<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the
Commission Only (as permitted by
[X] Definitive Proxy Statement Rule 14a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
ONEWORLD SYSTEMS, INC.
(Name of Registrant as specified in its charter)
(Name of person(s) filing proxy statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No Fee Required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: N/A
(2) Aggregate number of securities to which transaction applies: N/A
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid: N/A
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: N/A
(2) Form, Schedule or Registration Statement No.: N/A
(3) Filing Party: N/A
(4) Date Filed: N/A
<PAGE>
OneWorld Systems, Inc.
1144 East Arques Avenue
Sunnyvale, California 94086
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 22, 1999
TO THE STOCKHOLDERS OF ONEWORLD SYSTEMS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of OneWorld
Systems, Inc., a Delaware corporation (the "Company"), will be held on June
22, 1999 at 3:00 p.m. local time at the Company's headquarters located at 1144
East Arques Avenue, Sunnyvale, California, for the following purposes as more
fully described in the Proxy Statement accompanying this Notice:
1. To approve alternative amendments to the Company's Certificate of
Incorporation (only one of which will be implemented by the Board of
Directors) to effectuate either a one-for-seven, one-for-ten, or one-
for-fourteen reverse stock split with respect to all issued and
outstanding shares of the Company's Common Stock. Please note that
approval of this proposal will trigger automatic conversion of 50% of
the outstanding shares of Series A Preferred Stock into Common Stock
(which will represent 38% of the outstanding Common Stock after such
conversion). For more information see the table on page 5 of the
attached Proxy Statement.
2. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
Information relating to the reverse stock split, the conversion of Series A
Preferred Stock into Common Stock, and their impact on the existing Common
Stockholders is set forth in the discussion of Proposal 1 contained in the
attached Proxy Statement. The Board of Directors has fixed the close of
business on May 20, 1999 as the record date for the determination of
stockholders entitled to notice of and to vote at this Special Meeting and at
any adjournment or postponement thereof. Approval of the amendment to the
Company's Certificate of Incorporation requires the affirmative vote of the
holders of a majority of the outstanding shares of the Company's Common Stock
and Series A Preferred Stock, voting together as a single class.
By Order of the Board of Directors
/s/ Marc E. Linden
_____________________________________
Marc E. Linden
Secretary
Sunnyvale, California
May 20, 1999
All stockholders are cordially invited to attend this meeting in person.
Whether or not you expect to attend this meeting, please take the time to vote
your proxy. YOUR VOTE IS IMPORTANT. Instructions for voting by mail or by
other means are contained on the reverse of this letter.
<PAGE>
YOUR VOTE IS IMPORTANT
Stockholders of record or "registered stockholders" can vote in one of three
ways:
1) By Mail: Mark your vote, date, sign and return the enclosed proxy in
the postage-paid return envelope provided.
2) By Televote: You may vote your proxy by using a touch-tone telephone.
Dial the toll-free number printed on your proxy card and have your
assigned control number at hand for verification.
3) By Internet: Visit the web site listed on your proxy card to cast your
vote via the Internet.
If your shares are held in "street" name, that is in the custody of a
financial institution or other holder of record, your vote is controlled by
that institution or holder. Some institutions may offer telephone and/or
internet voting in addition to returning the proxy card by mail. Specific
instructions are printed directly on your proxy card.
Even if you have given your proxy, you still may vote in person if you
attend the meeting. Please note, however, that if your shares are held
beneficially through a broker, bank or other nominee and you wish to vote at
the meeting, you must obtain from the record holder a proxy issued in your
name.
<PAGE>
OneWorld Systems, Inc.
1144 East Arques Avenue
Sunnyvale, California 94086
----------------
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed proxy is solicited on behalf of the Board of Directors of
OneWorld Systems, Inc., a Delaware corporation (the "Company"), for use at the
Special Meeting of Stockholders to be held on June 22, 1999, at 3:00 p.m.
local time (the "Special Meeting"), or at any adjournment or postponement
thereof, for the purposes set forth herein and in the accompanying Notice of
Special Meeting. The Special Meeting will be held at the Company's
headquarters located at 1144 East Arques Avenue, Sunnyvale, California. The
Company intends to mail this proxy statement and accompanying proxy card on or
about May 21, 1999 to all stockholders entitled to vote at the Special
Meeting.
Stockholders Entitled to Vote
Stockholders of record at the close of business on May 20, 1999 are entitled
to notice of and to vote at the Special Meeting. At the close of business on
May 20, 1999, the Company had outstanding and entitled to vote 25,244,293
shares of Common Stock, each of which is entitled to one vote on each matter
to be voted upon at the Special Meeting, and 3,100,000 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock") each of which is
entitled to ten votes on each matter to be voted upon at the Special Meeting.
Votes Required for Approval
The presence, in person or by proxy, of at least a majority of the shares
outstanding on the record date, May 20, 1999, is necessary to attain a quorum.
All votes will be tabulated by the inspector of elections appointed for the
Special Meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Broker non-votes occur when a nominee, such
as a financial institution, returns a proxy, but does not have the
authorization from the beneficial owner to vote the owner's shares on a
particular proposal because the nominee did not receive voting instructions
(via proxy vote) from the beneficial owner. Broker non-votes are counted
toward a quorum. The following votes are required to approve each item of
business at the meeting:
. Amendment of Certificate of Incorporation: Approval of the amendment to
the Company's Certificate of Incorporation to effectuate a reverse stock
split with respect to all issued and outstanding shares of the Company's
Common Stock (Proposal 1) requires the affirmative vote of the holders
of a majority of the outstanding shares of the Company's Common Stock
and Series A Preferred Stock, voting together as a single class.
Abstentions will be counted toward the tabulation of votes cast on the
proposal and will have the same effect as negative votes. Broker non-
votes are treated as abstentions, and hence will have the same effect as
negative votes.
. Other Items: A majority of votes cast at the meeting, in person or by
proxy, is required for approval of other items of business.
How to Vote Your Shares
YOUR VOTE IS IMPORTANT. Your shares can be voted at the special meeting only
if you are present in person or represented by proxy. Whether or not you
expect to attend the meeting, please take the time to vote your proxy.
1
<PAGE>
Stockholders of record or "registered stockholders" can vote in one of three
ways:
. By Mail: Mark your vote, date, sign and return the enclosed proxy in the
postage-paid return envelope provided.
. By Televote: You may vote your proxy by using a touch-tone telephone.
Dial the toll-free number printed on your proxy card and have your
assigned control number at hand for verification.
. By Internet: Visit the web site listed on your proxy card to cast your
vote via the Internet.
If your shares are held beneficially in "street" name through a nominee such
as a financial institution or other holder of record, your vote may also be
cast by telephone and/or internet as well as by mail if your financial
institution offers such voting alternatives. Please follow the specific
instructions provided by your nominee on your proxy card.
Even if you have given your proxy, you still may vote in person if you
attend the meeting. Please note, however, that if your shares are held
beneficially through a broker, bank or other nominee and you wish to vote at
the meeting, you must obtain from the record holder a proxy issued in your
name.
Solicitation
The Company will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
card and any additional information furnished to stockholders. Copies of
solicitation materials will be furnished to banks, brokerage houses,
fiduciaries and custodians holding in their names shares of Common Stock or
Series A Preferred Stock beneficially owned by others to forward to such
beneficial owners. The Company may reimburse persons representing beneficial
owners of Common Stock or Series A Preferred Stock for their costs of
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other regular employees of the
Company. No additional compensation will be paid to directors, officers or
other regular employees for such services. In addition, the Company
anticipates engaging a proxy solicitor to assist it in obtaining completed
proxies.
Stockholder Proposals
Proposals of stockholders that were intended to be presented at the 1999
Annual Meeting of Stockholders needed to be received by the Company not later
than March 8, 1999 to be included in the proxy statement and proxy relating to
that Annual Meeting.
Revocability of Proxies
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. A proxy may be revoked by filing
with the Secretary of the Company at the Company's principal executive office,
1144 East Arques Avenue, Sunnyvale, California 94086, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be revoked
by attending the meeting and voting in person. Attendance at the meeting will
not, by itself, revoke a proxy.
