<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _______
COMMISSION FILE NUMBER: 000-23260
ONEWORLD SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3095680
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1144 EAST ARQUES AVE.
SUNNYVALE, CA 94086
(Address of principal executive offices, including zip code)
(408) 523-1100
(Registrant's telephone number, including area code)
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 [ ]
The number of shares of Common Stock outstanding as of October 30, 1998 was
17,427,043
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ONEWORLD SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.........................................3
Condensed Consolidated Balance Sheets
as of September 30, 1998 and March 31, 1998.......................................3
Condensed Consolidated Statements of Operations
for the three and six months ended September 30, 1998 and 1997....................4
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 1998 and 1997..............................5
Notes to Condensed Consolidated Financial Statements................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................................9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................17
Item 2. Changes in Securities/Recent Sales of Unregistered Securities......................17
Item 3. Defaults Upon Senior Securities....................................................17
Item 4. Submission of Matters to a Vote of Security Holders................................17
Item 5. Other Information..................................................................17
Item 6. Exhibits and Reports on Form 8-K...................................................18
SIGNATURES.........................................................................................19
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,526 $ 3,097
Note receivable from Boca Research, Inc. 5,855 --
Accounts receivable, net 182 8,160
Inventories, net 18 2,351
Other current assets 245 253
------- -------
Total current assets 7,826 13,861
Property and equipment, net 431 4,049
Other assets 64 63
------- -------
Total assets $ 8,321 $17,973
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 809 $ 7,625
Accrued and other liabilities 3,244 6,003
------- -------
Total current liabilities 4,053 13,628
Stockholders' equity 4,268 4,345
------- -------
Total liabilities and stockholders' equity $ 8,321 $17,973
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE> 4
ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 353 $ 17,100 $ 12,718 $ 33,007
Cost of revenue 129 12,038 9,678 22,354
-------- -------- -------- --------
Gross profit 224 5,062 3,040 10,653
-------- -------- -------- --------
Operating expenses:
Research and development 1,082 2,722 3,619 5,144
Sales, general and administrative 1,692 4,253 5,584 9,454
Restructuring costs -- -- 404 --
-------- -------- -------- --------
Total operating expenses 2,774 6,975 9,607 14,598
-------- -------- -------- --------
Loss from operations (2,550) (1,913) (6,567) (3,945)
-------- -------- -------- --------
Other income, net:
Gain on sale of modem operations -- -- 6,128 --
Gain on sale of investments -- 1,617 -- 1,617
Other income, net 93 244 105 301
-------- -------- -------- --------
Total other income, net 93 1,861 6,233 1,918
-------- -------- -------- --------
Loss before income taxes (2,457) (52) (334) (2,027)
Income tax benefit -- -- 22 --
-------- -------- -------- --------
Loss from continuing operations (2,457) (52) (312) (2,027)
-------- -------- -------- --------
Discontinued operations:
Income from discontinued operations -- -- 90 --
-------- -------- -------- --------
Net loss $ (2,457) $ (52) $ (222) $ (2,027)
======== ======== ======== ========
Basic per share data:
Loss per share from continuing operations $ (0.14) $ (0.00) $ (0.02) $ (0.12)
Income per share from discontinued operations -- -- 0.01 --
-------- -------- -------- --------
Net loss per share $ (0.14) $ (0.00) $ (0.01) $ (0.12)
======== ======== ======== ========
Diluted per share data:
Loss per share from continuing operations $ (0.14) $ (0.00) $ (0.02) $ (0.12)
Income per share from discontinued operations -- -- 0.01 --
-------- -------- -------- --------
Net loss per share $ (0.14) $ (0.00) $ (0.01) $ (0.12)
======== ======== ======== ========
Shares used in computing per share amounts:
Basic 17,179 16,979 17,171 16,935
Diluted 17,179 16,979 17,171 16,935
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE> 5
ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
September 30,
1998 1997
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (222) $(2,027)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 671 1,775
Gain on sale of modem operations (6,128) --
Loss on sale of investments -- 2,074
Changes in operating assets and liabilities:
Accounts receivable, net (1,070) (8,746)
Receivable from sale of investment -- (3,691)
Inventories 200 (214)
Income taxes -- 7,665
Other current assets (54) (144)
Accounts payable 758 (923)
Accrued and other liabilities 480 (105)
------- -------
Net cash used in operating activities of:
Continuing operations (5,365) (4,336)
Discontinued operations (184) --
------- -------
Net cash used in operating activities (5,549) (4,336)
------- -------
INVESTING ACTIVITIES:
Proceeds from sale of modem operations 4,000 --
Proceeds from sale of investments -- 1,969
Purchases of property and equipment (30) (220)
Other assets (2) 56
------- -------
Net cash provided by investing activities 3,968 1,805
------- -------
FINANCING ACTIVITIES:
Repayments under line of credit -- (4,241)
Proceeds from issuance of Common Stock, net 9 107
------- -------
Net cash provided by (used in) financing activities 9 (4,134)
------- -------
Net decrease in cash and cash equivalents (1,572) (6,665)
Cash and cash equivalents at beginning of period 3,098 9,687
------- -------
Cash and cash equivalents at end of period $ 1,526 $ 3,022
======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid:
Interest $ 198 $ 133
Income taxes $ 19 $ --
Non-cash investing and financing activities:
Sale of modem operations in exchange for
note receivable from Boca Research, Inc. $ 5,855 $ --
Warrants issued to Boca Research, Inc. $ 140 $ --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
ONEWORLD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
OneWorld Systems, Inc. ("OneWorld Systems" or the "Company") provides
simple, easy-to-use wide-area communication solutions to help businesses
communicate efficiently and cost effectively. The Company designs,
develops, manufactures and sells integrated client and server hardware and
software solutions for the growing communication needs of small and
medium-sized businesses and offices. The Company's recently released
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. Founded in 1989 as Global Village Communication, Inc.,
OneWorld Systems is the only supplier of communication solutions that
integrate fax services, Internet and remote access for Windows and mixed
Windows/Mac personal computer environments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The interim condensed consolidated financial
statements as of September 30, 1998 and for the three and six months ended
September 30, 1998 and 1997, include all adjustments (consisting of only
normal recurring adjustments) that in the opinion of management are
necessary to present fairly the financial information set forth therein, in
accordance with generally accepted accounting principles. Certain
reclassifications have been made for consistent presentation. These
financial statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto contained in the
Company's Form 10-K for the fiscal year ended March 31, 1998.
The Company's interim results are subject to fluctuation and largely based
on sales from the Company's modem operations, which were sold in June 1998
(see note 5 of the Notes to Condensed Consolidated Financial Statements).
As a result, the Company believes the results of operations for the interim
periods are not indicative of the results to be expected for any future
period.
EARNINGS PER SHARE. The Company adopted Statement of Accounting Standards
Board (SFAS) No. 128, "Earnings per Share" effective December 28, 1997.
This pronouncement requires the presentation of both basic and diluted
earnings per share ("EPS"). Basic EPS excludes dilution and is computed by
dividing net income 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. Dilutive common equivalent shares include
"in the money" stock options to the extent that such common equivalent
shares are not anti-dilutive. The Company has restated net income (loss)
per share for the three and six months ended September 30, 1997 presented
in the accompanying condensed consolidated financial statements to reflect
net income (loss) per share on both a basic and a diluted basis
INVENTORIES. Inventories are stated at the lower of first-in, first-out
cost or market. On September 30, 1998 inventories consisted of:
<TABLE>
<CAPTION>
September 30, March 31,
(in thousands) 1998 1998
------------- ---------
<S> <C> <C>
Purchased parts $ -- $ --
Work in process -- --
Finished goods 18 2,351
------ ------
Total inventories $ 18 $2,351
====== ======
</TABLE>
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. LINE OF CREDIT
The Company had a line of credit agreement with a bank expiring in April
1999. As a result of the Company's sale of its modem operations, the line
of credit has been suspended. The Company is currently negotiating a new
line of credit.
