<PAGE> 1
================================================================================
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, 1999
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 [ ] No [X]
The number of shares of Common Stock outstanding as of November 1, 1999 was
4,465,226.
================================================================================
<PAGE> 2
ONEWORLD SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements........................................................3
Condensed Consolidated Balance Sheets
as of September 30, 1999 and March 31, 1999................................................3
Condensed Consolidated Statements of Operations
for the three and six months ended September 30, 1999 and 1998.............................4
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 1999 and 1998.......................................5
Notes to Condensed Consolidated Financial Statements...........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................19
Item 2. Changes in Securities and Use of Proceeds..............................................19
Item 3. Defaults Upon Senior Securities........................................................19
Item 4. Submission of Matters to a Vote of Security Holders....................................19
Item 5. Other Information......................................................................19
Item 6. Exhibits and Reports on Form 8-K.......................................................20
SIGNATURES.........................................................................................21
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, 1999 March 31, 1999
------------------ --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,036 $ 11,175
Accounts receivable, net 9 79
Inventories, net 188 184
Other current assets 456 254
------------------ --------------
Total current assets 5,689 11,692
Property and equipment, net 295 268
Other assets 154 168
------------------ --------------
Total assets $ 6,138 $ 12,128
================== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 688 $ 796
Accrued and other liabilities 1,164 1,796
------------------ --------------
Total current liabilities 1,852 2,592
------------------ --------------
Stockholders' equity:
Convertible preferred stock, $0.001 par value (involuntary
liquidation value of $3,114,338 and $8,304,900) 5,000,000 shares
authorized, 1,162,505 and 3,100,000 shares issued and outstanding 1 3
Common stock, $0.001 par value; 30,000,000 shares authorized,
4,465,226 and 2,524,429 shares issued and outstanding 4 2
Additional paid in capital 53,515 53,511
Accumulated deficit (49,234) (43,980)
------------------ --------------
Total stockholders' equity 4,286 9,536
------------------ --------------
Total liabilities and stockholders' equity $ 6,138 $ 12,128
================== ==============
</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,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue $ 82 $ 353 $ 232 $ 12,718
Cost of revenue 75 129 157 9,678
--------- --------- --------- ---------
Gross profit 7 224 75 3,040
--------- --------- --------- ---------
Operating expenses:
Research and development 845 1,082 1,846 3,619
Marketing and sales 1,233 854 2,482 3,635
General and administrative 656 838 1,402 1,949
Restructuring costs -- -- -- 404
--------- --------- --------- ---------
Total operating expenses 2,734 2,774 5,730 9,607
--------- --------- --------- ---------
Loss from operations (2,727) (2,550) (5,655) (6,567)
--------- --------- --------- ---------
Other income, net:
Gain on sale of modem business -- -- 268 6,128
Other income, net 74 93 158 105
--------- --------- --------- ---------
Total other income, net 74 93 426 6,233
--------- --------- --------- ---------
Loss before income taxes (2,653) (2,457) (5,229) (334)
Income tax benefit (provision) (18) -- (25) 22
--------- --------- --------- ---------
Loss from continuing operations (2,671) (2,457) (5,254) (312)
--------- --------- --------- ---------
Discontinued operations:
Income from discontinued operations -- -- -- 90
--------- --------- --------- ---------
Net loss $ (2,671) $ (2,457) $ (5,254) $ (222)
========= ========= ========= =========
Basic per share data:
Loss per share from continuing operations $ (0.61) $ (1.43) $ (1.53) $ (0.18)
Income per share from discontinued operations -- -- -- 0.05
--------- --------- --------- ---------
Net loss per share $ (0.61) $ (1.43) $ (1.53) $ (0.13)
========= ========= ========= =========
Diluted per share data:
Loss per share from continuing operations $ (0.61) $ (1.43) $ (1.53) $ (0.18)
Income per share from discontinued operations -- -- -- 0.05
--------- --------- --------- ---------
Net loss per share $ (0.61) $ (1.43) $ (1.53) $ (0.13)
========= ========= ========= =========
Shares used in basic per share computations 4,359 1,718 3,435 1,717
Dilutive effect of stock options -- -- -- --
--------- --------- --------- ---------
Shares used in diluted per share computations 4,359 1,718 3,435 1,717
========= ========= ========= =========
</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,
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,254) $ (222)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 106 671
Gain on sale of modem operations (268) (6,128)
Changes in operating assets and liabilities:
Accounts receivable, net 70 (1,070)
Inventories, net (4) 200
Other current assets (202) (54)
Accounts payable (108) 758
Accrued and other liabilities (364) 480
--------- ---------
Net cash used in operating activities:
Continuing operations (6,024) (5,365)
Discontinued operations -- (184)
--------- ---------
Net cash used by operating activities (6,024) (5,549)
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of modem business -- 4,000
Purchases of property and equipment (133) (30)
Other assets 14 (2)
--------- ---------
Net cash provided (used) by investing activities (119) 3,968
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 4 9
--------- ---------
Net cash provided by financing activities 4 9
--------- ---------
Net increase (decrease) in cash and cash equivalents (6,139) (1,572)
Cash and cash equivalents at beginning of period 11,175 3,098
--------- ---------
Cash and cash equivalents at end of period $ 5,036 $ 1,526
========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 7 $ 198
Income taxes $ 25 $ 19
Non-cash investing and financing activities:
Sale of modem operations in exhange 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") (founded in
1989 and incorporated in Delaware as Global Village Communication, Inc.)
develops and manufactures products that enhance and simplify wide-area data
communications for the small and medium sized office market. The Company's
OneWorld(R) OfficePort(TM) family of network communication appliances are
designed to be versatile, easy-to-use, cost-effective and expandable
solutions that combine Internet access and routing, remote access, modem
pooling and fax capabilities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The interim condensed consolidated financial
statements as of September 30, 1999 and for the three and six months ended
September 30, 1999 and 1998, 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, 1999.