Dissenters Rights
There are no dissenters' rights associated with the reverse split
contemplated in Proposal 1.
2
<PAGE>
PROPOSAL 1
APPROVAL OF AMENDMENT TO COMPANY'S CERTIFICATE OF INCORPORATION
TO EFFECTUATE REVERSE STOCK SPLIT
Stockholders are asked to approve three alternative amendments to the
Company's Certificate of Incorporation to effectuate a one-for-seven, one-for-
ten, or one-for-fourteen reverse split with respect to the Company's Common
Stock. If the stockholders approve this Proposal, only one of the proposed
amendments will be effected. The Board of Directors will have the discretion
to select which of the three stockholder-approved alternative reverse split
ratios the Company will effect, if any. The Board of Directors has determined
that this action is in the best interest of the Company and its Common
Stockholders, as it would trigger the automatic conversion of fifty percent
(50%) of the currently outstanding shares of Series A Preferred Stock, and
potentially adjust the market value of the Common Stock upward to meet the
minimum bid price requirement for listing on the Nasdaq National Market.
Trigger Automatic Conversion of Series A Preferred Stock
Pursuant to the terms of a Unit Purchase Agreement dated as of March 3,
1999, entered into by and among the Company and certain investors, including,
among others, certain affiliates of Integral Capital Partners, L.P., certain
affiliates of Hambrecht & Quist LLC, and Kevin Compton, a member of the Board
of Directors (collectively, the "Investors"), the Company issued and sold to
the Investors an aggregate of 620,000 Units for an aggregate purchase price of
approximately $10.1 million (the "Unit Purchase"). Each Unit sold consisted of
13 newly issued and unregistered shares of Common Stock and 5 newly issued and
unregistered shares of Series A Preferred Stock. The equivalent price paid per
share was $2.679 for the Series A Preferred Stock and $0.22325 for the Common
Stock, for an average effective price of $0.25869 per common-equivalent share,
which represented a premium of approximately 38% over the closing price of the
Company's Common Stock as quoted on the Over The Counter Bulletin Board (the
"OTCBB") on the day preceding the sale. Each share of Series A Preferred Stock
issued in the Unit Purchase is initially convertible into Common Stock at a
ratio of ten shares of Common Stock for each one share of Series A Preferred
Stock so converted.
The terms of the Series A Preferred Stock provide to its holder certain
rights not extended to Common Stockholders. Those rights include, among
others: (i) the right to receive preferred dividends in an amount equal to
$0.2679 (10%) per annum per share, when and if declared by the Board of
Directors, accruing from the date of issuance of the Series A Preferred Stock;
(ii) liquidation distribution preferences and rights of redemption; (iii)
voting rights on a "as converted basis" on all matters submitted to the
holders of Common Stock; and (iv) the right to convert to Common Stock at any
time. Furthermore, the Series A Preferred Stock is fully participating.
Upon the occurrence of certain events, portions of the Series A Preferred
Stock automatically convert into Common Stock, relinquishing all preferred
rights on the converted shares. Specifically, at such time as a sufficient
number of shares of Common Stock are authorized and available for issuance to
permit the conversion of all outstanding shares of Series A Preferred Stock,
fifty percent (50%) of such outstanding share of Series A Preferred Stock will
automatically convert into shares of Common Stock at the then applicable
conversion rate. One-fourth of the remaining fifty percent (50%) of the
currently outstanding Series A Preferred Stock will convert into Common Stock
on the first date when the per share closing price of the Company's Common
Stock reaches each of the following milestone price: $0.77607, $1.03476,
$1.29345, and $1.55214 per share, respectively. Each automatic conversion
milestone price will be proportionally adjusted in the event of any reverse
split, forward split, recapitalization or other similar change in the
Company's Common Stock. The conversion of the Series A Preferred shares will
result in an increase in the number of shares of Common Stock outstanding as
set forth in the table below. The conversion will not be financially dilutive
to current Common Stockholders, as the Series A Preferred Stock is already
fully participating. In most instances, the conversion will not be dilutive to
the voting power of current Common Stockholders as the Series A Preferred
already has full voting rights on an as-converted basis with respect to most
matters to be voted upon by the holders of the
3
<PAGE>
Common Stock. Only on matters which specifically require a separate class vote
of Common Stockholders (for example, in the case of amendments to the
Company's Certificate of Incorporation for the purpose of (i) increasing or
decreasing the number of authorized shares of Common Stock, (ii) increasing or
decreasing the par value per share of the Common Stock, or (iii) altering or
changing the powers, preferences or special rights of the Common Stock so as
to affect such stock adversely) would the conversion of the Series A Preferred
be dilutive to the voting power of current Common Stockholders.
Currently there are not sufficient authorized shares to trigger such a fifty
percent (50%) conversion. After the Company's issuance and sale of an
aggregate of 8,060,000 shares of Common Stock and an aggregate of 3,100,000
shares of Series A Preferred Stock to the Investors pursuant to the Unit
Purchase, the Company had outstanding an aggregate of 25,244,293 shares of
Common Stock and 3,100,000 shares of Series A Preferred Stock. The Series A
Preferred Stock is convertible into an aggregate of 31,000,000 shares of
Common Stock. Thus, for all outstanding shares of the Series A Preferred Stock
to convert, a total of at least 56,244,293 shares of authorized Common Stock
would be required. This number of shares exceeds the Company's currently
authorized capital of 30,000,000 shares of Common Stock.
Stockholder approval of this proposal will authorize the Board of Directors
to effectuate either a one-for-seven, one-for-ten, or one-for-fourteen reverse
stock split, any of which will result in a reduction of the number of
outstanding shares of Common Stock sufficient to allow for conversion of all
of the outstanding Series A Preferred Stock, and thus trigger the conversion
of 50% of the outstanding Series A Preferred Stock.
Minimum Bid Price Requirement
On February 24, 1999, the Common Stock was delisted from the Nasdaq National
Market(TM), in part due to failure to maintain a minimum bid price of one
dollar per share. Since that date, the Common Stock has been trading on the
OTCBB.
In June 1998, the Common Stock began trading below the minimum one dollar
bid price required to maintain listing on the Nasdaq National Market(TM). In
December 1998, the Company presented Nasdaq with a compliance plan to address
this and other deficiencies. The compliance plan consisted of (i) obtaining
additional capital, which was completed in March 1999, and (ii) a reverse
split of the Common Stock, designed to facilitate meeting the one dollar
minimum bid price requirement.
Should a reverse split result in the Common Stock trading above the one
dollar minimum bid price, the Company would once again be in compliance with
the maintenance criteria for continued listing on the Nasdaq National
Market(TM). Although there can be no assurance of relisting, this could make
the Company eligible for relisting on the Nasdaq National Market(TM) under an
appeals procedure.
While there can be no assurance that a reverse split will result in the
Common Stock trading above the one dollar minimum bid price for any given
period of time, or that the Company can successfully appeal the delisting, the
Company believes that it is desirable to attempt to be relisted on the Nasdaq
National Market(TM).
Continued trading on the OTCBB could result in lower average trading volumes
of the Common Stock, which in turn could lead to an increase in stock price
volatility. Additionally, because of the delisting, the Company is no longer
eligible to use the convenient Form S-3 registration statement when
registering its securities with the Securities and Exchange Commission ("SEC")
and hence, must now utilize the more expensive and less convenient Form S-1
registration statement in connection with such registrations. By
reestablishing its Form S-3 eligibility, the Company will not be burdened with
the substantial additional cost associated with the use of Form S-1.
There can be no assurance, however, that a reverse split will enable the
Common Stock to maintain the minimum bid price required for listing on the
Nasdaq National Market or that Nasdaq will relist the Common Stock on the
Nasdaq National Market should the trading price of the Common Stock be
maintained at or above the minimum bid price.
4
<PAGE>
Impact of a Reverse Split
If the stockholders approve this Proposal and the Board of Directors elects
to effectuate the reverse stock split, the Board of Directors will have the
discretion to implement any one of the three stockholder-approved alternative
reverse split ratios.
Any such reverse split would not reduce the number of currently authorized
shares from 30,000,000; however, all outstanding options and share reserves
under the Company's stock option plans would be appropriately adjusted to
reflect the change in outstanding shares. Likewise, all stock warrants
outstanding would be adjusted in the same manner to reflect the reverse split.