4. 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) No. 30 and prior period financial
statements have been restated to reflect the discontinuation of the
enterprise network server operation.
5. SALE OF MODEM OPERATIONS
On June 18, 1998, the Company completed the sale of its modem operations to
Boca Research, Inc. ("Boca"). Included in the sale were substantially all
of the Company's assets related to the Company's single user modem and
software product offerings. Additionally, the Company issued to Boca a five
year Warrant to purchase up to 425,000 shares of the Company's Common Stock
at approximately $1.00 per share. In consideration for these assets, Boca
assumed certain of the Company's liabilities related to the modem
operations, paid the Company $4.0 million in cash, and delivered a
non-interest bearing promissory note for $6.0 million payable in two equal
installments on September 30 and December 31, 1998, which has been recorded
at $5.855 million. The installment payment due on September 30, 1998 was
received October 2, subsequent to the balance sheet date, and therefore is
not reflected as a reduction of the note receivable balance on September
30, 1998. The difference between the booked value and the face value of the
note will be recognized as interest income over the life of the note.
During the quarter ended June 30, 1998, the Company recorded a net gain of
$6.1 million on the sale of its modem operations.
The full effect of the sale of the modem operations to Boca was recorded
during the quarter ended June 30, 1998. The assets purchased by Boca
included products which represented the overwhelming majority of the
Company's revenues and gross profit. These products did not contribute to
the Company's reported net revenue or gross profit for the quarter ended
September 30, 1998. For the six months ended September 30, 1998, these
products accounted for approximately 97% of the Company's reported net
revenue and 92% of reported gross profit, and for the year ended March 31,
1998, these products accounted for approximately 95% of the Company's
reported net revenue and approximately 88% of reported gross profit. The
Company's modem operations sold to Boca were not segregated from, nor
accounted separately from, the other activities of the Company. Therefore,
the Company is unable to accurately determine the operating expenses
associated with the assets sold to Boca.
6. RESTRUCTURE COSTS
On March 31, 1998, the Company announced a fundamental shift in business
strategy to refocus its efforts on its new line of communications servers
for small and medium size offices and a change of its name to OneWorld
Systems, Inc. During the first quarter of fiscal 1999, the Company recorded
a restructuring charge of approximately $404,000 comprised of additional
one-time costs for severance and employees related costs (approximately
$247,000), lease abandonment (approximately $88,000), and fixed asset
write-offs (approximately $69,000) associated with the transition to
OneWorld Systems.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings
per share pursuant to SFAS No. 128:
<TABLE>
<CAPTION>
Three months ended Six months ended
(in thousands, except per share data) September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss from continuing operations $ (2,457) $ (52) $ (312) $ (2,027)
Income from discontinued operations -- -- 90 --
-------- -------- -------- --------
Net loss $ (2,457) $ (52) $ (222) $ (2,027)
======== ======== ======== ========
Weighed average shares used in:
Basic per share computations 17,179 16,979 17,171 16,935
Dilutive effect of stock options -- -- -- --
-------- -------- -------- --------
Diluted per share computations 17,179 16,979 17,171 16,935
======== ======== ======== ========
Anti-dilutive common stock equivalants not
included in the diluted per share computations:
"In the money" dilutive stock options 104 512 195 528
======== ======== ======== ========
Basic per share data:
Loss per share from continuing operations $ (0.14) $ (0.00) $ (0.02) $ (0.12)
Income per share from discontinued operations -- -- 0.01 --
-------- -------- -------- --------
Net loss per share $ (0.14) $ (0.00) $ (0.01) $ (0.12)
======== ======== ======== ========
Diluted per share data:
Loss per share from continuing operations $ (0.14) $ (0.00) $ (0.02) $ (0.12)
Income per share from discontinued operations -- -- 0.01 --
-------- -------- -------- --------
Net loss per share $ (0.14) $ (0.00) $ (0.01) $ (0.12)
======== ======== ======== ========
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited consolidated financial statements and notes thereto for the
fiscal 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 risk factors and other cautionary disclosures set
forth below and elsewhere in this report.
OVERVIEW
OneWorld Systems, Inc. ("OneWorld Systems" or the "Company") provides simple,
easy-to-use wide-area communication solutions to help businesses communicate
efficiently and cost effectively. The Company designs, develops, manufactures
and sells integrated client and server hardware and software solutions for the
growing communication needs of small and medium-sized businesses and offices.
The Company's recently released 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. Founded in 1989 as Global Village Communication, Inc.,
OneWorld Systems is the only supplier of communication solutions that integrate
fax services, Internet and remote access for Windows and mixed Windows/Mac
personal computer environments.
On March 31, 1998, the Company announced an agreement to sell its modem
operations to Boca Research, Inc. ("Boca") and unveiled a new corporate strategy
focusing on wide-area data communications for the small and medium sized office.
The transaction closed June 18, 1998, and the Company changed its name to
OneWorld Systems, Inc. at that time.
Upon the close of the transaction, the Company ceased selling individual use
modems or other individual use communications systems. These products
represented substantially all of the Company's revenue during the first quarter
of fiscal 1999.
The Company's primary source of revenue in the future will be from its newly
released 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 OneWorld 5000 family of communications servers 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 is the first product of its kind to offer all these
capabilities simultaneously to both Windows and Macintosh users.
The Company began shipping the OneWorld 5000 Suite server in late September
1998. The Company's planned shipment of other versions of its server products is
dependent upon the completion of the development of these products. The Company
may have difficulty resolving product development issues, or any other issues
that may arise, in a timely manner, which could delay the planned shipment 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 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 not be sold
through the same channels as the Company's modem products were sold.
Consequently, the Company has been required to establish new distribution
channels, including expanding the Company's VAR channel. There can be no
assurance that the Company will be successful in maintaining and expanding 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.
9
<PAGE> 10
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. 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 shipments 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's competitors of new products with the
potential to replace products developed by the Company may cause customers to
defer purchasing the Company's 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 operations to Boca Research. The
modem operations accounted for substantially all of the Company's revenue in the
previous fiscal year. 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.
<TABLE>
<CAPTION>
Three months ended Six months ended
(in thousands) September 30 September 30
------------------------ ------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total net revenue 353 17,100 12,718 33,007
====== ====== ====== ======
Percent decrease compared to
prior fiscal year period -98% -61%
------------------------ ------------------------
</TABLE>
The decrease in net revenue for the second quarter of fiscal 1999 and the six
months ended September 30, 1998 as compared to the same period in fiscal 1998
was primarily attributable to the Company's sale of its modem operations. Net
revenue for the three month period ended September 30, 1998 was primarily
attributable to the Company's legacy products retained after the sale of the
modem business. The Company sold no modem business products after the close of
the transaction with Boca Research on June 18, 1998.
During the quarter ended September 30, 1998, the Company's two largest customers
accounted for approximately 33% and 10%, respectively, of the Company's net
revenue.
International net revenue decreased to approximately $59,000 or 17% of net
revenues for the second quarter of fiscal 1999 from $1.6 million or 9% of net
revenue for the second quarter of fiscal 1998. The decrease in net international
revenues is primarily attributable to the Company's sale of its modem operations
during the prior quarter. For the six month period ended September 30, 1998
international revenue increased 50% to $6.2 million or 48% of net revenues from
$4.1 million or 12 % of net revenues for the same period in fiscal 1998. The
increase in international revenue was primarily due to an increase in
international OEM modem product shipments made during the first quarter of
fiscal 1999. The Company is concentrating its launch of its new OneWorld 5000
server in the United States and Canada only. Therefore, the Company does not
anticipate significant international net revenues in the near future. The
preceding sentence discussing the anticipated levels of international revenue is
a forward-looking statement.
