated 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 disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. Cash and cash equivalents
consist of cash and highly liquid investments such as money market funds,
commercial paper, and U.S. Treasury Bills with maturities of three months or
less at the time of purchase.
INVENTORIES. Inventories are stated at the lower of cost or market. Costs are
calculated using standard cost, which approximates the lower of actual cost
(first-in, first-out method) or market.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the respective assets,
generally three to five years. Leasehold improvements are amortized over the
lesser of the estimated useful lives of the improvements or the lease term,
generally five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of cash, cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair values due to the short maturity of those instruments. The
carrying amounts of short-term debt approximates fair value due to the
instrument's variable rate structure.
PRODUCT WARRANTY. The Company warrants its products for up to five years from
date of shipment. A provision for the estimated future costs of warranty repair
or replacement is provided at the time of sale.
REVENUE RECOGNITION. Revenue is generally recognized at the time of shipment.
Revenue from sales to distributors and dealers are subject to agreements
allowing limited rights of return and exchange, and price protection.
Accordingly, the Company provides reserves for estimated future returns,
exchanges, and price protection credits in the same period as related revenue.
Revenue from products licensed to original equipment manufacturers (OEM's) is
recognized when sales to end users are reported to the Company.
The Company's revenue recognition policies comply with the provisions of the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 97-2, "Software Revenue Recognition."
25
<PAGE> 26
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SOFTWARE DEVELOPMENT COSTS. Development costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. Through March 31, 1998, software development has been substantially
completed concurrent with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized to date.
INCOME TAXES. The Company accounts for income taxes under the asset and
liability method of accounting. Under the asset and liability method, deferred
tax assets and liabilities are recognized based on the expected future tax
consequences of events that have been recognized in the Company's consolidated
financial statements or tax returns.
ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation" effective for the fiscal year ended
March 31, 1997. SFAS No. 123 establishes a fair market value method of
accounting for stock-based employee compensation plans. As allowed under the
provisions of SFAS No. 123, the Company chose to continue the intrinsic value
based method for stock-based employee compensation plans and provide pro forma
disclosures of results and results per share as if the accounting provisions of
SFAS No. 123 has been adopted. As the Company has elected to adopted only
disclosure requirements of SFAS No. 123.
NET INCOME (LOSS) PER SHARE. Net income (loss) per share data has been computed
using net income (loss), the weighted average number of shares of Common Stock,
and common equivalent shares from stock options outstanding (when dilutive using
the treasury stock method). The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" effective December
28, 1997. SFAS requires presentation of basic per share and, for companies with
complex capital structures, diluted per share data. Basic earnings per share
("EPS") excludes dilution and is computed by dividing net income (loss)
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS includes dilution and net income per
share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding during the period. For the years ended
March 31, 1998 and March 31, 1997, "in-the-money" dilutive options of
approximately 820,000 and 2.3 million respectively, were not included in the
calculation of diluted EPS as they were considered antidilutive. The Company has
restated income (loss) per share for all periods presented in the accompanying
consolidated financial statements to reflect net income (loss) per share on both
a basic and a diluted basis.
FOREIGN CURRENCY TRANSLATION. All assets and liabilities denominated in foreign
currencies are translated at the exchange rate on the balance sheet date.
Revenues, costs, and expenses are translated at average rates of exchange
prevailing during the period. Translation adjustments are accumulated as a
separate component of stockholders' equity. Gains and losses resulting from
foreign currency transactions and realized translation adjustments are included
in the consolidated statements of operations.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. The
Company reviews long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds its fair value.
Further, long-lived assets and certain identifiable intangibles that are to be
disposed of, which are not covered by Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations -- Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," are required to be reported at the lower of
the asset's carrying amount or its fair value less cost to sell. To date the
Company has made no such adjustments.
RECLASSIFICATIONS. Certain amounts in prior years' consolidated financial
statements have been reclassified to conform with the fiscal 1998 consolidated
financial statement presentation.
26
<PAGE> 27
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
March 31,
----------------------
(In thousands) 1998 1997
-------- --------
<S> <C> <C>
Accounts receivable:
Trade accounts receivable $ 9,470 $ 10,712
Less allowance for returns and doubtful accounts (1,310) (6,388)
-------- --------
Net accounts receivable $ 8,160 $ 4,324
-------- --------
Inventories:
Purchased parts $ -- $ 199
Work in process -- 369
Finished goods 2,351 1,503
-------- --------
Total inventories $ 2,351 $ 2,071
-------- --------
Property and equipment:
Computer, test, and production equipment $ 10,229 $ 9,847
Furniture and fixtures 2,726 3,193
Leasehold improvements 2,428 2,428
-------- --------
15,383 15,468
Less accumulated depreciation and amortization (11,334) (8,539)
-------- --------
Total property and equipment, net $ 4,049 $ 6,929
-------- --------
Accrued and other liabilities:
Warranty and other product related obligations $ 2,859 $ 2,090
Accrued compensation and benefits 766 740
Other 2,378 4,808
-------- --------
Total accrued and other liabilities $ 6,003 $ 7,638
======== ========
</TABLE>
NOTE 3. ACQUISITIONS AND DIVESTITURES
AIRMEDIA LIVE, INC. In the second quarter of fiscal 1997, the Company completed
an equity investment in AirMedia, Inc. ("AirMedia") of $4.1 million The Company
accounted for its investment in AirMedia using the cost method of accounting. In
July 1997, the Company sold its investment in AirMedia to an existing AirMedia
shareholder for approximately $2.0 million in cash. As a result, the Company
recorded a loss of $2.1 million in the second quarter of fiscal 1998.