Each outstanding share of Series A Preferred Stock is convertible to Common
Stock, currently at a ratio of 10 shares of Common Stock for each share of
Series A Preferred Stock so converted. This conversion ratio will also be
adjusted downward proportionately to reflect the proposed reverse stock split
(e.g., in the event of a 1-for-10 reverse split with respect to the Common
Stock, rather than being convertible for 10 shares of Common Stock, each share
of Series A Preferred Stock will thereafter be convertible into only 1 share
of Common Stock).
By approving this proposal, the stockholders are authorizing the Board of
Directors to use its discretion to select one of the three stockholder-
approved ratios set forth in the table below. The Company views the desirable
range of outstanding shares subsequent to the reverse stock split before any
conversion of Series A Preferred Stock, to be within a range of 3.6 million to
1.8 million shares. Factors that will affect the Board of Directors' choice
among the three alternative reverse splits to be approved by the stockholders
(and the choice as to whether or not to implement the reverse split) include:
overall stock market and price per share trends of the Common Stock, business
developments, and actual and projected earnings.
The following chart illustrates the likely approximate number of shares
outstanding if this proposal is approved (based on approximately 25,244,293
shares of Common Stock outstanding on the Record Date):
<TABLE>
<CAPTION>
Approximate # of Outstanding Shares
---------------------------------------------------------
Before Conversion After Conversion After Conversion
of 50% of Series A of 50% of Series A of 100% of Series A
Ratio Preferred Preferred Preferred
----- ------------------ ------------------ -------------------
<S> <C> <C> <C>
Current (1:1)......... 25,244,293 40,744,293 56,244,293
1:7................... 3,606,328 5,820,613 8,034,899
1:10.................. 2,524,429 4,074,429 5,624,429
1:14.................. 1,803,164 2,910,307 4,017,450
</TABLE>
No fractional shares will be issued. Instead, all fractional shares will be
rounded down (but not below one share) and the Company will pay the affected
stockholder the fair market value of such fractional share, as reasonably
determined by the Board of Directors.
The selected reverse stock split will be effected through an amendment to
the Company's Certificate of Incorporation. Specifically, a new Paragraph C,
or other appropriate language satisfactory to the Delaware Secretary of State,
will be added to Article IV of the Company's Certificate of Incorporation. The
new Paragraph C will be selected from the following:
One-for-seven Reverse Stock Split
C. All outstanding shares of Common Stock of this corporation on
(the effective date) are divided by seven (7) and any fractional shares
resulting from such division will be cancelled and each stockholder will
receive an amount of cash equal to the fair market value of the Common
Stock on the effective date of the reverse stock split. The fair market
value of a share of Common Stock shall be a number reasonably determined by
the Board of Directors, which may be expressed in a formulary fashion,
e.g., the average closing price for a share on the OTC Bulletin Board for
the ten trading days following the Bulletin Board's implementation of the
reverse stock split.
5
<PAGE>
One-for-ten Reverse Stock Split
C. All outstanding shares of Common Stock of this corporation on
(the effective date) are divided by ten (10) and any fractional shares
resulting from such division will be cancelled and each stockholder will
receive an amount of cash equal to the fair market value of the Common
Stock on the effective date of the reverse stock split. The fair market
value of a share of Common Stock shall be a number reasonably determined by
the Board of Directors, which may be expressed in a formulary fashion,
e.g., the average closing price for a share on the OTC Bulletin Board for
the ten trading days following the Bulletin Board's implementation of the
reverse stock split.
One-for-fourteen Reverse Stock Split
C. All outstanding shares of Common Stock of this corporation on
(the effective date) are divided by fourteen (14) and any fractional shares
resulting from such division will be cancelled and each stockholder will
receive an amount of cash equal to the fair market value of the Common
Stock on the effective date of the reverse stock split. The fair market
value of a share of Common Stock shall be a number reasonably determined by
the Board of Directors, which may be expressed in a formulary fashion,
e.g., the average closing price for a share on the OTC Bulletin Board for
the ten trading days following the Bulletin Board's implementation of the
reverse stock split.
The effective date of the reverse split will be the date on which Delaware's
Secretary of State approves such amendment to the Certificate of
Incorporation.
Tax Consequences
The Company does not expect any significant adverse federal income tax
consequences to be associated with the reverse split. For example, the
transaction should be treated as a reorganization under
Section 368(a)(1)(E)(5) of the Internal Revenue Code of 1986, as amended, and
the applicable Treasury Regulations, judicial authority and current
administrative rulings and practices in effect on the date of this proxy
statement. For example, a stockholder's basis in the shares will be the same
(i.e., no gain or loss recognized) and any applicable holding period will
continue. Where the Company purchases fractional or other shares of
stockholders, such transaction will have the typical federal income tax
consequences associated with the purchase and sale of stock by an issuer.
Exchange of Certificates
Assuming that the stockholders approve the reverse split and that the Board
of Directors elects to implement this proposal, stockholders will be required
to exchange their old certificates for new certificates in the appropriate
denominations. This exchange will be handled by the Company's transfer agent.
Stockholders will not be required to pay a fee for such services, rather such
expenses will be borne by the Company.
As soon as practicable after the effective date of the reverse split,
transmittal forms will be mailed to each holder of record of certificates
representing shares of Common Stock. Stockholders of record will use this
transmittal form to surrender and exchange their current certificates for new
certificates representing the post-split number of shares of Common Stock to
which the stockholder is entitled. The transmittal forms will be accompanied
by instructions specifying other details of the exchange. Upon the receipt of
such transmittal form, each stockholder of record should promptly surrender
any certificates representing the shares of Common Stock owned by such
stockholder prior to the reverse stock split, in accordance with the
applicable instructions. Each holder who surrenders certificates will receive
one or more new certificates representing the whole number of shares of Common
Stock that such stockholder holds as a result of the reverse stock split.
Stockholders whose shares are held beneficially in "street" name through a
nominee such as a financial institution or other holder of record will not be
required to take any action with respect to the exchange of certificates. The
nominee holder will physically exchange such certificates on your behalf.
6
<PAGE>
STOCKHOLDERS SHOULD NOT SUBMIT CERTIFICATES UNTIL REQUESTED TO DO SO IN
WRITING BY THE COMPANY'S TRANSFER AGENT.
After the effective date, each certificate representing shares of Common
Stock outstanding prior to the effective date (an "old certificate") will,
until surrendered and exchanged as described above, be deemed, for all
corporate purposes, to evidence ownership of the number of shares of Common
Stock into which the shares of Common Stock evidenced by such certificate have
been converted by the reverse stock split.
The non-interested members of the Board of Directors have unanimously
determined that the proposed amendment to Company's Certificate of
Incorporation to effectuate a reverse stock split is in the best interests of
the Company and its stockholders, and strongly recommends a vote in favor of
the amendment. Kevin Compton, a member of the Company's Board of Directors and
partner at Kleiner Perkins Caufield & Byers, also invested in the Unit
Purchase. Eugene Eidenberg, a member of the Company's Board of Directors, is
an advisory director of Hambrecht & Quist Venture Capital, an affiliate of
Hambrecht & Quist LLC. Messrs. Compton and Eidenberg did not participate in
voting on Proposal 1 due to their ownership interest in and affiliation with
an owner of the Series A Preferred Stock, respectively.