10
<PAGE> 11
Revenue reserves and allowances are established for estimated future returns due
to end-user returns, stock balancing and discontinued and nonsellable 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.
COST AND EXPENSES
On June 18, 1998, the Company sold its modem operations to Boca Research. The
modem operations accounted for substantially all of the Company's gross profit
and a significant portion of its research and development, marketing and sales,
and general and administrative expenses during the prior fiscal year.
Consequently, the comparisons below should not be relied upon as predictors of
future performance.
GROSS PROFIT
Cost of revenue primarily consisted 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 was:
<TABLE>
<CAPTION>
Three months ended Six months ended
(in thousands) September 30 September 30
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenue 353 17,100 12,718 33,007
Cost of revenue 129 12,038 9,678 22,354
------ ------ ------ ------
Gross profit 224 5,062 3,040 10,653
====== ====== ====== ======
Gross profit percentage of net revenue 63% 30% 24% 32%
====== ====== ====== ======
</TABLE>
The gross margin increase in the second quarter of fiscal 1999 as compared to
the second quarter of fiscal 1998 is primarily due to the shift to higher margin
software and server products sold during the quarter compared to the relatively
lower margin modem products sold in the same period of fiscal 1998. The gross
profit margin decrease between the six months ended September 30, 1998 compared
to the six months ended September 30, 1997 was primarily attributable to price
reductions on certain of the Company's modem products, an increase in lower
margin OEM modem business, and one-time costs associated with the transition to
OneWorld Systems. Gross profit margins are likely to fluctuate as a result of
the sales mix between lower and higher margin products, changes in distribution
channels, as well as changes in component and production costs, price reductions
and reserve requirements.
EXPENSES
Operating expenses were comprised of the following:
<TABLE>
<CAPTION>
(in thousands) Three months ended September 30 Six months ended September 30
1998 1997 1998 1997
------------------- -------------------- ------------------- ---------------------
% of net % of net % of net % of net
$ revenue $ revenue $ revenue $ revenue
------ --------- ------ ---------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Research and development 1,082 307% 2,722 16% 3,619 28% 5,144 16%
Marketing and sales 854 242% 3,210 19% 3,635 29% 7,003 21%
General and administrative 838 237% 1,043 6% 1,949 15% 2,451 7%
Restructure costs -- -- % -- -- % 404 3% -- -- %
------ ------ ------ ------
Total operating expenses 2,774 6,975 9,607 14,598
====== ====== ====== ======
</TABLE>
RESEARCH AND DEVELOPMENT
Research and development expenses for the second quarter of fiscal 1999
decreased 60% compared to the second quarter of fiscal 1998. Research and
development expenses decreased 30% for the six months ended September 30 as
compared to the same period in the prior fiscal year. The decrease in research
and development expenses is primarily related to reductions in headcount and
manufacturing support costs resulting from the sale of the Company's modem
operations to Boca Research.
11
<PAGE> 12
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 SFAS
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.
MARKETING AND SALES
Marketing and sales expenses decreased 73% between the second quarter of fiscal
1999 and the second quarter of fiscal 1998, and a decrease of 48% when comparing
the six month periods ended September 30 of each year presented. The decline in
fiscal 1999 expenses was primarily attributable to a reduction in advertising
and promotion expenses, as well as, a reduction in personnel costs associated
with the sale of the modem operations.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 20% when comparing both the
quarterly results for the second quarter of fiscal 1999 compared to fiscal 1998
and the results for the six month period ended September 30, 1998 compared to
the six month period ended September 30, 1997. The decrease was primarily
attributable to a reduction in personnel costs associated with the sale of the
modem operations.
FACILITIES COSTS
As a result of restructuring and the sale of its modem business, the Company has
sublet excess space in its facilities. During the quarter ended September 30,
1998 sublet rental receipts exceeded facilities rent expenditures. The Company
anticipates that sublet income will in part offset facilities rent expense in
the future, however, there can be no guarantee that net rental income will be
achieved. The Company may experience an adverse result in its sublet activities
if there is a change in the Company's spatial requirements or its ability to
attract and retain qualified tenants.
RESTRUCTURING COSTS
On March 31, 1998, the Company announced a fundamental shift in business
strategy to refocus its efforts on its new line of communication servers for
small and medium size offices and a change of its name to OneWorld Systems, Inc.
During the first fiscal quarter of 1999, the Company recorded a restructuring
charge of approximately $404,000 comprised of additional one-time costs for
severance and employees related costs (approximately $247,000), lease
abandonment (approximately $88,000), and fixed asset write-offs (approximately
$69,000) associated with the transition to OneWorld Systems. No additional
restructuring charges were recognized in the second quarter of 1999.
NET OTHER INCOME
<TABLE>
<CAPTION>
(in thousands) Three months ended September 30 Six months ended September 30
1998 1997 1998 1997
------------------ ------------------ ------------------ -------------------
% of net % of net % of net % of net
$ revenue $ revenue $ revenue $ revenue
------ --------- ------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other income, net
Gain on sale of modem business -- --% -- --% 6,128 48% -- --%
Gain on sale of investments -- --% 1,617 9% -- --% 1,617 5%
Other income, net 93 26% 244 1% 105 1% 301 1%
------ ------ ------ ------ ------ ------ ------ ------
Total other income, net 93 26% 1,861 10% 6,233 49% 1,918 6%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Other net income for the three and six month period ended September 30, 1998
consisted primarily of imputed interest income on the note receivable from Boca
Research. Net other income in the six month period ended September 30, 1998
included a net gain on sale of the Company's modem operations of $6.1 million
recorded during the quarter ended June 30, 1998. On June 18, 1998, the Company
completed the sale of its modem operations to Boca Research (see note 5 of the
Notes to Condensed Consolidated Financial Statements).
12
<PAGE> 13
Additionally, other net income for the three and six month periods ended
September 30, 1997 included a net gain on the sale of the Company's investments
in GlobalCenter, Inc. and AirMedia, Inc.
The effective tax rate for the second quarter of fiscal 1999 was zero, unchanged
from the second quarter of fiscal 1998. The effective tax rate for the six month
period ended September 30, 1998 was 7%, an increase from zero for the six month
period ended September 30, 1997. The increase relates to refunds of prior
periods state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $1.5 million at September 30,
1998, representing 18% of total assets. The Company's working capital was $3.8
million at September 30, 1998 as compared to $0.2 million at March 31, 1998, an
increase of $3.6 million. The increase in working capital was primarily
attributable to the receipt of proceeds and elimination of certain liabilities
associated with the sale of the modem operations to Boca Research.
At September 30, 1998, the Company's principal source of liquidity was $1.5
million in cash and future payments of the note receivable from Boca Research,
Inc. (see note 5 of the Notes to Condensed Consolidated Financial Statements).
During September 1998, the Company and Boca Research discussed restructuring the
obligations owing to the Company. No agreement was reached regarding any
restructuring, and the Company received the first installment of $3.0 million on
October 2, 1998. The Company expects to continue discussions regarding the
second payment due December 31, 1998. However, there can be no assurance that
the second payment will be received in a timely manner or at all. Failure to
receive the second payment when due could have a material adverse affect on the
Company's business, financial condition and results of operations.
The Company does not expect fiscal 1999 capital expenditures to exceed
historical levels and may possibly be reduced. During the past several quarters,
the Company has experienced significant negative cash flows from operations.