GLOBALCENTER, INC. In April 1996, the Company announced that it had incorporated
its Internet Services Division as a standalone business called GlobalCenter,
Inc. ("GlobalCenter"). At the same time, the Company announced that UUNET
Technologies, Inc. had acquired a 19.9% equity interest in GlobalCenter. At that
time, the Company no longer had the ability to exercise significant control over
GlobalCenter. Accordingly, the Company no longer consolidated the results of
GlobalCenter and began to account for its investment using the equity method of
accounting. As a result of the refinancing and operating performance of
GlobalCenter during the first quarter of fiscal 1997, the Company recorded an
investment loss of $2.2 million, and reduced the book value of its investment to
zero. In December 1996, GlobalCenter entered into a definitive merger agreement
whereby GlobalCenter and Phoenix-based Primenet Services for the Internet, Inc.
merged reducing the Company's percentage ownership below 10%. Accordingly, in
the third quarter of fiscal 1997, the Company began accounting for its
investment in GlobalCenter using the cost method of accounting. In September
1997, the Company agreed to sell its remaining equity stake in GlobalCenter to
an existing shareholder of GlobalCenter for approximately $3.7 million in cash.
As a result the Company recorded a gain of $3.7 million in the second quarter of
fiscal 1998. In addition, during the course of the year the Company was repaid
a loan (plus interest due) of $2.6 million from GlobalCenter which had been
previously reserved against.
KNX LIMITED. In January 1996, the Company acquired KNX Limited, a leading
UK-based provider of ISDN remote access products. The transaction was effected
through the exchange of shares of Common Stock of the Company for all
outstanding shares of KNX Limited. In total, the Company issued, or reserved for
issuance on exercise of options, 1,365,951 shares of the Company's Common Stock.
The acquisition of KNX was accounted for using the pooling-of-interests method
of accounting.
27
<PAGE> 28
In the second quarter of fiscal 1997, the Company adopted a formal plan to
discontinue its enterprise network server operation based in the United Kingdom
(formerly, the Company's ISDN division). The disposition of the division has
been accounted for as a discontinued operation in accordance with Accounting
Principles Board (APB) Opinion No. 30 and prior period consolidated financial
statements have been restated to reflect the discontinuation of the enterprise
network server operation. The loss from discontinued operations of $1.8 million
and $3.3 million in fiscal years 1997 and 1996, respectively, represents the
operation's operating losses, with no associated tax benefits. The gain from
discontinued operations of $1.3 million in fiscal 1998 (net income tax effect of
zero) is the result of the release of a portion of a reserve established for
contingent liabilities associated with the disposition of the operation based on
the Company's determination that some of these contingencies had been resolved.
The loss on disposal of discontinued operations of $2.2 million in fiscal 1997
(net income tax effect of zero) represents the estimated cost of disposal of the
operation, net of $3.8 million of cash received from the sale of the operation's
assets and a $2.1 million loss from operations from the measurement date to the
disposal date.
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LINE OF CREDIT
As of March 31, 1998, the Company's borrowings under its line of credit were
subject to the terms of a forbearance agreement it negotiated with its bank in
April 1997 which expires in April 1999. Borrowings under the forbearance
agreement bear interest at the bank's prime rate plus 2.5% (11.0% at March 31,
1998 and 13.5% at March 31, 1997.) Total borrowings are limited to the lesser of
$5,000,000 or 60% of eligible accounts receivable, as defined, and are
collateralized by all of the Company's assets. The agreement contains various
covenants and restrictions, including restrictions on the Company's ability to
pay dividends or effect mergers or acquisitions. As of March 31, 1998, there
were no borrowings under this line of credit and the Company was in compliance
with all covenants and restrictions (see Note 10).
NOTE 5. COMMITMENTS AND CONTINGENCIES
Lease Commitments. The Company leases facilities under noncancelable operating
leases expiring in January 2000, April 2000, and December 2002. The lease
expiring in April 2000 has a renewal option for an additional five-year term.
Space associated with this lease has been subleased for various periods through
April 2000.
FUTURE MINIMUM LEASE PAYMENTS AS OF MARCH 31, 1998 ARE:
<TABLE>
<CAPTION>
Sublease Sublease
(In Thousands) Lease Payments Income Payments
-------------- ---------- --------
Fiscal year ending March 31,
<S> <C> <C> <C>
1999 $ 1,643 $ (1,316) $ 327
2000 1,644 (1,039) 605
2001 176 - 176
Thereafter 90 - 90
------- -------- -------
Total future minimum lease commitments $ 3,553 $ (2,355) $ 1,198
======= ======== =======
</TABLE>
Rent expense, net of sublease income, was approximately $0.5 million, $1.2
million, and $1.4 million for the fiscal years ended March 31, 1998, 1997, and
1996, respectively.