7
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of April 5, 1999, with respect to: (i) each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the Common Stock, (ii) each of the Company's
directors, (iii) each of the four highest paid executive officers of the
Company, and (iv) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
Common Stock After
Series A Conversion of 100% of
Preferred Stock Common Stock Percent Series A Preferred
----------------------- ----------------------- of -----------------------
Shares Shares Total Shares
Beneficially Percent of Beneficially Percent of Voting Beneficially Percent of
Beneficial Owner(1) Owned(1) Class(2) Owned(1) Class(3) Power(4) Owned (1) Class (4)
- ------------------- ------------ ---------- ------------ ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Directors and Executive
Officers
Kevin R. Compton(5).... 310,000 10.0% 810,459 3.2% 7.0% 3,910,459 7.0%
Eugene Eidenberg....... -- -- -- -- -- -- --
Kenneth Goldman........ -- -- 4,000 * * 4,000 *
Leonard Lehmann(6)..... -- -- 507,985 2.0% 2.0% 507,985 2.0%
Marc E. Linden......... -- -- 1,976 * * 1,976 *
Charles Oppenheimer.... -- -- -- -- -- -- --
Marsha Raulston........ -- -- -- -- -- -- --
Neil Selvin(7)......... -- -- 452,666 1.8% 1.8% 452,666 1.8%
Directors and officers
as a group
(8 persons)(8)........ 310,000 10.0% 1,777,086 7.0% 8.6% 4,877,086 8.6%
Certain Beneficial
Owners
Hambrecht & Quist
LLC(9)................ 1,341,905 43.3% 3,488,953 13.8% 30.1% 16,908,003 30.1%
One Bush Street
San Francisco, CA 94104
Integral Capital
Partners(10).......... 1,395,000 45.0% 3,627,000 14.4% 31.3% 17,577,000 31.3%
2750 Sand Hill Road
Menlo Park, CA 94025
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission that deem shares to be beneficially
owned by any person who has or shares voting or investment power with
respect to such shares. Unless otherwise indicated, the persons named in
this table have sole voting and sole investment power with respect to all
shares shown as beneficially owned, subject to community property laws
where applicable. Common Stock subject to options that are currently
exercisable or are exercisable within 60 days of the date of this proxy
statement are deemed to be outstanding and to be beneficially owned by
the person holding such options for the purpose of computing the
percentage ownership of any other person.
(2) Percentage of Beneficial Ownership is based on 3,100,000 shares of Series
A Preferred Stock outstanding as of April 5, 1999.
(3) Percentage of Beneficial Ownership is based on 25,244,293 shares of
Common Stock outstanding as of April 5, 1999.
(4) Percentage of Total Voting Power and Percent of Class of Common Stock as
if 100% of the Series A Preferred Stock had been converted is based on
56,244,293 voting shares, consisting of 25,244,293 Common shares each
entitled to one vote and 3,100,000 Series A Preferred Shares each
entitled to ten votes.
8
<PAGE>
(5) Mr. Compton's beneficial ownership includes 806,000 shares of Common
Stock and 310,000 shares of Series A Preferred Stock, convertible into
3,100,000 shares of Common Stock, held by the Compton Family Trust, April
19, 1996.
(6) Includes 507,985 shares held by the Lehmann family trusts.
(7) Includes 143,294 shares subject to stock options exercisable within 60
days of April 5, 1999.
(8) Includes 1,633,792 shares held by officers and directors or entities
affiliated with officers and directors of the Company and 143,294 shares
subject to stock options held by officers and directors, exercisable
within 60 days of April 5, 1999.
(9) Based on Schedule 13D filed by Hambrecht & Quist LLC with the Securities
and Exchange Commission, dated March 12, 1999.
(10) Based on Schedule 13D filed by Integral Capital Partners with the
Securities and Exchange Commission, dated March 11, 1999.
ANNEXED DOCUMENTS
To aid the stockholders in their review of information contained herein
before voting upon the matters to be decided at the Special Meeting, the
Company has attached the following documents as Annexes to this proxy
statement:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998, attached hereto as Annex A;
2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1998, attached hereto as Annex B;
3. The Company's Current Report on Form 8-K filed on March 11, 1999
attached hereto as Annex C.
CERTAIN TRANSACTIONS
In March 1999 the Company completed a $10.1 million private placement of its
equity securities with certain affiliates of Integral Capital Partners L.P., a
technology investment firm based in Menlo Park, California, Hambrecht & Quist
LLC, an investor and underwriter for technology growth companies. Kevin
Compton, a member of the Company's Board of Directors and partner at Kleiner
Perkins Caufield & Byers, also invested in the Unit Purchase. Eugene
Eidenberg, a member of the Company's Board of Directors, is an advisory
director of Hambrecht & Quist Venture Capital, an affiliate of Hambrecht &
Quist LLC. Messrs. Compton and Eidenberg did not participate in voting on
Proposal 1 due to their ownership interest in and affiliation with an owner of
the Series A Preferred Stock, respectively.
Pursuant to the Unit Purchase, the Company sold 620,000 Units at a cost of
approximately $16.30 per Unit. Each Unit consisted of 13 shares of newly
issued and unregistered Common Stock, and 5 shares of newly issued and
unregistered Series A Preferred Stock. Each share of Series A Preferred Stock
is initially convertible into 10 shares of the Company's Common Stock. The
conversion ratio is subject to adjustment upon the shareholders' approval of
and the Board of Directors' implementation of Proposal 1.
9
<PAGE>
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Special Meeting. If any other matters are properly
brought before the meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the Board of Directors
/s/ Marc E. Linden
_____________________________________
Marc E. Linden
Secretary
May 20, 1999
10
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information reporting requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy statements
and other information may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices
located at Seven World Trade Center, Suite 1300, New York, NY 10048, and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60611-2511. Copies of such material may be obtained by mail from the
Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The SEC also maintains a
website that contains reports, proxy statements and other information
regarding registrants that file electronically with the SEC at
http://www.sec.gov. The Company's Common Stock is quoted on the Over The
Counter Bulletin Board (OTCBB).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the SEC by the Company (File
No. 0-23260) pursuant to the Exchange Act are hereby incorporated by reference
in this Proxy Statement:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1998; and
2. The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended June 30, 1998, September 30, 1998, and December 31, 1998; and
3. The Company's Current Report on Form 8-K filed on March 11, 1999.
All documents and reports subsequently filed with the SEC by the Company
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Proxy Statement prior to the date of the Special Meeting of the
Company's Stockholders shall be deemed to be incorporated by reference in this
Proxy Statement and to be part hereof from the dates of filing of such
documents and reports.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any
statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS
AND SCHEDULES TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS AND SCHEDULES ARE
SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE ALSO AVAILABLE, WITHOUT
CHARGE, UPON WRITTEN REQUEST BY ANY PERSON TO WHOM THIS PROXY STATEMENT HAS
BEEN DELIVERED, FROM ONEWORLD SYSTEMS, INC., 1144 EAST ARQUES AVENUE,
SUNNYVALE, CALIFORNIA 94086, ATTENTION: INVESTOR RELATIONS.
11
<PAGE>
ANNEX A
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the fiscal year ended March 31, 1998
Commission File Number 000-23260
----------------
OneWorld Systems, Inc.
(Exact name of registrant as specified in its charter)
State of Incorporation: Delaware
IRS identification number: 94-3095680
1144 East Arques Avenue
Sunnyvale, CA 94086-4602
(408) 523-1000
(address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The approximate aggregate market value of the Common Stock held by non-
affiliates of the Registrant, based upon the closing price of the Common Stock
reported on the National Association of Securities Dealers, Inc. Automated
Quotation (NASDAQ) National Market was $11,740,350 as of June 25, 1998. (1)
The number of shares of Common Stock outstanding as of June 25, 1998 was
17,162,912
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated on or about July 6, 1998 to
be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held August 20, 1998 are incorporated by reference into
Part III. (1)Excludes 827,792 shares of Common Stock held by directors,
officers and affiliates as of June 25, 1998.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
A-2
OneWorld Systems, Inc.
Annual Report On Form 10-K
For The Year Ended March 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I
ITEM 1. Business................................................... 1
ITEM 2. Properties................................................. 10
ITEM 3. Legal Proceedings.......................................... 10
ITEM 4. Submission of Matters to a Vote of Security Holders........ 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 11
ITEM 6. Selected Consolidated Financial Data....................... 12
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
ITEM 8 Financial Statements and Supplementary Data................ 20
PART III
ITEM 10. Directors and Executive Officers of the Company. .......... 39
ITEM 11. Executive Compensation. ................................... 39
Security Ownership of Certain Beneficial Owners and
ITEM 12. Management. ............................................... 39
ITEM 13. Certain Relationships and Related Transactions. ........... 39
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form
8-K. ...................................................... 40
</TABLE>
<PAGE>
A-3
PART I
ITEM 1. Business
The following discussion should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended March
31, 1998. This report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1934, as amended. Actual results could
differ materially from those anticipated in forward-looking statements as a
result of risks identified and the other cautionary disclosures set forth
below and elsewhere in this report.