NET LOSS PER SHARE. Net loss per share has been computed using the weighted
average number of shares of common stock outstanding in accordance with
SFAS No. 128, "Earnings per Share." Basic earnings per share ("EPS")
excludes dilutive securities 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 is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. The Company incurred a net
loss for all periods presented. Therefore, common stock equivalents of
approximately 2,533,600 and 441,000 representing outstanding options,
warrants, and convertible preferred stock (using the if-converted method)
were not included in the computation for the periods ended September 30,
1999 and September 30, 1998, respectively, because they were anti-dilutive.
INVENTORIES. Inventories are primarily comprised of finished goods and are
stated at the lower of cost or market. Costs are calculated using standard
cost, which approximates the lower of actual cost (first-in, first-out
method) or market.
3. RESTRUCTURING COSTS
As of September 30, 1999, the Company's total accrued restructuring costs
balance was approximately $60,000 and is primarily comprised of the
remaining lease liabilities on two of its facilities.
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 quarter of fiscal 1999, the Company recorded
a restructuring charge of approximately $404,000. As of September 30, 1999
the accrual balance associated with the March 1998 restructuring was
approximately $36,000 and relates primarily to the remaining lease payments
of the Plano, Texas facility.
In December 1996, the Company announced a restructuring plan to streamline
its operations, reduce its workforce and enable the Company to improve its
operating results. As of September 30, 1999 the accrual balance associated
with the December 1996 restructuring was approximately $24,000 and relates
primarily to the remaining lease payments on the Marietta, Georgia
facility.
6
<PAGE> 7
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 42,500 shares of the Company's Common Stock
at approximately $10.00 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 was recorded at
$5.855 million. The difference between the recorded value and the face
value of the note was recognized as interest income over the life of the
note. The loan was fully paid by the end of the fiscal year ended March 31,
1999.
During the quarter ended June 30, 1998, the Company recorded a gain on the
sale of the modem business of $6.128 million and during the quarter ended
March 31, 1999 recorded an additional gain of $47,000 representing the
release of reserves determined to be fully resolved. During the quarter
ended June 30, 1999, the Company recorded an additional gain on the sale of
the modem business of $268,000 representing the release of the remaining
reserves for contingencies which expired on June 18, 1999. As of September
30, 1999, the cumulative net gain on of the sale of the modem business was
$6.443 million.
The assets purchased by Boca included products which represented the
overwhelming majority of the Company's revenues and gross profits in prior
years. These products did not contribute to the Company's reported net
revenue or gross profit after June 18, 1998.
6. STOCKHOLDERS' EQUITY
On June 22, 1999 the Company's stockholders approved the proposed amendment
to the Company's Certificate of Incorporation to authorize the Board of
Directors to adopt a reverse stock split with respect to the Company's
Common Stock. On June 23, 1999 the Board of Directors approved a
one-for-ten reverse split ratio effective July 6, 1999. The effect of the
reverse split has been accounted for retroactively throughout these
financial statements.
On July 6, 1999, in connection with the one-for-ten reverse split, 50% of
the Series A Convertible Preferred Stock (or 1,550,000 shares) was
automatically converted into Common Stock at a conversion ratio of
one-for-one.
On July 7, 1999, the closing price of the Company's Common Stock, as quoted
on the Over The Counter Bulletin Board (the "OTCBB"), exceeded a specific
price resulting in the automatic conversion of an additional 12.5% of the
originally outstanding Series A Convertible Preferred Stock (or 387,500
shares) into Common Stock at a conversion ratio of one-for-one.
As of September 30, 1999, 1,162,505 shares of Series A Convertible
Preferred Stock remain outstanding. Although these shares may be converted
by the holder at any time, the remaining Series A Convertible Preferred
Stock will automatically convert into Common Stock in three equal amounts
as a result of the Company's Common Stock achieving certain future closing
prices.
7
<PAGE> 8
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, 1999. 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. (the "Company", "we", or "us") was founded in June 1989
and incorporated in Delaware as Global Village Communication, Inc. We develop
and manufacture products that enhance and simplify wide area data communications
for the small and medium sized office market. Our OneWorld(R) OfficePort(TM)
family of network communication appliances 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.
Since the sale of our single-user modem operations in June 1998, we are focused
entirely on our new family of network communication appliances targeted at the
small and medium sized office market. These appliances combine Internet access
and routing, remote access, fax and shared modem capabilities in a single,
easy-to-use product. Our primary source of revenue is now from these products.
During September 1999 we began shipping the new OneWorld(R) OfficePort(TM)
family of network communication appliances, which replaced our earlier family of
Network Communication Servers. The OfficePort appliances combine all of the
features of our earlier products with new digital wide-area communications
capabilities. Revenue from this product line is dependent upon the commercial
acceptance of the products, which in turn depends on continued development and
technical enhancement of the products, sales and marketing efforts, technical
reviews by independent parties, introductions of new technologies, performance
of our suppliers, and announcements by competitors, among other factors. There
can be no assurance we will be successful in our ongoing development efforts or
able to introduce technical enhancements and/or new features and functionality
in a timely manner. Failure to do so could result in lower customer acceptance
of our products and result in our products falling behind competitors' product
capabilities, which would have a material adverse effect on sales of our
products. Many of our competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base than we do. There can be no assurance
that the marketplace will accept our network communications appliances. In
conjunction with the introduction of our OfficePort appliance, we refocused our
sales efforts around a direct sales and support model. Utilizing telesales and
electronic commerce via the Internet, OneWorld now sells directly to our
end-user customers. In the future we anticipate generating a majority of our
sales from these direct sales efforts. In addition, to ensure a high level of
customer satisfaction, we now provide direct pre-sales and post-sales support.
There can be no assurance that we will be successful in generating sufficient
sales leads, or generating sufficient sales orders to meet our expectations. If
the sales of our new products are below expectations, our business, financial
condition and results of operations will be materially adversely affected.