LEGAL MATTERS. The Company is a party to certain lawsuits and claims arising out
of the normal conduct of its business. These claims generally relate to
commercial transactions, patent infringements, and employment matters. While the
ultimate resolution of such suits or other proceedings against the Company
cannot be predicted with certainty, management expects that these matters will
not have a material adverse effect on the financial position or results of
operations of the Company.
NOTE 6. STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK. As of March 31, 1998, the number of Common and
Preferred Stock shares authorized was 30,000,000 and 5,000,000, respectively.
The classes, series, rights, and preferences of the Preferred Stock may be
established by the Company's Board of Directors.
On January 5, 1996, the Company issued approximately 1,400,000 shares of Common
Stock as part of the consideration for the acquisition of KNX Limited (see Note
3).
On January 19, 1998, the Company issued approximately 142,000 shares of Common
Stock as settlement of a compensation liability incurred upon the acquisition of
KNX Limited (see Note 3).
COMMON STOCK ISSUED AND OUTSTANDING.
<TABLE>
<CAPTION>
March 31,
-----------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Shares issued and outstanding beginning of period 16,929,690 16,744,837 16,167,429
Exercise of stock options 15,702 288,967 583,711
Shares issued under employee stock purchase plan 74,987 74,386 63,229
Treasury shares acquired -- (178,500) (69,532)
Shares issued to settle compensation liability 142,392 -- --
---------- ---------- ----------
Shares issued and outstanding end of period 17,162,771 16,929,690 16,744,837
========== ========== ==========
</TABLE>
28
<PAGE> 29
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION PLAN. The Company has adopted a stock option plan (the "Plan")
under which incentive stock options may be granted to employees and officers,
and non-qualified (supplemental) stock options may be granted to employees,
officers, directors, and consultants to purchase an aggregate of 5,600,000
shares of Common Stock. Options may be granted at an exercise price of at least
100% of the fair market value of Common Stock at the date of grant, or for
supplemental options, at an exercise price not less than 85% of the fair market
value of such stock at the date of grant. All options expire no later than 10
years after the date of grant and generally vest over 4 or 5 years with 20% to
25% vesting after one year and the balance vesting monthly over the remaining 3
to 4 years. As of March 31, 1998, options to purchase 754,673 shares of Common
Stock were exercisable under the Plan.
DIRECTOR'S PLAN. In January 1994, the Company adopted the 1994 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan
provides for automatic grants of options to purchase shares of Common Stock to
non-employee directors of the Company at or above the fair market value of the
Common Stock on the date of grant. The Company has reserved a total of 200,000
shares of the Company's Common Stock for issuance upon the exercise of options
granted pursuant to the Directors' Plan. Options granted under the Directors'
Plan expire 10 years following the grant and vest in five annual installments
commencing on the date of grant and are contingent upon the continuous service
of the director. As of March 31, 1998, options representing 45,831 shares were
exercisable under the Directors' Plan.
A summary of the combined stock option activity under the Plan and Directors'
Plan is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ------ --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 2,485,435 $ 2.76 2,315,955 $ 9.25 2,350,444 $ 4.66
Granted 894,301 2.32 1,779,330 5.78 1,011,485 15.64
Exercised (15,507) 0.11 (288,967) 1.99 (583,711) 2.70
Canceled (1,073,133) 2.80 (1,320,883) 10.00 (462,263) 8.24
Repriced - granted - - 1,762,384 4.68 - -
Repriced - canceled - - (1,762,384) 10.96 - -
--------- ------ --------- ------ --------- ------
Outstanding - end of year 2,291,096 $ 2.60 2,485,435 $ 2.76 2,315,955 $ 9.25
--------- ------ --------- ------ --------- ------
Weighted average fair value of options,
calculated under SFAS No. 123 (see below) $ 1.80 $ 2.47 $ 9.64
====== ====== ======
</TABLE>
The following table summarizes information as of March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ------------------------------------
Weighted Average
Remaining Weighted Average Weighted Average
Range of Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
- ------------------------ ---------- ------------------ ---------------- -------- ---------------------
<S> <C> <C> <C> <C> <C>
$ 0.0400 - $ 3.0000 945,338 8.19 $ 1.5506 234,402 $ 0.5892
$ 3.0625 1,186,925 8.31 $ 3.0625 526,015 $ 3.0625
$ 3.3750 - $14.8800 158,833 8.45 $ 5.4419 40,087 $ 7.7579
- -------- -------- --------- ---- -------- ------- --------
$ 0.0400 - $14.8800 2,291,096 8.27 $ 2.6036 800,504 $ 2.5734
======== ======== ========= ==== ======== ======= ========
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. In December 1993, the Company adopted the 1993
Employee Stock Purchase Plan (the "Purchase Plan") reserving 400,000 shares of
Common Stock for issuance under the Purchase Plan. The Purchase Plan provides a
means by which employees may purchase the Company's Common Stock through payroll
deductions, of up to 10% of their compensation, at a price per share equal to
the lower of (i) 85% of the fair market value of a share of Common Stock on the
first day of each annual offering; or (ii) 85% of the fair market value of a
share of Common Stock on the date of purchase. As of March 31, 1998, 269,027
shares had been purchased under the Purchase Plan.
29
<PAGE> 30
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMON STOCK RESERVED FOR FUTURE ISSUANCE.