OneWorld Systems, Inc. ("OneWorld Systems" or the "Company") (founded in
June 1989 as "Global Village Communication, Inc." and incorporated in
Delaware), develops and manufactures products that enhance and simplify wide
area data communications for the small and medium size office market. The
Company's recently introduced OneWorld 5000 communications servers are
designed to be versatile, easy-to-use, cost-effective and expandable solutions
that combine Internet access and routing, remote access, on-line service
access, and fax capabilities.
On March 31, 1998 the Company, then Global Village Communication, Inc.,
announced an agreement (the "Agreement") to sell substantially all of the
Company's assets related to the Company's single user modem product offerings
including accounts receivable, inventory, property and equipment, intellectual
property, and other production and research and development assets (the "Modem
Business") to Boca Research, Inc. ("Boca") and unveiled this new corporate
strategy focusing on wide-area data communications for the small and medium
size office market. The transaction was closed June 18, 1998, and the
Company's name changed to OneWorld Systems, Inc. at that time.
Historical Modem Business
During the fiscal year ended March 31, 1998, the Company was actively
engaged in the Modem Business, where it was a leader in the design,
development and marketing of easy-to-use integrated communications products
for personal computers with Windows, Macintosh, OS/2 and DOS operating
systems. The Company's products enabled mobile, home office and networked
computer users in small to medium sized organizations to access the Internet
and information services, connect to a remote organization's internal network,
view personalized Internet content and communicate efficiently with
colleagues, customers and suppliers.
Unit sales volumes and market share of Macintosh compatible computers have
continued to decline over the past year. As a result, during fiscal 1998 the
Company's revenues and gross margin from its products for the Apple Macintosh
family of computers declined. In an attempt to offset this decline, the
Company introduced a number of personal-use products compatible with personal
computers utilizing the Windows operating system ("Windows"), including the
industry's first 56 Kbps modem/ethernet PC Card (PCMCIA). However, the Company
was unable to gain sufficient market share in the Windows arena to offset the
revenue decline from its Macintosh products as price cutting, slower than
anticipated market acceptance of the 56 Kbps technologies, and the inability
to fully fund sales and marketing initiatives limited revenue from these
Windows products.
Throughout this period the 56 Kbps technology standard was in a state of
uncertainty, consumers were faced with a choice among multiple non-
interoperable implementations. Though the Company introduced versions of its
56 Kbps modem products that were software upgradeable to the pending ITU
standard at no cost to the end-user, this was insufficient to fully overcome
the confusion in the marketplace. In addition, the Company's financial
condition constrained its ability to increase, or fully fund, its sales and
marketing activities in support of its new 56 Kbps products. As a result,
sales of the Company's new 56 Kbps products were below expectations.
During fiscal 1998, a substantial majority of the Company's revenue
continued to be attributable to sales of its Apple Macintosh compatible modem
products. Continued dependence on the declining Apple market,
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A-4
combined with the delay in purchases of 56 Kbps modems resulting from
confusion over the lack of an industry standard and the Company's inability to
significantly increase its market share of Windows compatible modem products
placed several financial constraints on the Company that adversely affected
its ability to remain competitive as a stand-alone modem company.
Price decreases during the year caused gross margins to decline. For
example, gross margins in the fourth fiscal quarter of 1997 were 39.4%; by the
third quarter of fiscal 1998, gross margins had declined to 29.8%. The Company
believed that continued price pressure in the industry, coupled with lower
manufacturing volumes when compared to the Company's competitors, would
continue to cause gross margins from the Company's modem products to decline
over time.
Efforts to increase sales of Windows-compatible modems required significant
cash expenditures, both on inventory, and on marketing and sales programs. The
Company was only able to fund these cash expenditures by selling certain
assets, including the sale of the assets of its subsidiary, Global Village
Communication, Ltd., to Mitel (completed in fiscal 1997), the sale of its
investment in GlobalCenter, Inc., and the sale of its investment in AirMedia,
Inc. Despite these dispositions, however, the Company's cash balance declined
from $9.7 million at the end of fiscal 1997 to $5.6 million at the end of the
third quarter of fiscal 1998. At that time, the Company did not have any
material, non-strategic assets that it could sell to continue operating the
business.
Given its deteriorating financial condition, the status of the modem
industry, and the continued dependence on the Macintosh market, the Company
determined that remaining an independent modem company was not financially
viable, would require significant infusions of cash with no assurance of a
return to profitability, and that funding the modem business and the
development and launch of the Company's OneWorld 5000 communications servers
were not simultaneously achievable. This ultimately led to the announcement on
March 31, 1998 that the Company would sell its Modem Business to Boca.
As a result of the sale to Boca, which was closed June 18, 1998, the Company
will no longer sell its individual use modems or other individual use
communications systems. More specifically, the sale to Boca includes the
Company's Teleport modems for Windows desktop computers, Teleport modems for
Macintosh desktop computers, PC Card modems for Windows notebook computers, PC
Card and PowerPort modems for Macintosh Powerbook notebook computers, product
sold to Apple on an OEM basis, and OEM versions of Faxworks. These products
represented substantially all of the Company's revenue in fiscal 1998.
New Focus on Communications Servers
In the future, the Company will focus on its new family of communications
server products aimed at the small and medium size market, which will combine
Internet access, routing, remote access, fax server and shared modem
capabilities in a single, easy-to-use product. These products, the OneWorld
Systems 5000 family of communication servers, were launched on June 8, 1998,
and are expected to ship in July. The Company's primary source of revenue in
the future will be from the OneWorld 5000 product line. Revenue from these
products is dependent on the successful completion of the development of the
product line. However, the Company may have difficulty completing development,
or resolving any other issues that may arise, in a timely manner, which could
delay the planned launch of the new OneWorld Systems communications server
product line. Commercial acceptance of these products is dependent on certain
factors including the Company's sales and marketing efforts, technical reviews
by third parties, introductions of new technologies or standards, performance
of the Company's VARs, distributors and suppliers and announcements by the
Company's competitors. Many of the Company's future competitors have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base,
than the Company. OneWorld 5000 products will have a significantly higher
selling price than many of the Company's past products and will require the
Company to expand its VAR channel. There can be no assurance that the Company
will be successful in establishing an effective distribution channel for its
new products. There can be
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A-5
no assurance that the Company's newly released products will be accepted by
the marketplace. If the Company's sales of its new products are below its
expectations, the Company's business, financial condition and results of
operations will be materially adversely affected.
With the reliance on revenue from future products and the Company's
projected expense levels, the Company does not expect to be profitable in the
short-term. In addition, the Company may face pricing pressure, which could
lead to reductions in the average sales prices for the Company's products and
could have a material adverse effect on gross margins. There is no assurance
that the Company will ever achieve profitability.
Though the Company continually seeks to further enhance its product
offerings and to develop new products, there can be no assurance that these
development efforts will result in enhanced or new products being introduced
on a timely basis, or that any such product enhancements or new products will
achieve market acceptance. In addition, the announcement by the Company of new
products with the potential to replace current products may cause customers to
defer purchasing the Company's current products which could have a material
adverse effect on the Company's results of operations. While the Company
writes off inventory that it considers to be excessive or obsolete, there can
by no assurance that the Company's recorded allowances for such write-offs and
returns will be adequate, and a material increase in such write-offs and
returns over Company expectations would have a material adverse effect on the
Company's results of operations.
Technology and Products
During fiscal 1998, the Company produced modems, telecommunications servers,
and proprietary communications software for two customer groups of the
communications marketplace: individual users and network users. The Company's
individual-use system products included TelePort modems for Macintosh and
Windows desktop computer users, PowerPort modems for Macintosh PowerBook
computer users and PC Card (PCMCIA) modems for Macintosh PowerBook and Windows
notebook users. On June 18, 1998, the Company sold all of these individual use
system products to Boca. The Company no longer sells any of these products.
The Company's line of network products includes the recently introduced
OneWorld 5000 communications server family as well as FaxWorks NT and FaxWorks
Pro LAN software providing fax services to office workgroups utilizing Windows
NT, Windows 3.1, and OS/2 operating systems. The OneWorld series of
communications server systems for Macintosh provides shared fax, dial-out
modem, and remote network access capabilities to small workgroups.