The OfficePort family of network communication appliances is priced
significantly lower than our former Network Communications Servers. With the
reliance on revenues from our new communications appliances and our projected
expense levels, we do not anticipate profitability in the short-term. In
addition, our industry is continually faced with the threat of pricing pressure,
which could lead to reductions in the average sales prices for our products and
could have a materially adverse affect on gross margins. There is no assurance
that we will ever achieve profitability.
Though we continually seek to further enhance our product offerings and to
develop new products, there can be no assurance that these development efforts
will result in enhanced or timely new product introductions. Furthermore, there
is no certainty that any enhancements or new products will achieve market
acceptance. With the announcement of new or enhanced products that could
potentially replace current products, customers may defer purchasing currently
available products, which could have a material adverse affect on our business,
financial condition and results of operations. Although we write off inventory
that is considered excess or obsolete, there can be no assurance that the
recorded allowances for such write-offs will be adequate. A material increase in
such write-offs and returns over our expectations could have a material adverse
effect on our business, financial condition and results of operations.
8
<PAGE> 9
On June 22, 1999, our stockholders authorized the Board of Directors to amend
our Certificate of Incorporation in order to effect a reverse split with respect
to our Common Stock. On June 23, 1999 the Board of Directors approved a
one-for-ten reverse split with respect to our Common Stock effective July 6,
1999. Subsequent to the one-for-ten reverse split on July 6, 1999, 1,550,000
shares of our Series A Convertible Preferred Stock were automatically converted
into Common Stock at a one-for-one conversion ratio. On July 7, 1999, the
closing price of our Common Stock, as quoted on the Over The Counter Bulletin
Board (the "OTCBB"), exceeded a specific price resulting in the automatic
conversion of an additional 387,500 shares of our outstanding Series A
Convertible Preferred Stock into Common Stock at a conversion ratio of
one-for-one. Cumulatively, an aggregate of 1,937,500 Series A Convertible
Preferred Stock have been converted into the same number of shares of Common
Stock. An additional 1,162,505 shares of Series A Convertible Preferred Stock
remained outstanding as of both September 30, and November 1, 1999.
NET REVENUE
On June 18, 1998, we sold our single-user modem operations to Boca Research,
Inc. The modem operations accounted for substantially all of our revenue during
the prior fiscal year. Consequently, the comparisons below should not be relied
upon as predictors of future performance.
Net revenues include revenues from gross shipments, licenses and royalties, less
returns and allowances.
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
(dollars in thousands) 1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total net revenue $ 82 $ 353 $ 232 $ 12,718
------------ ------------ ------------ ------------
Percentage decrease compared to
prior fiscal year period -77% -98%
------------ ------------
</TABLE>
The decrease in net revenue for the second quarter of fiscal 2000 as compared to
the same period in fiscal 1999 was primarily attributable to the decline in
revenues from legacy products retained after the sale of our modem operations
which have since been discontinued. During the quarter ended September 30, 1998,
revenue from these products made up a substantial majority of total net revenue
for the quarter. The decrease in revenue for the six months ended September 30,
1999 when compared to the same six month period in the prior year is primarily
attributable to the sale of our modem operations in June 1998. We sold no modem
business products after the close of the transaction with Boca Research on June
18, 1998.
Net revenues for the quarter ended September 30, 1999 decreased 45% from
$150,000 for the quarter ended June 30, 1999. The decline is primarily
attributable to a reduction in the average selling price of our products as a
result of the introduction of the OfficePort appliances. The OfficePort family
has a significantly lower selling price than the products it replaced. Also
contributing to the decline was a decrease in revenue from our legacy products
(see also `Liquidity and Capital Resources', and `Certain Factors Which May
Affect Future Performance - Market Acceptance of Our New Products').
International net revenue decreased to $3,000 or 3% of net revenues for the
second quarter of fiscal 2000, from $59,000 or 17% of net revenue for the second
quarter of fiscal 1999. The decrease in international revenue was attributable
to the revenues from legacy products sold during the quarter ended September 30,
1998 that were discontinued and not offered during the fiscal quarter ended
September 30, 1999. International net revenue decreased to $16,000 or 7% of net
revenues for the six month period ended September 30, 1999 from $6.2 million or
48% of net revenues for the six month period ended September 30, 1998. The
decrease in international revenue was attributable to the sale of our modem
operations in June 1998. We are focusing the sale of our OfficePort appliance
products in the United States and Canada only.
Revenue allowances are established for estimated future returns due to customer
returns. There can be no assurance that our historical experience regarding
returns and allowances will continue or that our projections will prove
accurate. If we experience returns in excess of these allowances, our business,
financial condition and results of operations could be materially adversely
effected.
9
<PAGE> 10
COST AND EXPENSES
On June 18, 1998, we sold our modem operations to Boca Research. The modem
operations accounted for substantially all of our gross profit and a significant
portion of our 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.
Our gross profit as a percentage of net revenue was:
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
(dollars in thousands) 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $ 82 $ 353 $ 232 $12,718
Cost of revenue 75 129 157 9,678
------- ------- ------- -------
Gross profit $ 7 $ 224 $ 75 $ 3,040
------- ------- ------- -------
Gross profit margin 9% 63% 32% 23%
------- ------- ------- -------
</TABLE>
The decrease in gross profit margin as a percentage of net revenue for the
second quarter ended September 30, 1999 as compared to the comparable period in
the prior fiscal year was attributable to a reduction in the level of sales of
high margin legacy software products that have been discontinued and were not
offered in the current quarter, and fixed manufacturing overhead expenses, which
were a greater proportion of total costs of revenue due to the lower level of
sales during the current period. Gross profit margins as a percentage of net
revenues decreased to 9% in the current fiscal quarter from 45% in the fiscal
quarter ended June 30, 1999. The decline is attributable to fixed manufacturing
overhead expenses, which were a greater proportion of total costs of revenue due
to the lower level of sales during the current period and a lower gross margin
on our new OfficePort appliances as compared to the products they replaced.
Gross profit margins are likely to fluctuate as a result of the overall volume
of sales, the sales mix between lower and higher margin products, the nature and
amount of licensing and royalty income, and changes in distribution channels, as
well as changes in component and production costs, price reductions and reserve
requirements.