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
Exercise of stock options 3,662,590
Employee stock purchase plan 130,973
---------
Total reserved shares 3,793,563
=========
</TABLE>
ACCOUNTING FOR STOCK-BASED COMPENSATION UNDER SFAS NO. 123. At March 31, 1998,
the Company had three stock-based compensation plans, which are described above.
Since the Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock plans, no
compensation cost has been recognized for such plans because the exercise price
of stock options is the fair value at the date of grant.
Had compensation cost for the Company's stock plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company's net results and per share results would have changed to the pro
forma amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ------------------------- ------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(3,378) $(5,584) $(39,881) $ (42,976) $ 8,836 $ 6,820
Basic net income (loss) per share $ (0.20) $ (0.33) $ (2.37) $ (2.55) $ 0.53 $ 0.41
Diluted net income (loss) per share $ (0.20) $ (0.33) $ (2.37) $ (2.55) $ 0.49 $ 0.38
------- ------- -------- --------- ------- -------
</TABLE>
The fair value of each option grant and Purchase Plan share issuable is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for grants in 1998 and 1997,
respectively: no dividend yield is expected for all years; expected volatility
of 106% and 96%; risk-free interest rates of 5.24% and 6.25%; and expected lives
of 3 years and 4 years.
Pro forma net results reflect only options granted in 1996 through 1998.
Therefore the full impact of calculating compensation cost for the Company's
stock option plans under SFAS No. 123 is not reflected in the pro forma net
results, amounts presented above as compensation cost is reflected over a stock
options vesting period and compensation cost for options granted prior to
April 1, 1995 is not considered.
NOTE 7. RESTRUCTURING COSTS
On March 31, 1998, the Company announced its agreement to sell the assets of its
Modem Business to Boca Research ("The Agreement") and refocus the Company for
product offerings in the small to medium sized office networking market. As a
result the Company recorded a net restructuring charge of $240,000 related
primarily to severance costs of 25 employees. The Company estimated that the
majority of the termination benefits would be paid during the first fiscal
quarter of 1999.
In December 1996, the Company announced a restructuring plan to streamline its
operations, reduce its workforce and enable the Company to improve its operating
results. The Company recorded a restructuring charge of $1.3 million related
primarily to severance costs ($270,000), write-offs of fixed assets and
purchased software ($490,000), a lease abandonment ($340,000) and other one-time
charges associated with the plan ($200,000). At March 31, 1998 the restructuring
accrual balance associated with the December 1996 decision was approximately
$40,000 and related primarily to remaining lease payments and miscellaneous
costs associated with the Company's Atlanta facility.
30
<PAGE> 31
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES
The components of income tax expense (benefit) from continuing operations are
displayed in the following table. No income tax expense or benefit has been
recorded in any of the results of discontinued operations.
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------
(In thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ -- $(8,637) $ 2,749
State -- 2 677
------- ------- -------
Total Current -- (8,635) 3,426
------- ------- -------
Deferred:
Federal -- 2,845 46
State -- 389 56
------- ------- -------
Total Current -- 3,234 102
------- ------- -------
Charge in lieu of income tax associated with exercise of stock options -- -- 1,632
------- ------- -------
$ -- $(5,401) $ 5,160
------- ------- -------
</TABLE>
The Company has gross deferred tax assets of approximately $26.9 million as of
March 31, 1998 and $25.6 million as of March 31, 1997. The deferred tax assets
are primarily comprised of net operating loss carryovers, tax credits, and
reserves and accruals recorded for financial reporting purposes which are not
allowed as tax deductions in the current periods in which they were recorded. As
of March 31, 1998 and 1997, the Company had established a full valuation
allowance against its deferred tax assets based on the belief that there was
sufficient uncertainty regarding the realizability of the deferred tax assets.
The difference between the effective income tax rate and the U.S. federal
statutory income tax rate for continuing operations is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
------------------------
(In thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate (34)% (34)% 35 %
State tax, net of federal benefit -- -- 5 %
Loss without tax benefit 38 % 25 % -- %
Foreign sales corporation benefit -- -- (2)%
Tax exempt interest -- -- (2)%
Research and experimental tax credit (6)% (2)% (4)%
Other 2 % (2)% (2)%
---- ---- ----
-- (13)% 30 %
---- ---- ----
</TABLE>
The Company acquired SofNet, Inc., in August 1994. As of the acquisition date,
SofNet had federal and Georgia net operating loss carryforwards of $9.3 million
which expire through 2009. The federal net operating loss is subject to an
annual limitation approximating $0.8 million as a result of an "ownership
change" as defined in Section 382 of the Internal Revenue Code. Any unused
annual limitation can be carried forward to subsequent years. In addition, the
SofNet operating losses can only be used to offset future earnings of SofNet as
a result of separate return limitation rules.
31
<PAGE> 32
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally, as of March 31, 1998, the Company had net operating loss
carryforwards of approximately $48.4 million for federal income tax purposes, of
which, $33.8 million expire in 2012 and $14.6 million expire in 2013. Net
operating loss carryforwards for California income tax purposes total
approximately $19.9 million, of which $13.9 will expire in 2002 and $6.0 million
expire in 2003.