However, the Company currently believes that its existing cash and cash proceeds
from the note receivable related to the sale of its modem operations (see note 5
of the Notes to Condensed Consolidated Financial Statements) should enable the
Company to meet its short term needs. The preceding sentences anticipating
future cash receipts and requirements are forward-looking statements. The
Company's funding requirements may change at any time due to various factors,
including the Company's operating results, the timing and receipt of any amounts
owing on its note receivable, the results and timing of the Company's launch of
new products and services, the market acceptance of these new products, the
Company's ability to reduce or control various operating expenses through cost
containment measures or operating reductions, the success of the Company's
marketing efforts, technological advances and competition. 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.
YEAR 2000 ISSUES
The Company is aware of the potential risk of Year 2000 software failures. The
Company has commenced, but not yet completed, its evaluation of the Year 2000
issue and is in the process of identifying the areas in which the Company may
have exposure in the systems utilized by the Company to operate its business,
systems used by key suppliers and customers, and OneWorld produced products.
The Company has assessed the impact on its corporate information system for Year
2000 issues and has determined that the Company's current information system
will not accommodate dates after 1999. The Company plans to adopt a new system
or upgrade its existing system within the next 12 months. Although the Company
has not yet purchased the new system, it believes that the cost will not exceed
$200,000. The Company does not expect delays in the implementation of a new
information system, however, there is a risk of not having sufficient time and
internal and external human resources to be fully operational on a new business
information system in a timely manner. The Company is exploring an interim
solution should the December 31, 1999 deadline not be achievable. The Company
believes that the transition to a new system or the implementation of an interim
solution will not cause any material disruption in its business.
13
<PAGE> 14
Additionally, the Company is in the process of reviewing the Year 2000 exposure
with its customers, suppliers and other business partners. There can be no
assurance made that all the systems of its customers, suppliers and other
business partners will be Year 2000 compliant on a timely basis, or at all. If
these third parties' systems are not compliant, the Company could experience
delays in customers orders or in obtaining supplies, materials and finished
products from the Company's vendors.
The Company has commenced efforts to ensure that all products that the Company
currently produces will be fully Year 2000 compliant. 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.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE PERFORMANCE
In addition to the other information in this Quarterly Report, one should
carefully consider the following factors in evaluating the Company.
PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
The Company believes that its future success will depend on its ability to
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.
MARKET ANTICIPATION OF NEW PRODUCTS OR TECHNOLOGIES
Since the environment in which the Company operates is characterized by rapid
new product and technology introductions and generally falling prices for
existing products, the Company's customers may from time to time postpone
purchases in anticipation of such new product introductions or lower prices. If
such anticipated changes are viewed as significant by the market, then this may
have the effect of temporarily slowing overall market demand and negatively
impacting the Company's operating results.
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. 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 Right Fax, Omtool, Castelle, 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. Other companies in the personal
computer industry 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.
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. 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 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
14
<PAGE> 15
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 shortfall in net
revenue would have a material adverse effect on the Company's financial
condition and results of operations.
DEPENDENCE ON MANUFACTURERS
Historically, the Company purchased fully manufactured and tested units from a
"turnkey" manufacturing subcontractor. The Company continues 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.
RELIANCE ON VALUE ADDED RESELLERS
The Company distributes 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 distribution
channel 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.
DEPENDENCE ON KEY PERSONNEL
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 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.
If the Company were to fail to replace or retain its key employees or attract
additional key employees, the Company's results of operations could be
materially adversely effected
INTELLECTUAL PROPERTY AND 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
15
<PAGE> 16
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.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been volatile and trading
volumes have been relatively low. Factors such as variations in the Company's
revenue, operating results and cash flow and announcements of technological
innovations or price reductions by the Company, its competitors, or providers of
alternative products could cause the market price of the Company's Common Stock
to fluctuate substantially. In addition, the stock markets have experienced
significant price and volume fluctuations that particularly have affected
technology-based companies and resulted in changes in the market prices of the
stocks of many companies that have not been directly related to the operating
performance of those companies. Such broad market fluctuations may adversely
affect the market price of the Company's Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Board of Director's has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of the Company's Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. While the Company has no
present intention to issue shares of Preferred Stock, any such issuance could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. In addition, the
Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which could have the effect of delaying or
preventing a change of control of the Company. Furthermore, certain provision of
the Company's Certificate of Incorporation may have the effect of delaying or
preventing changes in control or management of the Company, which could
adversely affect the market price of the Company's Common Stock.
UNCERTAIN INTERNATIONAL DEMAND
The Company is concentrating its launch of its new OneWorld 5000 server in the
United States and Canada only and currently has no near term plans for
addressing other international markets for these products. If the Company were
to offer the OneWorld 5000 communications server internationally, there can be
no assurance that the Company will be able to attain international demand for
the its 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.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Not applicable.
ITEM 2. CHANGES IN SECURITIES/RECENT SALES OF UNREGISTERED SECURITIES
- Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of Stockholders on August 20, 1998. The
following matters were approved by the stockholders by the votes indicated:
<TABLE>
<CAPTION>
Total Votes For Total Votes Withheld
Matter: Each Director From Each Director
- ------------------------------------------- --------------------------- ----------------------------
<S> <C> <C>
Election of directors:
Neil Selvin 15,362,956 231,873
Leonard A. Lehmann 15,362,956 231,873
Kevin R. Compton 15,362,956 231,873
Eugene Eidenberg 15,362,956 231,873
Kenneth A. Goldman 15,362,956 231,873
</TABLE>
<TABLE>
<CAPTION>
Number of Shares
----------------------------------------------------------
Broker
Other Matters: For Against Abstain Non-Vote
- ------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
To approve an amendment to the 1991 Stock 4,315,642 1,378,674 243,414 9,854,539
Option Plan to increase the number of
shares of Common Stock authorized for
issuance thereunder by 1,600,000 shares.
To approve an amendment of the 1994 14,527,870 981,747 282,652 --
Non-Employee Directors' Stock Option Plan
increasing the annual grants thereunder
and to approve the grant of certain
options.
To ratify the selection of KPMG Peat 15,598,814 96,566 96,889 --
Marwick LLP as independent auditors of
the Company for its fiscal year ending
March 31, 1999.
To transact other such business as may 14,813,176 622,092 357,001 --
properly come before the meeting.
</TABLE>
ITEM 5. OTHER INFORMATION - Not applicable.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.2 1991 Stock Option Plan, as amended (the "Option Plan")
10.12 1994 Non-Employee Directors' Stock Option Plan, as amended
(the "Directors' Plan")
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K during the quarter
ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OneWorld Systems, Inc.
Date: November 12, 1998 /S/Neil Selvin
------------------------------------------
President and Chief Executive Officer
(Principle Executive Officer)
Date: November 12, 1998 /S/Marc E. Linden
------------------------------------------
Senior Vice President Finance and
Chief Financial Officer
(Principle Financial and Accounting
Officer)
18
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.2 1991 Stock Option Plan, as amended (the "Option Plan")
10.12 1994 Non-Employee Directors' Stock Option Plan, as amended
(the "Directors' Plan")
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10.2
ONEWORLD SYSTEMS, INC.
1991 STOCK OPTION PLAN
ADOPTED SEPTEMBER 17, 1991
AMENDED AUGUST 20, 1998
1. PURPOSES
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company and
its Affiliates, may be given an opportunity to purchase stock of
the Company.
(b) The Company, by means of the Plan, seeks to retain the services
of persons who are now Employees or Directors of or Consultants
to the Company or its Affiliates, to secure and retain the
services of new Employees, Directors and Consultants, and to
provide incentives for such persons to exert maximum efforts for
the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan
shall, in the discretion of Board or any Committee to which
responsibility for administration of the Plan has been delegated
pursuant to subsection 3(c), be either Incentive Stock Options
or Supplemental Stock Options. All Options shall be separately
designated Incentive Stock Options or Supplemental Stock Options
at the time of grant, and in such form as issued pursuant to
Section 6, and a separate certificate or certificates will be
issued for shares purchased on exercise of each type of Option.