The Company's core software technologies, FaxWorks communications software
for Windows, OS/2 and DOS operating systems, GlobalFax communications software
for Macintosh systems, and embedded software underlying the Company's server
systems, provide a consistent, user-friendly interface across individual and
network product lines. For Windows, the Company also provides integrated
communication software to original equipment manufacturers (OEMs). Certain
rights to OEM versions of FaxWorks and to GlobalFax were transferred to Boca
on June 18, 1998. The Company retains the right to utilize these software
products (and associated trademarks) in conjunction with the Company's network
products, royalty free.
Network Servers For Multiple Users
The OneWorld line of network products includes the recently announced
OneWorld 5000 family of communications servers which are specifically designed
for the small and medium size office. Leveraging the Company's heritage and
experience, the OneWorld 5000 family integrates hardware, server software and
client software elements into a complete hardware/software solution. These
communications servers will provide versatile, easy-to-use, cost-effective and
expandable solutions that will meet a small office's growing communications
needs and modest budget.
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<PAGE>
A-6
The OneWorld Systems family of communications servers will provide the major
data communications functions required by small businesses, including sending
and receiving faxes; Internet access and routing so that the entire office has
access to the Internet (not just one PC in the office); modem pooling so that
the entire office can share modems and access on-line services from any desk
at anytime; and remote access so that employees can dial into the office
network from home or on the road. In addition, the OneWorld 5000 family of
communications servers will be among the first to offer all these capabilities
simultaneously to both Windows and Macintosh users.
These products are designed to be simple for the small office to administer
and manage. A Wizard, software designed to simplify installation and
configuration, is being developed to guide the small office manager through
the process of setting up all the communications functions. A single graphical
administration program will allow the network administrator to easily manage
the various communications functions and user profiles from any PC on the
network. In addition, client software is based on the Company's award-winning
software, including GlobalFax and FaxWorks, known to many users for their
ease-of-use.
To address the budgetary concerns of the small office, the OneWorld Systems
products will enable offices to purchase a suite of data communications
functions in one multi-function product for a fraction of the price of a
collection of single-function products.
Phone line allocation will be handled by "Dynamic Port Allocation," a
proprietary technology developed by the Company so that every telephone port
is available for every function and can be assigned by the server on demand,
and on the fly, with no user or network administrator intervention required.
For example, employees can fax by day, and use remote access by night, taking
full advantage of the phone lines installed. In contrast to a collection of
single function servers, each with their own dedicated phone lines, the result
is the need for fewer phone lines and reduced monthly telecommunications
costs, one of the largest expenses for small and medium sized businesses.
Future growth and expansion has been designed into the OneWorld 5000
communications servers. Additional ports can be added as a small office grows.
Functionality can be added as offices need it without the extra expense of a
new, separate product. As a small office grows, new communications
capabilities can be added, which could include ISDN, frame relay, T1 or DSL,
for example. New functions such as firewalls and support for Virtual Private
Networks (VPNs), and other new capabilities will be available in the future.
Multiple OneWorld 5000 communications servers can be added to different
departments or banded together for higher capacity. OneWorld 5000
communications servers can be expanded as needed, thereby protecting the
investment of the small business.
For small and medium-sized organizations, the Company also offers FaxWorks
Pro LAN and FaxWorks Server NT, fax server software for use in Windows, OS/2,
and Windows NT environments. FaxWorks integrates advanced fax software
features into a single user interface, allowing users to send and receive
faxes directly from their computer on the network.
The Company's existing OneWorld 100 communications servers for Macintosh
provide complete, easy-to-use communication solutions for Macintosh network
based workgroups. The OneWorld Combo server features fax, remote access, and
network modem capabilities, giving each user on a Macintosh network the
ability to send and receive faxes and dial out to on-line services or bulletin
board systems. OneWorld Combo is also a complete Apple Remote Access 1.0/2.0
server that allows offsite Macintosh users to connect to their company network
from virtually any location. OneWorld Fax includes both fax and network modem
capabilities, and OneWorld Network Modem provides network modem capabilities.
All servers can be upgraded to add additional capabilities.
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A-7
The following table shows the Company's major network products:
Network Servers for Multiple Users
OneWorld 5000 Family of Communications Servers (announced)
OneWorld 5000 Remote Access Server
(Remote access, Internet routing and network modem with four 56
Kbps modems)
OneWorld 5000 Fax Server
(Network fax server and network modem with four 56 Kbps modems)
OneWorld 5000 Suite Server
(all capabilities of the Remote Access and Fax Servers with four 56
Kbps modems)
Integrated Communications Software
FaxWorks Pro LAN for Windows
FaxWorks Pro for OS/2
FaxWorks Pro LAN for OS/2
OneWorld 100 Communications Servers for Macintosh
OneWorld Network Modem
(network modem server for Ethernet and LocalTalk networks)
OneWorld Fax
(network fax modem server for Ethernet and LocalTalk networks)
OneWorld Combo
(network modem, fax, and ARA 1.0/2.0 server for Ethernet and
LocalTalk networks)
Sales and Marketing
Sales. Consistent with modem industry practice, the Company distributed its
modem products through a worldwide system of distributors, dealers, system
integrators, OEMs and mail order houses. The Company's two largest customers
accounted for approximately 28% and 18%, respectively, of the Company's net
revenue in fiscal 1998. The Company's largest customer accounted for
approximately 21% of net revenue in fiscal 1997.
International sales represented approximately 15%, 15%, and 19% of the
Company's net revenue in fiscal 1998, 1997, and 1996, respectively. In
addition to domestic sales, the Company will initially sell its new server
products in Canada, and may in the future sell these products in additional
countries.
Risks inherent in the Company's future international business activities
generally include unexpected changes in regulatory requirements, tariffs and
other trade barriers, costs and risks of localizing products for foreign
countries, longer accounts receivable payment cycles, difficulties in managing
international distributors, potentially adverse tax consequences, repatriation
of earnings, the burdens of complying with a wide variety of foreign laws and
changes in demand resulting from fluctuations in exchange rates. In addition,
the laws of certain foreign countries do not provide protection for the
Company's intellectual property to the same extent as do the laws of the
United States.
The Company intends to ship products within a short period after receipt of
an order. Consequently, the Company does not believe that it will have a
material backlog of unfilled orders, and revenues in any quarter will be
substantially dependent on orders booked in that quarter. The Company's
expense levels are based in part on its expectations as to future revenues.
Therefore, the Company may be unable to adjust spending in a
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A-8
timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall of demand in relation to the Company's expectations
or any material delay of customer orders would have an almost immediate
adverse effect on the Company's results of operations. Fluctuations in
operating results may also result in volatility in the price of the Company's
Common Stock.
The Company will distribute its new OneWorld 5000 communications servers
through national and regional value added resellers (VARs) and corporate
resellers, particularly those with a focus on serving the small and medium
size office market. The Company intends to increase the number of VARs by
launching VAR recruiting, training and support programs. There can be no
assurance that the Company will be successful in attracting existing or new
VARs to distribute these products, or that the VAR channel will be a
successful one for the OneWorld 5000 product family. Failure to attract these
VARs or their inability to sell the products would cause sales of such
products to be below Company expectations, and the Company's business,
financial condition and results of operations would be materially adversely
affected.
The Company is subject to the risk that its inventories may rapidly become
obsolete or that the Company may carry quantities of certain products that
exceed current or projected demand. While the Company has in the past and
intends on continuing to reserve for inventory that it considers to be excess
or obsolete, there can be no assurance that the Company will record allowances
for such write-offs and returns that are adequate, and a material increase in
such write-offs and returns over historical rates could have a material
adverse effect on the Company's results of operations.
Marketing. The Company complements its sales activities with a range of
public relations and advertising programs designed to stimulate customer
demand. The Company believes that reviews and comments by influential trade
press, business press, market analysts and user group leaders have a
pronounced impact on demand for the Company's products. The Company conducts
regular product strategy briefings and new product previews. Historically, the
Company has enjoyed strong support from the trade press and has received
numerous awards for its products.