At March 31, 1998, the Company had unused research and development credits of
approximately $1.0 million for federal income tax purposes, which expire through
2013, and $440,000 for California income tax purposes which will carryforward
indefinitely. There are also alternative minimum tax credits of approximately
$530,000 available to reduce future federal income taxes, which will
carryforward indefinitely.
NOTE 9. CUSTOMERS AND CREDIT CONCENTRATIONS
The Company sells primarily to distributors, dealers, and OEMs in North America,
Europe, and the Pacific Rim. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral. The Company maintains
reserves for potential credit losses, and such actual losses have been within
management's expectations.
The following table summarizes the annual percentage contribution to revenues by
customers whose revenues exceed 10% of total revenues:
<TABLE>
<CAPTION>
Percentage of Revenues Percentage of Accounts Receivable
Year Ended March 31, as of March 31,
------------------------------- ----------------------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Customer A 28% 21% 33% 37% 16%
Customer B 18% 11% 1% 19% --
Customer C 7% 11% 4% 4% 13%
</TABLE>
Customers A and C are distributors; Customer B is an OEM.
The Company's international sales for the fiscal years ended March 31, 1998,
1997, and 1996 represented approximately 15%, 15%, and 19% of net revenue,
respectively.
NOTE 10. NET ASSETS HELD FOR SALE
On March 31, 1998, the Company signed an Asset Purchase Agreement ("the
Agreement") with Boca Research, Inc., a Florida corporation, and its wholly
owned subsidiary Boca Global, Inc., a Florida corporation (together "Buyer").
Pursuant to the terms of the Agreement, the Company will sell to Buyer
substantially all of the Company's assets related to the Company's single user
modem product offerings including accounts receivable, inventory, property and
equipment, intellectual property, and other production and research and
development assets (the "Modem Business"). Additionally, the Company issued to
the Buyer a Warrant to purchase up to 425,000 shares of the Company's Common
Stock at $1.0003 per share. In consideration for these assets, the Buyer will
assume certain of the Company's liabilities related to the Modem Business,
including all product warranty, upgrade and support liabilities, as well as
related accounts payable obligations. The Buyer shall pay to the Company $10.0
million in cash, payable in installments. Upon the close of the transaction the
Buyer will deliver an initial payment of $4.0 million and a non-interest bearing
promissory note for $6.0 million payable in two equal installments on September
30, 1998 and December 31, 1998. Shareholder approval was required for the
completion of the transaction. Such approval was obtained at a Special Meeting
of Stockholders of the Company, and the transaction closed on June 18, 1998 (the
"Closing Date"). The transaction will be accounted for as an asset sale in the
first quarter of fiscal 1999.
In conjunction with the closing of the transaction, the Company's line of credit
(see Note 4) was suspended as the sale included most of the assets securing the
line. The Company is currently negotiating a new line of credit.
32
<PAGE> 33
NOTE 11. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA --
SALE OF MODEM BUSINESS
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA. The following unaudited pro
forma condensed consolidated balance sheet at March 31, 1998, and the discussion
of the unaudited pro forma condensed consolidated statements of operations data
for the fiscal year ended March 31, 1998 give pro forma effect to the estimated
financial impact of the sale of the Modem Business. The pro forma condensed
consolidated balance sheet at March 31, 1998 gives pro forma effect to the sale
of the Modem Business as if the transaction it contemplates was consummated on
March 31, 1998. The discussion of the unaudited pro forma condensed consolidated
statements of operations data for the fiscal year ended March 31, 1998 present
the results of operations of the Company as if the transaction contemplated in
the sale of the Modem Business occurred on April 1, 1997.
The pro forma information is based on the historical consolidated financial
statements of the Company giving effect to the assumptions and adjustments set
forth in the following notes and discussions. The overall assumption has been
made that the effect of the sale of the Modem Business would have been to
transfer the substantial majority of the Company's products and operating
activities and associated revenues, assets (excluding cash and any tax related
benefits) and liabilities, and a significant amount of related expenses to the
Buyer. The Company would have retained primarily its OneWorld, FaxWorks Pro and
Pro LAN, FocalPoint and NewsCatcher products, the development efforts associated
with its new family of communications server products and corporate general and
administrative activities, and associated revenues, expenses, assets and
liabilities, henceforth referred to as the "Retained Business".
33
<PAGE> 34
ONE WORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed financial data and discussions have been
prepared by Company management and are not necessarily indicative of how the
Company's balance sheet and operating results would have been presented had the
transaction contemplated in the Agreement been consummated on the assumed dates,
nor are they necessarily indicative of the presentation of the Company's balance
sheet and statements of operations for any future period.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 1998
--------------------------------------------------
(in thousands) Company Pro Forma Pro Forma
Historical Adjustments Results
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,097 $ 4,000 (A) $ 7,097
Accounts receivable, net 8,160 (7,845)(B) 315
Inventories, net 2,351 (2,351)(B) --
Notes receivable -- 5,860 (A) 5,860
Other current assets 253 (83)(B) 170
---------- ----------- ---------
Total current assets 13,861 (419) 13,442
Property and equipment, net 4,049 (1,376)(C) 2,673
Other assets 63 63
---------- ----------- ---------
Total assets $ 17,973 $ (1,795) $ 16,178
========== =========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,625 $ (6,666)(D) $ 959
Accrued and other liabilities 6,003 (1,888)(E) 4,115
---------- ----------- ---------
Total current liabilities 13,628 (8,554) 5,074
Stockholders' equity:
Common stock 17 17
Additional paid-in capital 43,246 234 (F) 43,480
Retained earnings (accumulated deficit) (38,918) 6,525 (F) (32,393)
---------- ----------- ---------
Total stockholders' equity 4,345 6,759 11,104
---------- ----------- ---------
Total liabilities and stockholders' equity $ 17,973 $ (1,795) $ 16,178
========== =========== =========
</TABLE>
34
<PAGE> 35
ONE WORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
(A) The Company will receive consideration of $10.0 million on the Closing
Date. The consideration will be in the form of $4.0 million in cash on
the Closing Date, and a Promissory Note for $6.0, of which $3.0 million
is payable on September 30, 1998 and $3.0 million on December 31, 1998.