OPERATING EXPENSES
Operating expenses are comprised of the following:
<TABLE>
<CAPTION>
Three months ended September 30,
1999 1998
----------------------------- ----------------------------
(dollars in thousands) % of net % of net
$ revenue $ revenue
------ ---------- ------ ---------
<S> <C> <C> <C> <C>
Research and development $ 845 1030.5 % $1,082 306.5 %
Marketing and sales 1,233 1503.7 854 241.9
General and administrative 656 800.0 838 237.4
Restructuring costs -- -- -- --
------ ------
Total operating expenses $2,734 $ 2,774
====== ======
</TABLE>
<TABLE>
<CAPTION>
Six months ended September 30,
1999 1998
--------------------------- ---------------------------
(dollars in thousands) % of net % of net
$ revenue $ revenue
------ -------- ------ ---------
<S> <C> <C> <C> <C>
Research and development $1,846 795.7 % $3,619 28.5 %
Marketing and sales 2,482 1069.8 3,635 28.6
General and administrative 1,402 604.3 1,949 15.3
Restructuring costs -- -- 404 3.2
------ ------
Total operating expenses $5,730 $ 9,607
====== ======
</TABLE>
10
<PAGE> 11
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 22% to $845,000 for the second
quarter of fiscal 2000 from $1.1 million in the comparable quarter of fiscal
1999. For the six month periods ended September 30, 1999, research and
development expenses decreased 49% to $1.8 million when compared to the same
period of the prior fiscal year. The decrease in research and development
expenses for the fiscal quarter comparison is primarily related to a reduction
in temporary personnel. The decrease in research and development expenses for
the six month period is primarily related to reductions in headcount and other
costs resulting from the sale of the single-user modem operations to Boca
Research, Inc. 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 increased 44% to $1.2 million between the second
quarter of fiscal 2000 compared to $854,000 during the corresponding period of
fiscal 1999. The increase in marketing and sales expense is primarily due to the
commencement of a national advertising campaign and an increase in direct
marketing expenses.
Marketing and sales expenses decreased 32% to $2.4 million during the six months
ended September 30, 1999 from $3.6 million from the corresponding six month
period of the prior year. The decline over the six month period was primarily
attributable to a reduction in advertising and promotional expenses, as well as
a reduction in personnel costs associated with the sale of the single-user modem
operations.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 22% to $656,000 from $838,000
between the second quarter of fiscal 2000 and the second quarter of fiscal 1999.
The decrease is primarily due to a reduction in outside services and temporary
labor. General and administrative expenses decreased 28% to $1.4 million during
the six month period ended September 30, 1999 from $1.9 million during the same
six month period from the prior fiscal year. General and administrative expenses
decreased primarily due to a reduction in personnel costs associated with the
sale of the single-user modem operations.
RESTRUCTURING COSTS
On March 31, 1998 we announced a fundamental shift in business strategy to
refocus our efforts on our new line of communication servers for small and
medium sized offices and a change of our name to OneWorld Systems, Inc. During
the first fiscal quarter of 1999, we recorded a restructuring charge of
approximately $404,000 comprised of additional one-time costs for severance and
employee 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. As of September 30, 1999 an
accrual balance of approximately $36,000 remained, associated with the lease
abandonment of the Plano, Texas facility.
11
<PAGE> 12
NET OTHER INCOME
Other net income consisted of the following:
<TABLE>
<CAPTION>
Three months ended September 30,
1999 1998
------------------------------- ---------------------------
(dollars in thousands) % of net % of net
$ revenue $ revenue
---------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Interest income $ 81 98.8 % $ 98 27.8 %
Interest expense (7) (8.5) (7) (2.0)
Gain on sale of modem business -- -- -- --
Other income -- -- 2 0.6
---------- ----------
Total other income, net $ 74 $ 93
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six months ended September 30,
1999 1998
-------------------------------- ---------------------------
(dollars in thousands) % of net % of net
$ revenue $ revenue
----------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Interest income $ 165 71.1 % $ 112 0.9 %
Interest expense (7) (3.0) (21) (0.2)
Gain on sale of modem business 268 115.5 6,128 48.2
Other income -- -- 14 0.1
----------- ----------
Total other income, net $ 426 $ 6,233
=========== ==========
</TABLE>
Net other income decreased to $74,000 or 90% of net revenues for the second
quarter of fiscal 2000 from $93,000 or 26% of net revenues for the second
quarter of fiscal 1999. The decrease in other net income is primarily due to the
payoff of the note receivable due from Boca Research which was the primary
contributor of interest income during the second quarter and six month periods
ended September 30, 1998. Interest income earned during the quarter ended
September 30, 1999 is primarily comprised of earnings from invested surplus
cash. For the six months ended September 30, 1999 other net income decreased to
approximately $426,000 from $6.2 million earned in the six month period of the
prior fiscal year. The decrease is primarily attributable to a one time gain of
$6.1 million on sales of the modem operation recorded in the first fiscal
quarter of 1999.
The effective tax rate for the second quarter of fiscal 2000 was approximately
0.7% as compared to 0.0% in the second quarter of fiscal 1999. For the six
months ended September 30, 1999 the effective tax rate was approximately 0.5%.
The income tax provision recorded during the second quarter of fiscal 2000
relates to prior period state income tax adjustments. The income tax provision
recorded also includes minimum state income taxes for fiscal year 2000 recorded
during the first quarter of the fiscal year. The income tax benefit recorded
during the first quarter of fiscal 1999 related to refunds of prior period state
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents totaled $5.0 million at September 30, 1999,
representing 82% of total assets. Our working capital was $3.8 million at
September 30, 1999 as compared to $9.1 million at March 31, 1999, a decrease of
$5.3 million. The decrease in working capital was primarily attributable to the
net loss incurred during the six months ended September 30, 1999.
On September 30, 1999, our principal source of liquidity was $5 million in cash
and short term investments.