2. DEFINITIONS
(a) "AFFILIATE" means any parent corporation or subsidiary
corporation whether now or hereafter existing, as those terms
are defined in Sections 424(e) and (f) respectively, of the
Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in
accordance subsection 3(c) of the Plan.
(e) "COMPANY" means OneWorld Systems, Inc. a Delaware corporation.
(f) "CONSULTANT" means any person, including an advisor, engaged by
the Company or Affiliate to render consulting services and who
is compensated for such services, provided that the term
"Consultant" shall not include Directors who are paid only a
Director's fee by the Company or who are not compensated by the
Company for their services as Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means
the employment or relationship as a Director or Consultant is
not interrupted or terminated. The Board, in its sole
10.2-1
<PAGE> 2
discretion, may determine whether Continuous Status as an
Employee, Director or Consultant shall be considered interrupted
in the case of (i) any leave of absence approved by the Board,
including sick leave, military leave, or any other personal
leave; or (ii) transfers between locations of the Company or
between the Company, Affiliates or their successors.
(h) "COVERED EXECUTIVE" means each Employee. Director or Consultant
subject to Section 16 of the Exchange Act with respect to the
Company or each Employee, Director or Consultant who would be
subject to Section 16 of the Exchange Act with respect to the
Company if equity securities of the Company had been registered
under Section 12 of the Exchange Act.
(i) "DIRECTOR" means a member of the Board.
(j) "DISINTERESTED PERSON" means a Director: (i) who either (A) was
not during the one year prior to service as an administrator of
the Plan granted or awarded equity securities pursuant to the
Plan or any other plan of the Company or any of its affiliates
entitling the participants therein to acquire equity securities
of the Company or any of its affiliates except as permitted by
Rule 16b-3(c)(2)(i); or (B)who is otherwise considered to be a
"disinterested person" in accordance with Rule 16b-3(c)(2)(i),
of any other applicable rules, regulations or interpretations
of the Securities and Exchange Commission; and (ii) who either
(A) is not a current Employee, is not a former Employee
receiving compensation for prior services (other than benefits
under a tax qualified pension plan), was not an officer of the
Company or an Affiliate at any time, and is not currently
receiving compensation for personal services in any capacity
other than as a Director, or (B) is otherwise considered an
outside director for purposes of Section 162(m) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither
service as a Director nor payment of a director's fee, by the
Company shall be sufficient to constitute "employment" by the
Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934. as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of the
common stock of the Company determined as follows:
(1) If the common stock is listed on any established stock
exchange or a national market system, including without
limitation the National Market System of the National
Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the Fair Marker Value of a
share of common stock shall be the closing sales price
for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the
exchange with the greatest volume of trading in common
stock) on the last market trading day prior to the day
of determination, as reporting in the Wall Street
Journal or such other source as the Board deems
reliable;
10.2-2
<PAGE> 3
(2) If the common stock is quoted on the NASDAQ System (but
not on the National Market System thereof) or is
regularly quoted by a recognized securities dealer but
selling prices are not reported the Fair Market Value
of a share of common stock shall be the mean between the
bid and asked prices for the common stock on the last
market trading day prior to the day of determination, as
reported in the Wall Street Journal or such other source
as the Board deems reliable;
(3) In the absence of an established market for the common
stock, the Fair Market Value shall be determined in good
faith by the Board.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of
the Code and the regulations promulgated thereunder.
(o) "SUPPLEMENTAL STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(q) "OPTION" means a stock option granted pursuant to the Plan.
(r) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an
individual Option grant. Each Option Agreement shall be subject
to the terms and conditions of the Plan.
(s) "OPTIONED STOCK" means the common stock of the Company subject
to an Option.
(t) "OPTIONEE" means an Employee, Director or Consultant who holds
an outstanding Option.
(u) "PLAN" means this 1991 Stock Option Plan.
(v) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being
exercised with respect to the Plan.
3. ADMINISTRATION
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in
subsection 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the persons
eligible under the Plan shall be granted Options, when
and how each Option shall be granted; whether an Option
will be an Incentive Stock Option or a Supplemental
Stock Option; the provisions of each Option granted
(which
10.2-3
<PAGE> 4
need not be identical), including the time or times such
Option may be exercised in whole or in part; and the
number of shares for which an Option shall be granted to
each such person.
(2) To construe and interpret the plan and Options granted
under it, and to establish, amend and revoke rules and
regulations for its administration. The Board, in the
exercise of this power, may correct any defect, omission
or inconsistency in the Plan or in any Option Agreement,
in a manner and to the extent it shall deem necessary or
expedient to make the Plan fully effective.
(3) To amend the Plan as provided in Section 11.
(4) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to
promote the best interests of the Company.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members (the "Committee"),
all of the members of which Committee shall be Disinterested
Persons if required by the provisions of subsection 3(d). If
administration is delegated to a Committee, the Committee shall
have, in connection with the administration of the Plan, the
powers therefore possessed by the Board (and references in this
Plan to the Board shall thereafter be to the Committee).
subject, however, to such resolutions. Not inconsistent with the
provisions of the Plan, as may be adopted from time to time by
the Board. The Board may abolish the Committee at any time and
revest in the Board the administration of the Plan.
Additionally, except with respect to Options granted to Covered
Executives, prior to the date or the first registration of an
equity security of the Company under Section 12 of the Exchange
Act and notwithstanding anything to the contrary contained
herein, the Board may delegate administration of the Plan to any
person or persons and the term "Committee" shall apply to any
person or persons to whom such authority has been delegated.
Notwithstanding anything in this Section 3 to the contrary, the
Board or the Committee may delegate to a committee of one or
more members of the Board the authority to grant options to
eligible persons who are not then subject to Section 16 of the
Exchange Act and who are not Covered Executives.
(d) Any requirement that an administrator of the Plan be a
Disinterested Person shall not apply (i) prior to the date of
the first registration of an equity security of the Company
under Section 12 of the Exchange Act, or (ii) if the Board or
the Committee expressly declares that such requirement shall not
apply. Any Disinterested Person shall otherwise comply with the
requirements of Rule 16b-3.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to
Options shall not exceed in the aggregate seven million two
hundred thousand (7,200,000) shares of the Company's common
stock if any Option shall for any reason
10.2-4
<PAGE> 5
expire or otherwise terminate, in whole or in part, without
having been exercised in full, the stock not purchased under
such Option shall revert to and again become available for
issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees.
Supplemental Stock Options may be granted only to Employees,
Directors or Consultants.
(b) A Director shall in no event be eligible for the benefits of
the Plan unless at the time discretion is exercised in the
selection of the Director as a person to whom Options way be
granted, or in the determination of the number of shares which
may be covered by Options granted to the Director: (i) the Board
has delegated its discretionary authority over the Plan to a
Committee which consists solely of Disinterested Persons; or
(ii) the Plan otherwise complies with the requirements of Rule
16b-3. The Board shall otherwise comply with the requirements of
Rule 16b-3. This subsection 5(b) shall not apply (i) prior to
the date of the first registration of an equity security of the
Company under Section 12 of the Exchange Act, or (ii) if the
Board or Committee expressly declares that it shall not apply.
(c) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed
to own pursuant to Section 424(d) of the Code) stock possessing
more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of any of its
Affiliates unless the exercise price of such Option is at least
one hundred ten percent (110%) of the Fair Market Value of such
stock at the date of grant and the Option is not exercisable
after the expiration of five (5) years from the date of grant.