The Company provides a one-year or three-year warranty on its server
products, which provide for the repair or replacement of products determined
to be defective. Therefore, the Company is exposed to the risk of product
returns from distributors, direct resellers and end-user customers. As part of
the sale of the Modem Business, Boca assumed all future warranty liability for
products (both installed and to be shipped in the future) it purchased from
the Company.
Competition
The market for the Company's products is intensely competitive and is
characterized by rapidly changing technology, evolving industry communication
standards and frequent new product introductions. A number of competitors,
including Cisco Systems, Shiva, 3Com, and Castelle, among others, offer
products that compete with one or more of the Company's communications server
products. Other companies in the personal computer industry, such as modem
vendors, remote access server vendors, communication software vendors, fax
machine manufacturers and personal computer manufacturers, could seek to
expand their product offerings by designing and selling products using
competitive technology that could render obsolete or have a material adverse
effect on sales of the Company's future products.
Many of the Company's competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base, than the Company. In addition, the
market for the Company's server products is characterized by significant price
competition, and the Company expects that it will face increasing pricing
pressures from its current competitors. Accordingly, there can be no assurance
that the Company will be able to provide products that compare favorably with
the products of the Company's competitors or that competitive pressures will
not require the Company to further reduce its prices.
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Any material reduction in the price of the Company's products could negatively
affect gross profit as a percentage of net revenue and could require the
Company to increase unit sales in order to maintain net revenue. There can be
no assurance, however, that the Company would be able to increase its unit
sales or make up for a short fall. Any failure to increase unit sales or make
up for a short fall in net revenue would have a material adverse effect on the
Company's financial condition and results of operations.
The Company's OneWorld fax server products compete primarily with dedicated
fax servers, stand-alone fax machines, electronic mail, centralized fax
systems produced by independent manufacturers such as Castelle, 4Sight,
Cypress, and STF, as well as printer vendors, including Apple and NEC, which
offer fax capabilities with some of their products. The Company's OneWorld
Remote Access, Suite, Network Modem and Combo servers compete with the same
products in the fax server category, as well as with remote access server
router and modem pool products produced by competitors such as Cisco Systems,
Shiva, 3COM, and others.
Proprietary Rights
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company has no patents or patent
applications pending. The Company seeks to protect its hardware, software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. The Company seeks to protect its
brand names under trademark and unfair competition laws. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that
the Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult, and while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to as great an
extent as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.
The Company believes that, due to the rapid pace of innovation within the
communications software industry, the Company's success in establishing and
maintaining a technological leadership position is likely to depend more upon
the technological and creative skills of its personnel, continued innovation,
its marketing skills and customer support than on the various legal means of
protecting its existing technology.
The Company is aware of products in addition to its own that are marketed
under the trademark "OneWorld". There can be no assurance that litigation with
respect to these trademarks will not be instituted by any third parties. If
any such litigation were successful, the Company could be required to pay
damages and cease all use of a particular trademark. There can be no assurance
that any loss of the right to use a trademark would not reduce sales of the
Company's products. In any event, even if the Company were successful in any
such litigation, the legal and other costs associated with such litigation
could be substantial. As is customary in the Company's industry, the Company
from time to time receives communications from third parties asserting that
the Company's products infringe, or may infringe, the proprietary rights of
third parties or seeking indemnification against such infringement. There can
be no assurance that any such claims would not result in protracted and costly
litigation. The Company anticipates that the duration of its trademarks will
be perpetual.
Research and Development
The Company's research and development efforts are primarily focused on
software development, hardware development, and systems integration. The
Company's expenditures for research and development were $9.7 million, $12.0
million and $14.6 million for the fiscal years ended March 31, 1998, 1997 and
1996, respectively. Customer-sponsored research and development was immaterial
during these periods.
7
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The Company believes that its future success will depend on its ability to
enhance its current products, develop new products on a timely and cost-
effective basis that meet changing customer needs and respond to emerging
industry standards and other technological changes. In particular, the Company
must adapt its products to the evolving technological standards of the various
computer platforms and new technical standards resulting from increases in
data transmission speed and wireless communication. Any failure by the Company
to anticipate or respond adequately to changes in technology and customer
preferences or any significant delay in product development or introduction
would have a material adverse effect on the Company's results of operations.
Due in part to the factors described above, the Company is subject to the risk
that its inventories may rapidly become obsolete or that the Company may carry
quantities of certain products that exceed current or projected demand. In
addition, products as complex as those offered by the Company may contain
undetected errors or defects when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company and
by current and potential customers, errors will not be found in new products
after commencement of commercial shipments resulting in a delay in market
acceptance or a recall of such products.
Manufacturing and Suppliers
Historically, the Company purchased fully manufactured and tested units from
a "turnkey" manufacturing subcontractor. The Company will continue to utilize
this manufacturing strategy for its new family of OneWorld 5000 communications
servers. The Company believes that there are a number of alternative contract
manufacturers that could produce the Company's products. However, it could
take a significant period of time and result in significant additional expense
to qualify an alternative subcontractor and commence manufacturing in the
event of a reduction or interruption of production. Therefore, the Company is
highly dependent, on a short-term basis, on its continued relationship with
its "turnkey" manufacturing subcontractor and any reduction, interruption, or
termination of this relationship could have a material adverse effect on the
operating results of the Company. Components and manufacturing services from
the Company's suppliers are obtained on an as-needed basis.
The Company has been, and will continue to be, dependent on sole or limited
source suppliers for certain key components used in its products, particularly
chip sets designed and manufactured by Rockwell International and Motorola.
The Company generally purchases sole or limited source components pursuant to
purchase orders placed from time to time in the ordinary course of business
and has no guaranteed supply arrangements with its sole or limited source
suppliers. Certain component suppliers, such as Rockwell, are also modem
manufacturers and, accordingly, could elect to satisfy their internal supply
requirements rather than the Company's purchase requirements. The Company at
times in the past has experienced delays in product development and
difficulties in manufacturing sufficient product to meet demand due to the
inability of certain suppliers to meet the Company's volume and schedule
requirements. There can be no assurance that the Company's suppliers will be
able to meet the Company's requirements for key components and failure to meet
such requirements in the future could have a material adverse effect on the
Company's results of operations.
Employees
As of March 31, 1998, the Company employed a total of 181 persons, including
59 in sales, marketing and customer support, 27 in operations, 67 in
engineering and product development and 28 in finance and administration. The
Company had two employees located in Canada, and one employee in England, and
178 employees located in the United States. After the sale of the Modem
Business the Company will employ approximately 70 persons. None of the
Company's employees are represented by a labor union or are subject to a
collective bargaining agreement. The Company believes that its relations with
its employees are good. The Company's future success depends to a significant
extent on its senior management and other key employees, including key
development personnel. The loss of the services of any of these individuals or
group of individuals could have a material adverse effect on the Company's
results of operations. The Company also believes that its future success will
depend in large part on its ability to attract and retain additional key
employees. Competition
8
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for such personnel in the computer industry is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. During the year the Company executed Change of Control Severance
Agreements with certain of its executive officers.
Executive Officers of the Company
The current executive officers of the Company and their ages as of March 31,
1998 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Neil Selvin............. 44 President, Chief Executive Officer and Director
Leonard A. Lehmann...... 43 Chairman of the Board
Marc E. Linden.......... 37 Senior Vice President & Chief Financial Officer
Charles R. Oppenheimer.. 39 Chief Operating Officer
Vice President, Human Resources & Customer
Marsha Raulston......... 49 Satisfaction
</TABLE>
Neil Selvin has served as President and Chief Executive Officer and director
of the Company since March 1993. From February 1990 to March 1993, he was
Director of Marketing at Apple Computer for the PowerBook product family and
prior to that for Apple's peripherals product line. From 1985 to 1990, Mr.
Selvin was employed by Ampex Corporation, a manufacturer of electronics
products, most recently as Chief Operating Officer of its Video Systems
division and also as business unit general manager and in several marketing
management positions. Prior to joining Ampex Corporation, Mr. Selvin held
marketing, sales and technical management positions at Varian Associates and
Apollo Lasers. Mr. Selvin received a B.A. in physics and mathematics from
Pomona College, an M.S. in physics from Brown University, and an M.B.A. from
Harvard Business School.