We do not expect fiscal 2000 capital expenditures to exceed historical levels.
We believe that our primary source of revenue in the future will be from our
OneWorld OfficePort appliances. To date, we have not yet established a
significant revenue source from these products. Consequently, during the past
several quarters, we have experienced significant negative cash flows from
operations. Revenues from our new products have not yet reached levels
sufficient to offset operating expenses. As such, we do not expect to be
profitable in the short-term and expect to continue to incur significant
negative cash flows from operations. We believe the Company will require
additional sources of capital, beyond our current sources of liquidity and
future revenues, prior to achieving profitability. We are currently evaluating
options as to how to satisfy this need. The preceding sentence is a
forward-looking statement, and actual results could differ materially from those
indicated. Failure to meet our expectations for revenue and gross profit from
our new products, operating expenses in excess of expectations, or other
unforeseen expenditures would have a material adverse impact on our business,
financial condition and results of operations. We 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 us
having to curtail the introduction or development of new
12
<PAGE> 13
products and our entry into new markets, any of which could have a material
adverse affect on our business, financial condition and results of operations.
YEAR 2000 ISSUES
We are aware of the potential for Year 2000 software failures. We have completed
evaluation of the Year 2000 issue, and are in the process of identifying the
areas in which we may have exposure in the systems we use to operate our
business, the systems used by key suppliers and customers, and the products we
produce.
During the quarter ended June 30, 1999, we completed the upgrade to our
corporate information system which we believe will ensure that it is Year 2000
compliant. In addition, we have determined that certain of our
telecommunications systems and desktop computer applications programs are not
Year 2000 compliant. During the quarter ended September 30, 1999, we completed
the upgrade of our base telecommunications system and desktop computer
applications programs. We are continuing the implementation of a corrective plan
of action which includes the upgrade or replacement of our peripheral
telecommunications systems and non-critical desktop application programs. We
expect these upgrades to be completed before the end of 1999.
Concurrent with performing the above steps, we will make certain investments in
systems, applications and products to address Year 2000 issues. We have not
tracked internal resources dedicated to the resolution of the Year 2000 issue
and, therefore, are unable to quantify internal costs incurred to date that are
associated with the Year 2000 issue. We have, however, hired external
consultants to resolve internal information system issues related to the
resolution of the Year 2000 issue. Approximately $75,000 of consulting fees
related to the upgrade of our internal information system was recorded during
the first fiscal quarter of 2000. There were no expenses incurred to resolve
Year 2000 issues during the second fiscal quarter of 2000. Expenditures to
resolve Year 2000 issues are not expected to be material, and are expected to be
a part of normal operations.
We are also in the process of reviewing our Year 2000 exposure from our
customers, suppliers and other business partners. There can be no assurance that
all the systems of our 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, we could experience delays in customers' orders or in
obtaining supplies, materials and finished products from our vendors, which
could have a material adverse affect on our business, financial condition and
results of operations.
We have completed testing of the OneWorld(R) OfficePort family of network
communication appliances, the associated GlobalFax, Faxworks, OneWorld Fax and
network modem client software, and the former Network Communications Server
products and believe them to be Year 2000 compliant. The costs incurred to test
for Year 2000 issues with respect to our products has not had a material impact
on our financial position, results of operation or cash flows. In the worst-case
scenario, despite all of our efforts, undetected Year 2000 issues may arise. We
will provide all corrections required to resolve these issues to existing
customers at no charge to them, thus affecting profitability. We do not
anticipate that the costs to make and distribute any such updates would be
material. If such a scenario were to occur, our contingency plan would be to
work internally as needed to make such products Year 2000 compliant as soon as
possible. There can be no assurance, however, that such a contingency plan will
provide a timely or effective solution to any such Year 2000 issues.
Our plan to complete our Year 2000 modifications is based upon management's best
estimates, which were derived utilizing numerous assumptions of future events,
including continued availability of certain resources and other factors. There
can be no assurance that these estimates will be achieved, and actual results
could differ materially from those plans. Specific factors that might cause such
material differences include the availability and cost of personnel trained in
this area, and the ability to locate and correct all relevant computer code.
13
<PAGE> 14
CERTAIN FACTORS WHICH MAY AFFECT FUTURE PERFORMANCE
In addition to the other information contained herein, one should carefully
consider the following factors in evaluating the Company.
MARKET ACCEPTANCE OF OUR NEW PRODUCTS
In September 1998, we introduced our OneWorld Network Communications Server
products, which were replaced in September 1999 with our new OfficePort family
of products. These are expected to be our primary source of future revenue. The
market for these types of products, especially in our target segment of small
and medium sized businesses, is still in the development stage and may never
become a viable market. The purchase price of our products can represent a
significant investment for our customers. In addition, many of our potential
customers may perceive OneWorld as a new company, and may be hesitant to
purchase our products. Because of these and other factors, potential customers
may delay their decision to purchase our products or may choose not to purchase.
Failure of the market to accept our new products would result in our inability
to achieve forecasted levels of sales and would have a material adverse affect
on our business, financial condition and results of operations.
PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
We believe that our future success will depend on our ability to enhance our
current products and develop new products on a timely and cost effective basis
that meets changing customer needs and respond to emerging industry standards
and other technological changes. In particular, we must adapt our products to
the evolving technological standards of the various computer platforms and new
technical standards resulting from increases in data transmission speed and
Internet technology evolution. Any failure 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 our
results of operations. Due in part to the factors described above, we are
subject to the risk that inventories may rapidly become obsolete or that the
quantities carried of certain products exceed current or projected demand. In
addition products as complex as those offered by us may contain undetected
errors or defects when first introduced or as new versions are released. There
can be no assurance that, despite our testing and trials 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 we operate is characterized by rapid new product
and technology introductions and generally falling prices for existing products,
our customers may from time to time postpone purchases in anticipation of such
new product introductions or lower prices. If the market views such anticipated
changes as significant, then this may have the effect of temporarily slowing
overall market demand and adversely affecting our operating results.