(d) No Covered Executive shall be eligible to be granted Options
covering more than one million (1,000,000) shares of the
Company's common stock in any twelve (12) month period.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms
and conditions as the Board shall deem appropriate. The
provisions of separate Options need not be identical, but each
Option shall include (through incorporation of provisions hereof
by reference in the Option or otherwise) like substance of each
of the following provisions:
(a) TERM. No option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
10.2-5
<PAGE> 6
(b) PRICE. The exercise price of each Incentive Stock Option shall
be not less than one hundred percent (100%) of the Fair Market
Value of the stock subject to the Option on the date the Option
is granted. The exercise price of each Supplemental Stock Option
shall be not less than eighty-five percent (85%) of the Fair
Market Value of the stock subject to the Option on the date the
Option is granted.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to
an Option shall be paid, to the extent permitted by applicable
statutes and regulations, either (i) in cash at the time the
option is exercised, or (ii) at the discretion of the Board or
the Committee, either at the time of the grant or exercise of
the Option, (A) by delivery to the Company of other common stock
of the Company, (B) according to a deferred payment or other
arrangement (which may include, without limiting the generality
of the foregoing the use of other common stock of the Company)
with the person to whom the Option is granted or to whom the
Option is transferred pursuant to Subsection 6(d) or (C) in any
other form of legal consideration that may be acceptable to the
Board.
In the case of any deferred payment arrangement, interest shall
be payable at least annually and be charged at the minimum rate
of interest necessary to avoid the treatment as interest, under
any applicable provisions of the Code, of any amounts other than
amounts stated to be interest under the deferred payment
arrangement.
(d) TRANSFERABILITY. An Option shall not be transferable except by
will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Option
is granted only by such person. The person to whom the Option is
granted may, by delivering written notice to the Company, in a
form satisfactory to the Company, designate a third party who,
in the event of the death of the Optionee, shall thereafter be
entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an
Option may, but need not, be allotted in periodic installments
(which may, but need not, be equal). The Option Agreement may
provide that from time to time during each of such installment
periods, the Option may become exercisable ("vest") with respect
to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to
such period and/or any prior period as to which the Option
became vested but was not fully exercised. The Option may be
subject to such other terms and conditions on the time or times
when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The
provisions of this subsection 6(e) are subject to any Option
provisions governing the minimum number of shares as to which an
Option may be exercised.
(f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee,
or any person to whom an Option is transferred under subsection
6(d), as a condition of exercising any such Option, (1) to give
written assurances satisfactory to the Company as to the
Optionee's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably
satisfactory to
10.2-6
<PAGE> 7
the Company who is knowledgeable and experienced in financial
and business matters, and that he or she is capable of
evaluating, alone or together with the purchaser representative,
the merits and risks of exercising the Option; and (2) to give
written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the Option for such
person's own account and not with any present intention of
selling or otherwise distributing the stock. The foregoing
requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the
shares upon the exercise of the Option has been registered under
a then currently effective registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), or
(ii) as to any particular requirement, a determination is made
by counsel for the Company that such requirement need not be met
in the circumstances under the then applicable securities laws.
The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with
applicable securities laws, including, but not limited to,
legends restricting the transfer of the stock.
(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an
Employee, Director or Consultant terminates (other than upon the
Optionee's death or disability), the optionee may exercise his
or her Option (to the extent that at the Optionee was entitled
to exercise it at the date of termination) but only within such
period of time ending on the earlier of (i) the date thirty (30)
days after the termination of the Optionee's Continuous status
as an Employee, Director or Consultant (or such longer or
shorter period specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option
Agreement if after termination, the Optionee does not exercise
his or her Option within the time specified in the Option
Agreement, the Option shall terminate, and the shares covered by
such Option shall revert to and again become available for
issuance under the Plan.
(h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a
result of the Optionee's disability, the Optionee may exercise
his or her Option (to the extent that the Optionee was entitled
to exercise it at the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter
period specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option
Agreement. If, at the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert
to and again become available for issuance under the plan. If,
after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to
and again become available for issuance under the Plan.
(i) DEATH OF OPTIONEE. In the event of the death of an Optionee
during, or within a period specified in the Option after the
termination of, the Optionee's Continuous Status as an Employee,
Director or
10.2-7
<PAGE> 8
Consultant, the Option may be exercised (to the extent the
Optionee was entitled to exercise the Option at the date of
death) by the Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only
within the period ending on the earlier of (i) the date eighteen
(18) months following the date of death (or such longer or
shorter period specified in the Option Agreement), or (ii) the
expiration of the term of such Option as set forth in the Option
Agreement. If, at the time of death, the Optionee was not
entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert
to and again become available for issuance under the Plan. If,
after death, the Optionee's estate or a person who acquired the
right to exercise the option by bequest or inheritance does not
exercise the Option within the time specified herein, the Option
shall terminate, and the shares covered by such Option shall
revert to and again become available for issuance under the
Plan.
(j) EARLY EXERCISE. The Option may, but need not, include a
provision whereby the Optionee may elect at any time while an
Employee, Director or Consultant to exercise the Option as to
any part or all of the shares subject to the Option prior to the
full vesting of the Option. Any unvested shares so purchased may
be subject to a repurchase right in favor of the Company or to
any other restriction the Board determines to be appropriate.
(k) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local
tax withholding obligation relating to the exercise of such
Option by any of the following means or by a combination of such
means: (1) tendering a cash payment; (2) authorizing the Company
to withhold shares from the shares of the common stock otherwise
issuable to the participant as a result of the exercise of the
Option; or (3) delivering to the Company owned and unencumbered
shares of the common stock of the Company.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the Options, the Company shall keep
available at all times the number of shares of stock required to
satisfy such Options.
(b) The Company shall seek to obtain from each regulatory commission
or agency having jurisdiction over the Plan such authority as
may be required to issue and sell shares of stock upon exercise
of the Options; provided however, that this understanding shall
not require the Company to register under the Securities Act
either the Plan, any Option or any stock issued or issuable
pursuant to any such Option. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission
or agency the authority which counsel for the Company deems as
necessary for the lawful issuance and sale of stock under the
Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Options
unless and until such authority is obtained.
10.2-8
<PAGE> 9
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Options shall
constitute general funds of the Company.
9. MISCELLANEOUS.
(a) The Board shall have the Power to accelerate the time at which
an Option may first be exercised or the time during which an
Option or any plan thereof will vest pursuant to subsection
6(e), notwithstanding the provisions in the Option stating the
time at which it may first be exercised or the time during which
it will vest.
(b) Neither an Optionee nor any person to whom an Option is
transferred under subsection 6(d) shall be deemed to be the
holder of, or to have any of the rights of a holder with respect
to, any shares subject to such Option unless and until such
person has satisfied all requirements for exercise of the Option
pursuant to its terms.
(c) Throughout the term of any Option, the Company shall deliver to
the holder of such Option, not later than one hundred twenty
(120) days after the close of each of the Company's fiscal years
during the Option term, a balance sheet and an income statement.
(d) Nothing in the Plan or any instrument executed or Option granted
pursuant thereto shall confer upon any Employee, Director,
Consultant or Optionee any right to continue in the employ of
the Company or any Affiliate (or to continue acting as a
Director or Consultant) or shall affect the right of the Company
or any Affiliate to terminate the employment or relationship as
a Director or Consultant of any Employee, Director, Consultant
or Optionee with or without cause.
(e) To the extent that the aggregate Fair Market Value (determined
at the time of grant) of stock with respect to which Incentive
Stock Options granted after 1986 are exercisable for the first
time by any Optionee during any calendar year under all plans of
the Company and its Affiliates exceeds one hundred thousand
dollars ($100,000), the Options or portions thereof which exceed
such limit (according to the order in which they were granted)
shall be treated as Supplemental Stock Options.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or
subject to any Option (through merger, consolidation,
reorganization, recapitalization, stock dividend. dividend in
property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate
structure or otherwise), the Plan and outstanding Options will
be appropriately adjusted in the class(es) and maximum number of
shares subject to the Plan and the class(es) and number of
shares and price per share of stock subject to outstanding
Options.