As the note is non-interested bearing, its value has been discounted
assuming a rate of 6% per annum
These pro forma calculations assume that had the transaction been
consummated on March 31, 1998 the purchase price would not have been
reduced based upon the net current asset position at that time.
(B) As stipulated in the Agreement, the Buyer will purchase all of the
Company's current assets related to its Modem Business with the
exception of cash, tax assets, assets related to the Retained Business
and certain corporate assets. This adjustment represents the net value
of those assets which would have been transferred to the Buyer as well
as the elimination of certain reserves associated with those assets as
they would no longer be required by the Company.
(C) The Agreement stipulates that the Buyer will purchase Property and
Equipment associated with the Company's Modem Business as well as that
associated with the Company's facility in Sunnyvale, California if Buyer
elects to assume the lease (the Buyer has elected not to assume the
lease). This adjustment represents an estimate of the net book value of
the Property and Equipment that is to be transferred to the Buyer.
(D) As stipulated in the Agreement, the Buyer will assume all of the
Company's liabilities related to its Modem Business with the exception
of employee related liabilities, tax liabilities, liabilities related to
the Retained Business and certain corporate liabilities. This adjustment
represents the net value of the Accounts Payable portion of those
liabilities which would have been assumed by the Buyer as well as
certain other liabilities which would not have been assumed by the Buyer
that would have been eliminated by the consummation of the transaction.
(E) As stipulated in the Agreement, the Buyer will assume all of the
Company's liabilities related to its Modem Business with the exception
of employee related liabilities, tax liabilities, liabilities related to
the Retained Business and certain corporate liabilities. This adjustment
represents the net value of the Accrued and other portions of those
liabilities which would have been assumed by the Buyer as well as
certain other liabilities which would not have been assumed by the Buyer
that would have been eliminated by the consummation of the transaction.
In addition, this adjustment includes an accrual of $1.4 million for
estimated expenses related to the transaction.
(F) This adjustment represents the amount of the gain that would have been
realized had the transaction been consummated on March 31, 1998,
including assumed valuation of the warrant issued to the Buyer. No
income tax expense associated with the gain has been assumed, given the
Company's available tax benefits. The actual amount of the gain will not
be determined until after the actual Closing Date and will be accounted
for in the first quarter of fiscal 1999. While the Company expects to
realize a substantial gain upon closing the transaction, that gain may
be materially different than the amount of this pro forma adjustment.
DISCUSSION OF THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS DATA. The assets being purchased by the Buyer include products which
represent the overwhelming majority of the Company's consolidated revenues. For
the year ended March 31, 1998 these products accounted for approximately 95% of
the Company's reported net revenues. Had the transactions contemplated in the
Agreement been consummated on April 1, 1997, the Company's net revenues would
have been reduced by approximately these amounts.
Similarly, these products represent the overwhelming majority of the Company's
gross profit. For the year ended March 31, 1998 these products accounted for
approximately 88% of the Company's reported gross profit. Had the transactions
contemplated in the Agreement been consummated on April 1, 1997, the Company's
gross profits would have been reduced by these amounts.
35
<PAGE> 36
ONE WORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The operations of the Modem Business being sold to the Buyer are not separate
from, nor are they accounted for separately from, the other activities of the
Company. There are numerous instances of shared resources including facilities,
management, systems, development, marketing and sales personnel and corporate
general and administrative functions. Therefore, the Company is unable to
accurately estimate the operating expenses associated with the assets being
purchased by the Buyer.
The aforementioned operating results also do not consider the amount of any
gain or loss on the transaction itself that would have been realized had the
transaction been consummated on April 1, 1997. The Company expects to realize a
substantial gain upon closing, however that gain may be materially different
than that estimated in these pro forma statements.