DEPENDENCE ON MANUFACTURERS
We purchase fully manufactured and tested base units and expansion components
from a "turnkey" manufacturing subcontractor. We believe that although there are
a number of alternative contract manufacturers that could produce our products,
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, we are highly
dependent, on a short-term basis, on the continued relationship with our
"turnkey" manufacturing subcontractor and any reduction, interruption, or
termination of this relationship could have a material adverse effect on our
operating results. Components and manufacturing services are obtained from our
supplier on an as-needed basis.
We have been, and will continue to be, dependent on sole or limited source
suppliers for certain key components used in our products, particularly chip
sets designed and manufactured by Rockwell International and Motorola. We
generally purchase sole or limited source components pursuant to purchase orders
placed from time to time in the ordinary course of business and have no
guaranteed supply arrangements with any 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
14
<PAGE> 15
fulfill our purchase requirements. In the past we have experienced delays in
product development and difficulties in manufacturing sufficient product to meet
demand due to the inability of certain suppliers to meet our requirements for
key components, and failure to meet such requirements in the future could have a
material adverse effect on our results of operations.
RISKS OF SYSTEM INTERRUPTION
Customer access to our online store could directly affect the number of and
timing of orders received and could therefore have an affect on future revenues.
We have contracted with outside vendors to host the storefront of our online
store and perform the necessary credit card verification procedures and
processing.
In the past we have experienced occasional system interruptions that made our
Web site unavailable. We are also aware that such system interruptions have also
taken place at Web sites that support or directly interact with our online
store, such as our storefront provider, credit card processor, and credit card
issuing banks. These interruptions could prevent us from efficiently taking
orders via the Internet, which may have an effect on the volume of orders
received through our online store. These interruptions are likely to continue.
Therefore, we need to monitor the hardware and software capacities of our Web
site as well as the volume capacity of our storefront host in order to assess
the necessity of any future hardware or software upgrades. We cannot accurately
project the rate or timing of any increases in traffic or sales volume on our
Web site and, therefore, the integration and timing of any upgrades is
uncertain. We maintain substantially all of our computer and communications
hardware at a single leased facility in Sunnyvale, California. Our storefront
vendor is located near Seattle, Washington. Our systems or those of our
storefront vendor could be damaged or interrupted by fire, flood, power loss,
telecommunications failure, break-ins, earthquake and similar events. Computer
viruses, physical or electronic break-ins and similar disruptions could cause
system interruptions, delays, and loss of critical data and could prevent us
from providing services and accepting and fulfilling customer orders via our
online store.
COMPETITION
The market for our products is intensely competitive and is characterized by
rapidly changing technology, evolving industry communication standards and
frequent new product introductions. A number of competitors, including Cisco
Systems, Shiva, 3Com and Castelle, among others, offer products that compete
with one or more of our communications server products. Our OfficePort
appliances compete with competitors such as Cisco and 3Com and many others who
provide a wide range of Internet access devices for all sizes of companies. In
addition, these products also compete with a number of smaller competitors who
are focused on the small to medium sized business market, including Ramp
Networks, Netopia and others. Our fax server products compete primarily with
dedicated fax servers, stand-alone fax machines, electronic mail, and
centralized fax systems and software produced by independent manufacturers such
as Castelle, AVT and Omtool. Our remote access servers compete with products
from Shiva (now owned by Intel), 3Com, and others who provide dedicated remote
access servers and modem pools. Other companies in the personal computer
industry, such as modem vendors, remote access server vendors, communications
software vendors, fax machine manufacturers and personal computer manufacturers,
could seek to expand their product offerings by designing and selling products
using competitive technology that could render our products obsolete or have a
material adverse effect on sales of current and future products.
Many of our competitors have substantially greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and a larger
customer base, than we do. In addition, the market for our server products can
be subject to significant price competition. We may face increasing pricing
pressures from current competitors. Accordingly, there can be no assurance that
we will be able to provide products that compare favorably with the products of
competitors or that competitive pressures will not require us to further reduce
prices. Any material reduction in our products' prices could negatively affect
gross profit as a percentage of net revenue and could require us to increase
unit sales in order to maintain net revenue. There can be no assurance, however,
that we would be able to increase unit sales or make up for a shortfall. Any
failure to increase unit sales or make up for a shortfall in net revenue would
have a material adverse effect on our financial condition and results of
operations.
15
<PAGE> 16
DEPENDENCE ON KEY PERSONNEL
Our future success depends to a significant extent on our 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 our results of operations. We also believe that our
future success will depend in large part on our 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 we will be successful in
attracting and retaining such personnel. If we were to fail to replace or retain
our key employees or attract additional key employees, our results of operations
could be materially adversely effected.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We rely primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. We have no patents or patent applications pending. We seek
to protect our hardware, software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection. We
seek to protect our brand names under trademark and unfair competition laws.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use proprietary
information. Policing unauthorized use of our products is difficult, and while
we are unable to determine the extent to which piracy of our software products
exists, software piracy can be expected to be a persistent problem. In addition,
the laws of some foreign countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. There can be no assurance
that our means of protecting our proprietary rights will be adequate or that
competitors will not independently develop similar technology.
Due to the rapid pace of innovation within the communications software industry,
we believe that success in technological leadership is likely to depend more
upon the technological, creative, and marketing skills of our personnel, our
continued innovation, and customer support than on the various legal means of
protecting existing technology.
We are aware of products or services in addition to our own that are currently
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, we 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 our
product. In any event, even if we were successful in any such litigation, the
associated legal and other costs could be substantial. As is customary in our
industry, we from time to time receive communications from third parties
asserting that our 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.
VOLATILITY OF STOCK PRICE
The market price of our Common Stock has been volatile and trading volumes have
been relatively low. Factors such as variations in our revenue, operating
results and cash flow and announcements of technological innovations or price
reductions by us, our competitors, or providers of alternative products could
cause the market price of our Common Stock to fluctuate substantially. In
addition, the stock markets have experienced significant price and volume
fluctuations that have particularly 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 our
Common Stock.