10.2-9
<PAGE> 10
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or
consolidation in which the Company is not the surviving
corporation; or (3) a reverse merger in which the Company is the
surviving corporation but the shares of the Company's common
stock outstanding immediately preceding the merger are convened
by virtue of the merger into other property, whether in the form
of securities, cash or otherwise, then to the extent permitted
by applicable law: (i) any surviving corporation shall assume
any Options outstanding under the Plan or shall substitute
similar Options for those outstanding under the Plan, or (ii)
such Options shall continue in full force and effect. In the
event any surviving corporation refuses to assume or continue
such Options, or to substitute similar options for those
outstanding under the Plan, then, with respect to Options held
by persons then performing services as Employees, Directors or
Consultants, the time during which such Options may be exercised
shall be accelerated and the Options terminated if not exercised
prior to such event.
(c) In the event of any Change of Control of the Company (other than
a Change of Control that has been approved by a majority of the
Company's Board of Directors who were directors immediately
prior to such Change in Control), then the time during which
such Options may be exercised shall be accelerated and the
Options terminated if not exercised prior to such event. A
"Change in Control" shall be deemed to occur if (i) the
stockholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than a merger or
consolidation that would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 80% of
the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately
after such merger or consolidation or (ii) the stockholders of
the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the
Company of (in one transaction or a series of transactions) all
or substantially all of the Company's assets.
11. AMENDMENT OF THE PLAN
(a) The Board at any time and from time to time, may amend the
Plan. However, except as provided in Section 10 relating to
adjustments upon changes in stock, no amendment shall be
effective unless approved by the stockholders of the Company
within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(1) Increase the number of shares reserved for Options under
the Plan;
(2) Modify the requirements as to eligibility for
participation in the Plan (to the extent such
modification requires stockholder approval in order for
the Plan to satisfy the requirements of Section 422 of
the Code); or
10.2-10
<PAGE> 11
(3) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to
satisfy the requirements of Section 422 of the Code,
comply with the stockholder approval requirements of
Section 162(m) of the Code or to comply with the
requirements of Rule 16b-3.
(b) It is expressly contemplated that the Board may amend the Plan
in any respect the Board deems necessary or advisable to provide
Optionees with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring
the Plan and/or Incentive Stock Options granted under it into
compliance therewith.
(c) Rights and obligations under any Option granted before amendment
of the Plan shall not be altered or impaired by any amendment of
the Plan unless (i) the Company requests the consent of the
person to whom the Option was granted and (ii) such person
consents in writing.
12. TERMINATION OF SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on September 16,
2001 which shall be within ten (10) years from the date the Plan
is adopted by the Board or approved by the stockholders of the
Company, whichever is earlier. No Options may be granted under
the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any Option granted while the Plan
is in effect shall not be altered or impaired by suspension or
termination of the Plan, except with the consent of the person
to whom the Option was granted.
13. EFFECTIVE DATE OF THE PLAN.
The Plan shall become effective as determined by the Board, but
no Options granted under the Plan shall be exercised unless and until
the Plan has been approved by the stockholders of the Company, which
approval shall be within twelve (12) months before or after the date the
Plan is adopted by the Board, and, if required, an appropriate permit
has been issued by the Commissioner of Corporations of the state of
Delaware.
10.2-11
<PAGE> 1
Exhibit 10.12
ONEWORLD SYSTEMS, INC.
1994 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED JANUARY 19, 1994
APPROVED BY SHAREHOLDERS
AMENDED JULY 30, 1997
AMENDED AUGUST 20, 1998
1. PURPOSE
(a) The purpose of the 1994 Non-Employee Directors' Stock Option
Plan, as amended (the "Plan") is to provide a means by which
each director of OneWorld Systems, Inc. (the "Company") who is
not otherwise an employee of the Company or of any Affiliate of
the Company (each such person being hereafter referred to as a
"Non-Employee Director") will be given an opportunity to
purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company as those
terms are defined in Sections 424(e) and (f), respectively, of
the Internal Revenue Code of 1986, as amended from time to time
(the "Code").
(c) The Company, by means of the Plan, seeks to retain the services
of persons now serving as Non-Employee Directors of the Company,
to secure and retain the services of persons capable of serving
in such capacity, and to provide incentives for such persons to
exert maximum efforts for the success of the Company
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors of the
Company (the "Board") unless and until the Board delegates
administration to a committee, as provided in subparagraph 2(b).
(b) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members of the Board (the
"Committee"). If administration is delegated to a Committee, the
Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board,
subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by
the Board. The Board may abolish the Committee at any time and
revest in the Board the administration of the Plan.
10.12-1
<PAGE> 2
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 10 relating to
adjustments upon changes in stock, the stock that may be sold
pursuant to options granted under the Plan shall not exceed in
the aggregate Two Hundred Thousand (200,000) shares of the
Company's common stock. If any option granted under the Plan
shall for any reason expire or otherwise terminate without
having been exercised in full, the stock not purchased under
such option shall again become available for the Plan.
(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.
4. ELIGIBILITY.
(a) Options shall be granted only to Non-Employee Directors of the
Company.
5. NON-DISCRETIONARY GRANTS.
(a) Upon the effective date of the Company's initial public offering
(the "Effective Date"), each person who is then a Non-Employee
Director shall be granted an option to purchase Ten Thousand
(10,000) shares of common stock of the Company on the terms and
conditions set forth herein.
(b) Each person who is, after the Effective Date, elected for the
first time to be a Non-Employee Director shall, upon the date of
his initial election to be a Non-Employee Director by the Board
or stockholders of the Company, be granted an option to purchase
Twenty-Five Thousand (25,000) shares of common stock of the
Company on the terms and conditions set forth herein.
(c) On March 31 of each year, commencing with March 31, 1995, each
person who is then a Non-Employee Director and has been a
Non-Employee Director for at least three (3) months shall be
granted an option to purchase Ten Thousand (10,000) shares of
common stock of the Company on the terms and conditions set
forth herein.
(d) On August 20, 1998, each person who is then a Non-Employee
Director shall voluntarily cancel their outstanding options in
exchange for a new grant equivalent to that received upon
initial election (Twenty-Five Thousand (25,000) shares of common
stock of the Company) on the terms and conditions set forth
herein.
6. OPTION PROVISIONS.
Each option shall contain the following terms and conditions:
10.12-2
<PAGE> 3
(a) The term of each option commences on the date it is granted and,
unless sooner terminated as set forth herein, expires on the
date ("Expiration Date") ten (10) years from the date of grant.
If the optionee's service as a Non-Employee Director of the
Company terminates for any reason or for no reason, the option
shall terminate on the earlier of the Expiration Date or the
date six (6) months following the date of termination of
service; provided, however, that if such termination of service
is due to the optionee's death, the option shall terminate on
the earlier of the Expiration Date or Six (6) months following
the date of the optionee's death. In any and all circumstances,
an option may be exercised following termination of the
optionee's service as a Non-Employee Director of the Company
only as to that number of shares as to which it was exercisable
on the date of termination of such service under the provisions
of subparagraph 6(e).
(b) Subject to subparagraph 4(b), the exercise price of each option
shall be one hundred percent (100%) of the fair market value of
the stock subject to such option on the date such option is
granted.