36
<PAGE> 37
SCHEDULE II
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Year end March 31,
------------------------------------
(In thousands) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Allowance for returns and doubtful accounts
Balance beginning of period $ 6,388 $ 1,854 $ 1,807
Additions charged to costs and expenses 1,387 20,090 8,268
Deductions (6,465) (15,556) (8,221)
-------- -------- --------
Balance end of period $ 1,310 $ 6,388 $ 1,854
-------- -------- --------
Warranty and other product-related obligations
Balance beginning of period $ 2,090 $ 1,503 $ 1,559
Additions charged to costs and expenses 1,855 2,774 4,479
Deductions (1,086) (2,187) (4,535)
-------- -------- --------
Balance end of period $ 2,859 $ 2,090 $ 1,503
-------- -------- --------
</TABLE>
37
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The Company's definitive Proxy Statement will be filed with the
Securities and Exchange Commission in Connection with the solicitation of
proxies for the Company's Annual Meeting of Stockholders to be held on
August 20, 1998 (the "Proxy Statement"). Certain information required by this
item is incorporated by reference from the information contained in the Proxy
Statement under the caption "Election of Directors." For information regarding
executive officers of the Company, see Part I of this Form 10-K under the
caption "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be contained in the
Company's definitive Proxy Statement under the caption "Executive Compensation"
and is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be contained in the
Company's definitive Proxy Statement under the caption "Security Ownership of
Certain Beneficial Owners and Management" and is incorporated by reference
herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be contained in the
Company's definitive Proxy Statement under the caption "Certain Transactions"
and is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedule
The Financial Statements and Schedule filed as part of this
Annual Report on Form 10-K are listed in the index under Item 8.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 1998.
(c) Exhibits
38
<PAGE> 39
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Document Page
- ------ ----------------------- ----
<S> <C> <C>
3.1 Form of Certificate of Incorporation of Global Village Communication Delaware *
3.2 Form of Bylaws of Global Village Communication Delaware *
4.1 Reference is made to Exhibits 3.1 through 3.2 *
4.2 Amended and Restated Investor Rights Agreements among the Company and certain *
other person named therein, dated as of May 26, 1992
4.3 Employee Shareholder Agreement between the Company and certain *
stockholders of the Company, as amended, and related schedule
4.4 Common Stock Purchase Agreement between the Company and other parties named *
therein, dated as of October 2, 1989
4.5 Series A Junior Preferred Stock Exchange Agreement between the Company *
and other parties named therein, dated as of May 14, 1991
4.6 Series B Preferred Stock Purchase Agreement between the Company and *
other parties named therein, dated as of May 14, 1991
4.7 Warrant to Purchase 31, 395 Shares of Series B Preferred granted by *
the Company to Company to Dominion Ventures, dated as of November 27,
1991
4.8 Series C Preferred Stock Purchase Agreement between the Company and *
other parties named therein, dated as of May 26, 1992
10.1 Form of Indemnity Agreement entered into between the Company and its directors *
and officers, with related schedule
10.2 1991 Stock Option Plan, as amended (the "Option Plan") *
10.3 Form of Incentive Stock Option under the Option Plan *
10.4 Form of Supplemental Stock Option under the Option Plan *
10.5 1993 Employee Stock Purchase Plan *
10.6 Sublease Agreement between the Company and Northern Telecom Inc., dated as of May *
21, 1992
10.7 Source Code License, Agreement between the Company and Apple Computer, Inc. dated *
August 31, 1992
10.8 Software Development Agreement between the Company and Apple Computer, Inc. dated *
August 31, 1992
10.9 Form of License and Distribution Agreement between the Company and Apple Computer, *
Inc. dated December 15, 1993
10.10 Distribution Agreement between the Company and Ingram Micro, dated as of February *
16, 1993
10.11 Distribution Agreement between the Company and Merisel, Inc. dated as of June 1, *
1993
10.12 1994 Non-Employee Directors' Stock Option Plan, including Form of Supplemental *
Stock Option
10.13+ Master OEM Purchase Agreement between Apple Computer, Inc. and the Company dated *
June 6, 1994
10.14+ License and Distribution Agreement between the Company and Apple Computer, Inc. *
dated June 6, 1994
10.15++ First Amendment to License Agreement between Apple Computer, Inc. and the Company, *
dated June 30, 1994
10.16++ Lease Agreement between Herman Christensen Jr. and Raymond P. Christensen and the *
Company dated July 14, 1994.
10.17++ Management Incentive Plan
13.0 Annual Report to Stockholders >
16.1 Letter regarding change in accountants. >
23.1 Consent of KPMG Peat Marwick LLP
25.1 Power of Attorney (see page 40 of Form 10-K)
27.1 Financial Data Schedule
* Filed as a exhibit to the Registrant's Registration Statement of Form
S-1 (Registration No 33-73878 as amended) and incorporate by reference
hereby.
+ The Company has received confidential treatment with respect to portions
of these Exhibits.
++ The Company has requested confidential treatment with respect to
portions of this document.
> Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994 and incorporated by reference
hereby.
V Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1994 and incorporated by reference
hereby.
</TABLE>
39
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Company has duly caused this Form 10-K Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized on June 29, 1998.
OneWorld Systems, Inc.