Effective February 25, 1999 we were delisted from the Nasdaq National Market(R).
Our Common Stock is currently traded on the Over the Counter Bulletin Board
("OTCBB"). Because of the structure of this market, our Common Stock may be
subject to an increase in stock price volatility.
16
<PAGE> 17
ANTI-TAKEOVER PROVISIONS
Our Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock (of which 3,100,000 shares have been issued, 1,937,495 shares
have been converted to Common Stock, and 1,162,505 shares remain outstanding -
see also "Management Discussion and Analysis of Financial Condition and Results
of Operations - Overview") 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 our 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 we have no present intention to
issue additional 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
our outstanding voting stock. In addition, we are 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. Furthermore,
certain provisions of our Certificate of Incorporation may have the effect of
delaying or preventing changes in control of our management, which could
adversely affect the market price of our Common Stock.
UNCERTAIN INTERNATIONAL DEMAND
We are concentrating sales of our OfficePort network communications appliances
only in the United States and Canada and currently have no near term plans for
addressing other international markets for these products. If we were to offer
our products internationally, there can be no assurance that we will be able to
attain international demand for our products or that we would be able to
effectively meet that demand. Risks inherent in our 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, 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 our intellectual property to the same extent as do the laws of
the United States.
17
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from interest rate changes, foreign currency
fluctuations, and changes in the market value of our investments.
INTEREST RATE RISK
We invest our excess cash in debt instruments of the U.S. Government and its
agencies, and of high-quality corporate issuers. By policy, we limit the amount
of our credit exposure to any one issue. We attempt to protect and preserve our
invested funds by limiting default, market and reinvestment risk. We also
require that a certain level of liquidity be maintained, and as a result, we
invest in debt instruments that will mature in the short-term. As instruments
mature, funds are reinvested in similar short-term investments. We began
actively investing our surplus cash in these types of investment vehicles in
July 1999.
Investments in both fixed and floating rate interest earning instruments carry a
degree of interest rate risk. Fixed rate securities may have their fair market
value adversely impacted due to a rise in interest rates, while floating rate
securities may produce less than expected returns if interest rates fall. Due in
part to these factors, our future investment income may fall short of
expectations due to changes in interest rates and we may suffer losses in
principal if forced to sell securities that have declined in market value due to
changes in interest rates.
The effect of interest rate fluctuations on us during the second quarter of
fiscal 2000 and during the six month period ended September 30, 1999 was not
material, nor do we currently anticipate that it will have a significant impact
during the remainder of this fiscal year.
FOREIGN CURRENCY RISK
We pay expenses of our international operations in local currencies. Our
international operations are subject to risks typical of an international
business, including but not limited to: differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors.
We are also exposed to foreign exchange rate fluctuations as they relate to
foreign sales. While our international sales are denominated in US Dollars, as
exchange rates vary, the effective price, that is the price as translated into
local currency, of our product to a foreign customer may vary. This change in
price could in turn impact the overall level of our foreign sales, or cause us
to adjust our US Dollar price to compensate for the change. Accordingly, our
future results could be materially adversely impacted by changes in these or
other factors.
The effect of foreign exchange rate fluctuations on us during the second quarter
of fiscal 2000 and during the six month period ended September 30, 1999 was not
material, nor do we currently anticipate that it will have a significant impact
during the remainder of this fiscal year.
INVESTMENT RISK
We are exposed to investment risk as the result of the impact of interest rate
fluctuations on the market value of our investments. We currently hold no equity
investments.
The effect of market risk arising from our investment holdings during the second
quarter of fiscal 2000 and during the six month period ended September 30, 1999
was not material, nor do we currently anticipate that it will have a significant
impact during the remainder of this fiscal year.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 22, 1999, our stockholders authorized the Board of Directors to amend
our Certificate of Incorporation to effect a reverse split with respect to our
Common Stock. On June 23, 1999 the Board of Directors approved a one-for-ten
reverse split with respect to our Common Stock effective July 6, 1999.
Subsequent to the one-for-ten reverse split on July 6, 1999, 1,550,000 shares of
our Series A Convertible Preferred Stock were automatically converted into
Common Stock at a one-for-one conversion ratio.
On July 7, 1999, the closing price of our Common Stock, as quoted on the Over
The Counter Bulletin Board (the "OTCBB") exceeded a specific price, resulting in
the automatic conversion of an additional 387,500 shares of our outstanding
Series A Convertible Preferred Stock into Common Stock at a conversion ratio of
one-for-one.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on August 31, 1999. At this meeting,
the following matters were approved by the stockholders by the votes indicated:
<TABLE>
<CAPTION>
Number of Shares
----------------------------------------------------
Total Votes For Total Votes Withheld
Election of directors: Each Director From Each Director
- ------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Neil Selvin 5,210,388 31,674
Leonard Lehmann 5,210,390 31,672
Kevin Compton 5,210,390 31,672
Kenneth Goldman 5,210,390 31,672
Roger Roberts 5,210,390 31,672
</TABLE>
<TABLE>
<CAPTION>
Broker
Other matters: For Against Abstain Non-Vote
- ------------------------------------------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
To approve the adoption of the 1999 Stock 4,245,655 91,533 6,137 898,737
Option Plan and the reservation of 1,165,000
shares of Common Stock thereunder.
To approve an amendment to the Company's 1994 5,105,225 128,527 8,310 -
Non-Employee Directors' Stock Option Plan
providing for the acceleration of the vesting
provisions of all outstanding stock options
previously granted to the outside directors
of the Company pursuant to such plan.
To ratify the selection of KPMG LLP as 5,212,177 21,396 8,489 -
independent auditors of the Company for its
fiscal year ending March 31, 2000.
To transact other such business as may properly 5,171,399 42,835 27,828 -
come before the meeting.
</TABLE>
ITEM 5. OTHER INFORMATION - Not applicable.