(c) Payment of the exercise price of each option is due in full in
cash upon any exercise when the number of shares being purchased
upon such exercise is less than 1,000 shares; but when the
number of shares being purchased upon an exercise is 1,000 or
more shares, the optionee may elect to make payment of the
exercise price under one of the following alternatives:
(i) Payment of the exercise Price per share in cash at the
time of exercise; or
(ii) Provided that at the time of the exercise the Company's
common stock is publicly traded and quoted regularly in
the Wall Street Journal, payment by delivery of shares
of common stock of the Company already owned by the
optionee, held for the period required to avoid a charge
to the Company's reported earnings, and owned free and
clear of any liens, claims, encumbrances or security
interest, which common stock shall be valued at fair
market value on the date preceding the date of exercise;
or
(iii) Payment by a combination of the methods of payment
specified in subparagraph 6(c)(i) and 6(c)(ii) above.
Notwithstanding the foregoing, this option may be exercised
pursuant to a program developed under Regulation T as
promulgated by the Federal Reserve Board which results in the
receipt of cash (or check) by the Company prior to the issuance
of shares of the Company's common stock.
(d) An option shall not be transferable except by will or by the
laws of descent and distribution, unless
(i) the Board shall be advised by counsel that such transfer
will not jeopardize the Plan's exemption from Section
16(b) of the Securities Exchange Act of 1934, and
10.12-3
<PAGE> 4
(ii) the Board shall have specifically provided in such
option that it shall be transferable. An option shall be
exercisable during the lifetime of the person to whom
the option is granted only by such person or by his
guardian, legal representative or permitted transferee.
(e) The option shall become exercisable in installments over a
period of five years from the date of grant at the rate of
twenty percent (20%) per year in five (5) equal annual
installments commencing on the date one year after the date of
grant of the option, provided that the optionee has, during the
entire period prior to such vesting date, continuously served as
a Non-Employee Director or as an employee of or consultant to
the Company or any Affiliate of the Company, whereupon such
option shall become fully exercisable in accordance with its
terms with respect to that portion of the shares represented by
that installment.
(f) The Company may require any optionee, or any person to whom an
option is transferred under subparagraph 6(d), as a condition of
exercising any such option:
(i) to give written assurances satisfactory to the Company
as to the optionee's knowledge and experience in
financial and business matters; and
(ii) to give written assurances satisfactory to the Company
stating that such person is acquiring the stock subject
to the option for such person's own account and not
with any present intention of selling or otherwise
distributing the stock.
These requirements, and any assurances given pursuant to such
requirements, shall be inoperative if
(i) the issuance of the shares upon the exercise of the
option has been registered under a
then-currently-effective registration statement under
the Securities Act of 1933, as amended (the "Securities
Act"), or,
(ii) as to any particular requirement, a determination is
made by counsel for the Company that such requirement
need not be met in the circumstances under the
then-applicable securities laws.
(g) Notwithstanding anything to the contrary contained herein, an
option may not be exercised unless the shares issuable upon
exercise of such option are then registered under the Securities
Act or, if such shares are not then so registered, the Company
has determined that such exercise and issuance would be exempt
from the registration requirements of the Securities Act.
7. COVENANTS OF THE COMPANY
(a) During the terms of the options granted under the Plan, the
Company available at all times the number of shares of stock
required to satisfy such options.
10.12-4
<PAGE> 5
(b) The Company shall seek to obtain from each regulatory commission
or agency having jurisdiction over the Plan such authority as
may be required to issue and sell shares of stock upon exercise
of the options granted under the Plan; provided, however, that
this undertaking shall not require the Company to register under
the Securities Act either the Plan, any option granted under the
Plan, or any stock issued or issuable pursuant to any such
option. If the Company is unable to obtain from any such
regulatory commission or agency the authority which counsel for
the Company deems necessary for the lawful issuance and sale of
stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon exercise of
such options.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the
Plan shall constitute general funds of the Company.
9. MISCELLANEOUS.
(a) Neither an optionee nor any Person to whom an option is
transferred under subparagraph 6(d) shall be deemed to be the
holder of, or to have any of the rights of a holder with respect
to, any shares subject to such option unless and until such
person has satisfied all requirements for exercise of the option
pursuant to its terms.
(b) Throughout the term of any option granted pursuant to the Plan,
the Company shall make available to the holder of such option,
not later than one hundred twenty (120) days after the close of
each of the Company's fiscal years during the option term, upon
request, such financial and other information regarding the
Company as comprises the annual report to the stockholders of
the Company provided for in the Bylaws of the Company and such
other information regarding the Company as the holder of such
option may reasonably request.
(c) Nothing in the Plan or in any instrument executed pursuant
thereto shall confer upon any Non-Employee Director any right to
continue in the service of the Company or any Affiliate or shall
affect any right of the Company, its Board or stockholders or
any Affiliate to terminate the service of any Non-Employee
Director with or without cause.
(d) No Non-Employee Director, individually or as a member of a
group, and no beneficiary or other person claiming under or
through him, shall have any right, title or interest in or to
any option reserved for the purposes of the Plan except as to
such shares of common stock, if any, as shall have been reserved
for him pursuant to an option granted to him.
10.12-5
<PAGE> 6
(e) In connection with each option made pursuant to the Plan, it
shall be a condition precedent to the Company's obligation to
issue or transfer shares to a Non-Employee Director, or to
evidence the removal of any restrictions on transfer, that such
Non-Employee Director make arrangements satisfactory to the
Company to insure that the amount of any federal or other
withholding tax required to be withheld with respect to such
sale or transfer, or such removal or lapse is made available to
the Company for timely payment of such tax.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or
subject to any option granted under the Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend,
dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in
corporate structure or otherwise), the Plan and outstanding
options will be appropriately adjusted in the class(es) and
maximum number of shares subject to the Plan and the class(es)
and number of shares and price per share of stock subject to
outstanding options.
(b) In the event of: (1) a merger or consolidation in which the
Company is not the surviving corporation; (2) a reverse merger
in which the Company is the surviving corporation but the shares
of the Company's common stock outstanding immediately preceding
the merger are convened by virtue of the merger into other
property, whether in the form of securities, cash or otherwise;
or (3) any other capital reorganization in which more than fifty
percent (50%) of the shares of the Company entitled to vote are
exchanged the time during which options outstanding under the
Plan may be exercised shall be accelerated and the options
terminated if not exercised prior to such event.
11. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the
Plan, provided, however, that the Board shall not amend the plan
more than once every six months, with respect to the provisions
of the plan which relate to the amount, price and timing of
grants, other than to comport with changes in the Code, the
Employee Retirement Income Security Act, or the rules
thereunder. Except as provided in paragraph 10 relating to
adjustments upon changes in stock, no amendment shall be
effective unless approved by the stockholders of the Company
within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(i) Increase the number of shares which may be issued under
the Plan;
(ii) Modify the requirements as to eligibility for
participation in the Plan (to the extent such
modification requires stockholder approval in order for
the Plan comply with to the requirements of Rule 16-b3);
or
10.12-6
<PAGE> 7
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to
comply with the requirements of Rule 16-b3.
(b) Rights and obligations under any option granted before any
amendment of the Plan shall not be altered or impaired by such
amendment unless
(i) the Company requests the consent of the person to whom
the option was granted and
(ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on January 10, 2004.
No options may be granted under the Plan while the Plan is
suspended or after it is terminated.
(b) Rights and obligations under any option granted while the Plan
is in effect shall not be altered or impaired by suspension or
termination of the Plan, except with the consent of the person
to whom the option was granted.
(c) The Plan shall terminate upon the occurrence of any of the
events described in Section 10(b) above.
13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.
(a) The Plan shall become effective upon adoption by the Board of
Directors, subject to the condition subsequent that the Plan is
approved by the stockholders of the Company.
(b) No option granted under the Plan shall be exercised or
exercisable unless and until the condition of subparagraph 13(a)
above has been met.
10.12-7
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