By: /s/ NEIL SELVIN
-----------------------------------------
Neil Selvin, President, Chief Executive
Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Neil Selvin and Marc E. Linden jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to the Form 10-K Annual
Report, and to file the same, with exhibits thereto and other documents in
connections therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ LEONARD A. LEHMANN Chairman of the Board June 29, 1998
- -------------------------------
Leonard A. Lehmann
/s/ NEIL SELVIN President, Chief Executive Officer and Director June 29, 1998
- ------------------------------- (Principle Executive Officer)
Neil Selvin
/s/ MARC E. LINDEN Senior Vice President and June 29, 1998
- ------------------------------- Chief Financial Officer
Marc E. Linden (Principle Financial and Accounting Officer)
/s/ KEVIN R. COMPTON Director June 29, 1998
- -------------------------------
Kevin R. Compton
/s/ EUGENE EIDENBERG Director June 29, 1998
- -------------------------------
Eugene Eidenberg
/s/ KENNETH A. GOLDMAN Director June 29, 1998
- -------------------------------
Kenneth A. Goldman
</TABLE>
40
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Document Page
- ------ ----------------------- ----
<S> <C> <C>
3.1 Form of Certificate of Incorporation of Global Village Communication Delaware *
3.2 Form of Bylaws of Global Village Communication Delaware *
4.1 Reference is made to Exhibits 3.1 through 3.2 *
4.2 Amended and Restated Investor Rights Agreements among the Company and certain *
other person named therein, dated as of May 26, 1992
4.3 Employee Shareholder Agreement between the Company and certain *
stockholders of the Company, as amended, and related schedule
4.4 Common Stock Purchase Agreement between the Company and other parties named *
therein, dated as of October 2, 1989
4.5 Series A Junior Preferred Stock Exchange Agreement between the Company *
and other parties named therein, dated as of May 14, 1991
4.6 Series B Preferred Stock Purchase Agreement between the Company and *
other parties named therein, dated as of May 14, 1991
4.7 Warrant to Purchase 31, 395 Shares of Series B Preferred granted by *
the Company to Company to Dominion Ventures, dated as of November 27,
1991
4.8 Series C Preferred Stock Purchase Agreement between the Company and *
other parties named therein, dated as of May 26, 1992
10.1 Form of Indemnity Agreement entered into between the Company and its directors *
and officers, with related schedule
10.2 1991 Stock Option Plan, as amended (the "Option Plan") *
10.3 Form of Incentive Stock Option under the Option Plan *
10.4 Form of Supplemental Stock Option under the Option Plan *
10.5 1993 Employee Stock Purchase Plan *
10.6 Sublease Agreement between the Company and Northern Telecom Inc., dated as of May *
21, 1992
10.7 Source Code License, Agreement between the Company and Apple Computer, Inc. dated *
August 31, 1992
10.8 Software Development Agreement between the Company and Apple Computer, Inc. dated *
August 31, 1992
10.9 Form of License and Distribution Agreement between the Company and Apple Computer, *
Inc. dated December 15, 1993
10.10 Distribution Agreement between the Company and Ingram Micro, dated as of February *
16, 1993
10.11 Distribution Agreement between the Company and Merisel, Inc. dated as of June 1, *
1993
10.12 1994 Non-Employee Directors' Stock Option Plan, including Form of Supplemental *
Stock Option
10.13+ Master OEM Purchase Agreement between Apple Computer, Inc. and the Company dated *
June 6, 1994
10.14+ License and Distribution Agreement between the Company and Apple Computer, Inc. *
dated June 6, 1994
10.15++ First Amendment to License Agreement between Apple Computer, Inc. and the Company, *
dated June 30, 1994
10.16++ Lease Agreement between Herman Christensen Jr. and Raymond P. Christensen and the *
Company dated July 14, 1994.
10.17++ Management Incentive Plan
13.0 Annual Report to Stockholders >
16.1 Letter regarding change in accountants. >
23.1 Consent of KPMG Peat Marwick LLP
25.1 Power of Attorney (see page 40 of Form 10-K)
27.1 Financial Data Schedule
</TABLE>
* Filed as a exhibit to the Registrant's Registration Statement of Form
S-1 (Registration No 33-73878 as amended) and incorporate by reference
hereby.
+ The Company has received confidential treatment with respect to portions
of these Exhibits.
++ The Company has requested confidential treatment with respect to
portions of this document.
> Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994 and incorporated by reference
hereby.
V Filed as an Exhibit to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1994 and incorporated by reference
hereby.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
OneWorld Systems, Inc.
We consent to incorporation by reference in the registration statements (Nos.
333-19899, 333-40999, and 333-44917 on Forms S-3 and S-8 of OneWorld Systems,
Inc. of our report dated May 18, 1998, except as to Note 10, which is as of
June 18, 1998, relating to the consolidated balance sheets of OneWorld Systems,
Inc. and subsidiaries as of March 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended March 31, 1998, and the related
schedule, which report appears in the March 31, 1998, annual report on Form
10-K of OneWorld Systems, Inc.
KPMG PEAT MARWICK LLP
Mountain View, California
June 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 3,097
<SECURITIES> 0
<RECEIVABLES> 9,470
<ALLOWANCES> (1,310)
<INVENTORY> 2,351
<CURRENT-ASSETS> 13,861
<PP&E> 15,383
<DEPRECIATION> (11,334)
<TOTAL-ASSETS> 17,973
<CURRENT-LIABILITIES> 13,628
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 4,328
<TOTAL-LIABILITY-AND-EQUITY> 17,973
<SALES> 61,468
<TOTAL-REVENUES> 61,468
<CGS> 42,204
<TOTAL-COSTS> 42,204
<OTHER-EXPENSES> 28,237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154
<INCOME-PRETAX> (4,709)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,709)
<DISCONTINUED> 1,331
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,378)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