19
<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
--------- --------------------------------------------------------------------
<S> <C>
3.1(a) + Amended and Restated Certificate of Incorporation of OneWorld
Systems, Inc.
3.1(b)++ Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred
Stock of OneWorld Systems, Inc., dated March 3, 1999
3.1(c)++ Certificate of Amendment to Amend and Restate Certificate of
Incorporation of OneWorld Systems, Inc., dated June 25, 1999
3.2 * Form of Bylaws of Global Village Communication, Inc.
4.1 Reference is made to Exhibits 3.1 and 3.2
4.9 - Warrant to purchase 42,500 Shares of Common Stock granted by the
Company to Boca Research, inc. dated as of June 18, 1998
4.10 ++ Unit Purchase Agreement between the Company and other parties
named therein, dated as of March 3, 1999
4.11 ++ Investor Rights Agreement dated as of March 3, 1999 by and among
the parties to the Unit Purchase Agreement
10.1 * Form of Indemnity Agreement entered into between the Company and
its directors and officers, with related schedule
10.2 o 1991 Stock Option Plan, as amended (the "Option Plan")
10.3 * Form of Incentive Stock Option under the Option Plan
10.4 * Form of Supplemental Stock Option under the Option Plan
10.5 * 1993 Employee Stock Purchase Plan
10.16 *# Lease agreement between Herman Christensen, Jr. and Raymond P.
Christensen and the Company dated July 14, 1994
10.17 *# Management Incentive Plan
10.18 +++ 1999 Stock Plan
10.19 +++ Form of Agreement for Employees under the 1999 Stock Plan
10.20 +++ Form of Agreement for Automatic Grants under the 1999 stock Plan
27.1 Financial Data Schedule
</TABLE>
* Filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No 33-73878 as amended) and hereby
incorporated by reference herein.
o Filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q filed with the Commission on November 13, 1998, and hereby
incorporated by reference herein.
- Filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q filed with the Commission on August 12, 1998, and hereby
incorporated by reference herein.
+ Filed as an exhibit to the Registrant's Annual Report on Form
10-K/A filed with the Commission on July 2, 1998, and hereby
incorporated by reference herein.
++ Filed as an exhibit to the Registrant's Annual Report on Form
10-K filed with the Commission on June 29, 1999, and hereby
incorporated by reference herein.
+++ Filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (Registration No 333-86259) filed with the
Commission on August 31, 1999, and hereby incorporated by
reference herein
# The Company has requested confidential treatment with respect to
portions of this document.
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K during the quarter
ended September 30, 1999.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
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, 1999
/s/ NEIL SELVIN
---------------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999
/s/ MARC E. LINDEN
---------------------------------------------
Senior Vice President Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
--------- --------------------------------------------------------------------
<S> <C>
3.1(a) + Amended and Restated Certificate of Incorporation of OneWorld
Systems, Inc.
3.1(b)++ Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred
Stock of OneWorld Systems, Inc., dated March 3, 1999
3.1(c)++ Certificate of Amendment to Amend and Restate Certificate of
Incorporation of OneWorld Systems, Inc., dated June 25, 1999
3.2 * Form of Bylaws of Global Village Communication, Inc.
4.1 Reference is made to Exhibits 3.1 and 3.2
4.9 - Warrant to purchase 42,500 Shares of Common Stock granted by the
Company to Boca Research, inc. dated as of June 18, 1998
4.10 ++ Unit Purchase Agreement between the Company and other parties
named therein, dated as of March 3, 1999
4.11 ++ Investor Rights Agreement dated as of March 3, 1999 by and among
the parties to the Unit Purchase Agreement
10.1 * Form of Indemnity Agreement entered into between the Company and
its directors and officers, with related schedule
10.2 o 1991 Stock Option Plan, as amended (the "Option Plan")
10.3 * Form of Incentive Stock Option under the Option Plan
10.4 * Form of Supplemental Stock Option under the Option Plan
10.5 * 1993 Employee Stock Purchase Plan
10.16 *# Lease agreement between Herman Christensen, Jr. and Raymond P.
Christensen and the Company dated July 14, 1994
10.17 *# Management Incentive Plan
10.18 +++ 1999 Stock Plan
10.19 +++ Form of Agreement for Employees under the 1999 Stock Plan
10.20 +++ Form of Agreement for Automatic Grants under the 1999 stock Plan
27.1 Financial Data Schedule
</TABLE>
* Filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No 33-73878 as amended) and hereby
incorporated by reference herein.
o Filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q filed with the Commission on November 13, 1998, and hereby
incorporated by reference herein.
- Filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q filed with the Commission on August 12, 1998, and hereby
incorporated by reference herein.
+ Filed as an exhibit to the Registrant's Annual Report on Form
10-K/A filed with the Commission on July 2, 1998, and hereby
incorporated by reference herein.
++ Filed as an exhibit to the Registrant's Annual Report on Form
10-K filed with the Commission on June 29, 1999, and hereby
incorporated by reference herein.
+++ Filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (Registration No 333-86259) filed with the
Commission on August 31, 1999, and hereby incorporated by
reference herein
# The Company has requested confidential treatment with respect to
portions of this document.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000875983
<NAME> ONE WORLD SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 5,036
<SECURITIES> 0
<RECEIVABLES> 45
<ALLOWANCES> (36)
<INVENTORY> 188
<CURRENT-ASSETS> 5,689
<PP&E> 3,549
<DEPRECIATION> (3,254)
<TOTAL-ASSETS> 6,138
<CURRENT-LIABILITIES> 1,852
<BONDS> 0
0
1
<COMMON> 27
<OTHER-SE> 4,286
<TOTAL-LIABILITY-AND-EQUITY> 6,138
<SALES> 232
<TOTAL-REVENUES> 232
<CGS> 157
<TOTAL-COSTS> 157
<OTHER-EXPENSES> 5,297
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (5,229)
<INCOME-TAX> 25
<INCOME-CONTINUING> (5,254)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,254)
<EPS-BASIC> (1.53)
<EPS-DILUTED> (1.53)
</TABLE>