Leonard A. Lehmann has served as Chairman of the Board of the Company since
its founding in June 1989. From January 1993 to March 1996, Mr. Lehmann served
as Vice President, Advanced Products and evaluated new technologies and
performed strategic planning for the Company. From March 1992 to January 1993,
he served as Vice President, Engineering of the Company. From June 1989 to
March 1992, he served as the Company's Chief Executive Officer. Mr. Lehmann
was also a founder of DigiRad Corporation, a medical imaging company, and
GreenSpring Computers, Inc., an industrial computer manufacturer. Mr. Lehmann
received a B.S. in electrical engineering from Cornell University, and an M.S.
and a Ph.D. in electrical engineering from Stanford University.
Marc E. Linden became the Company's Senior Vice President and Chief
Financial Officer in July 1997. Mr. Linden joined the Company in June 1996 as
Vice President of New Business Development. From October 1992 to June 1996,
Mr. Linden was Director of Business Development and Planning of Octel
Communications, a voicemail equipment manufacturer. From 1987 to 1992, he was
employed as a consultant with McKinsey & Co. Mr. Linden received a B.A. in
Economics from the University of California Berkeley, and an M.B.A. from
Harvard Business School.
Charles R. Oppenheimer became the Company's Chief Operating Officer in June
1998. From July 1997 to May 1998 Mr. Oppenheimer served as Senior Vice
President and General Manager, Products Division. From October 1994 to June
1997 Mr. Oppenheimer served as Vice President and General Manager, Macintosh
Division. He previously served as Vice President, Marketing of the Company
beginning in July 1993. From 1984 to July 1993, Mr. Oppenheimer was employed
by Apple Computer, most recently as Director of System Software Marketing and
also as manager of System Software Marketing and manager of Macintosh Product
Marketing. Mr. Oppenheimer received a B.S. in computer science from Union
College, and an M.B.A. from The Wharton School.
9
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Marsha Raulston became the Company's Vice President, Customer Satisfaction
in January 1994 and, in January 1997, also assumed responsibility for Human
Resources. From October 1991 to January 1994, Ms. Raulston was Vice President
of Customer Service of Intuit, a personal finance software company. From June
1987 to October 1991, Ms. Raulston served as Corporate Coordinator, Quality of
Work Life at American Airlines, Inc., and, prior to that, she worked for the
Citicorp Diners Club Inc., a credit card issuer. Ms. Raulston holds a B.A. in
psychology from Stephens College in Columbia, Missouri and an M.A. in
sociology from the University of Nottingham in Nottingham, England.
ITEM 2. Properties
The Company leases approximately 128,000 square feet of office space for its
headquarters in Sunnyvale, California. This facility accommodates
administration, finance, sales, marketing, customer satisfaction, engineering,
and research and development. The lease expires in April 2000 and the monthly
rent is approximately $106,000. Approximately 64,835 square feet of this
office space is subleased at a monthly income of $116,000.
The Company's manufacturing and distribution operation consists of a 23,940
square foot facility in Plano, Texas. The lease expires in December 2002 and
monthly rent is approximately $9,975.
The Company also leases approximately 21,000 square feet of office space in
Marietta, Georgia. The lease expires in January 2000 and the monthly rent is
approximately $18,000. Approximately 16,000 square feet is subleased at a
monthly income of $13,000. Also, the Company leases sales office space at
other facilities, including in the United States, one in England and one in
Canada.
Boca, as part of their purchase of the Modem Business, will assume only the
Company's lease in England. The Company believes the space to which it is
committed is adequate for its current needs and that additional space
sufficient to meet the Company's needs for the foreseeable future is available
on commercially reasonable terms. The Company's facilities are subject to a
variety of environmental regulations. The Company has incurred no significant
expenses to date related to complying with these regulations.
ITEM 3. Legal Proceedings
In the ordinary course of business, the Company may be involved in legal
proceedings from time to time. As of the date of this submission, there are no
material proceedings pending against the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
10
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PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following required information is filed as part of the report:
The Company has not paid cash dividends on its Common Stock. The Company's
Stock is traded over-the-counter and is quoted on the NASDAQ National Market
under the symbol "OWLD." Prior to the Company's name change, effective June
18, 1998, the Company's Stock was traded under the symbol "GVIL." The
following table sets forth the range of high and low closing sale prices for
the Common Stock:
<TABLE>
<CAPTION>
Low Sales Price High Sales Price
--------------- ----------------
<S> <C> <C>
Fiscal 1998
First Quarter............................. $1.44 $ 4.63
Second Quarter............................ 1.69 3.56
Third Quarter............................. 1.00 3.58
Fourth Quarter............................ 0.91 2.72
Fiscal 1997
First Quarter............................. $8.25 $18.25
Second Quarter............................ 5.88 9.50
Third Quarter............................. 3.00 9.25
Fourth Quarter............................ 1.06 3.56
</TABLE>
On March 31, 1998, there were approximately 351 holders of record of the
Company's Common Stock. This number does not include beneficial owners of the
Common Stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
11
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ITEM 6. Selected Consolidated Financial Data
The following selected consolidated financial information for the years
ended March 31, 1994 through March 31, 1998 is derived from the Company's
consolidated financial statements, which have been audited by the Company's
independent auditors. The information set forth below is qualified by
reference to and should be read in conjunction with the Financial Statements
and related notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are included elsewhere
in this report.
<TABLE>
<CAPTION>
Fiscal years ended March 31,
---------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- -------
In thousands, except per share data
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data(a)(b):
Net revenue................... $46,637 $80,021 $136,941 $ 90,174 $61,468
Income (loss) from
operations................... 6,764 (3,239) 16,154 (42,029) (8,973)
Income (loss) from continuing
operations................... 4,302 (6,206) 12,148 (35,852) (4,709)
Gain (loss) from discontinued
operations................... (408) (1,466) (3,312) (4,029) 1,331
Net income (loss)............. $ 3,900 $(7,672) $ 8,836 $(39,881) $(3,378)
Basic earnings per share:
Income (loss) from
continuing operations...... $ (0.42) $ 0.73 $ (2.13) $ (0.28)
Net income (loss)........... $ (0.51) $ 0.53 $ (2.37) $ (0.20)
Shares used in computing
income (loss) per share.... 14,633 16,529 16,844 17,006
Diluted earnings per share:
Income (loss) from
continuing operations...... $ (0.42) $ 0.68 $ (2.13) $ (0.28)
Net income (loss)........... $ (0.51) $ 0.49 $ (2.37) $ (0.20)
Shares used in computing
income (loss) per share.... 14,633 17,861 16,844 17,006
Balance Sheet Data:
Working capital............... $27,011 $28,468 $ 36,402 $ (3,760) $ 233
Total assets.................. 36,407 53,722 72,035 35,200 17,973
Total liabilities............. 7,269 17,587 24,204 27,850 13,628
Stockholder's equity.......... $29,138 $36,135 $ 47,831 $ 7,350 $ 4,345
</TABLE>
The selected consolidated financial data has been derived from, and should
be read in conjunction with, the related Consolidated Financial Statements.
(a) In the second quarter of fiscal 1997, the Company adopted a formal
plan to discontinue the operations of its enterprise network server
operation based in the United Kingdom (formerly, the Company's ISDN
Division). Therefore, operating results for the ISDN Division are
classified as discontinued operations on the Company's Consolidated
Statements of Operations, and prior periods have been restated accordingly.
(b) The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128 "Earnings Per Share" which modifies the computation and
presentation of earnings per share (EPS) in a manner comparable to
international guidelines. The information presented above has been restated
to reflect the adoption of this standard.
12
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ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto for the year ended
March 31, 1998. This report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ materially from those anticipated in forward-looking statements as a
result of the risks identified and the other cautionary disclosures set forth
below and elsewhere in this report.
OneWorld Systems, Inc. ("OneWorld Systems" or the "Company") (founded in
June 1989 as "Global Village Communication, Inc." and incorporated in
Delaware), develops and manufactures products that enhance and simplify wide
area data communications for the small and medium size office market. The
Company's recently introduced OneWorld 5000 communications servers are
designed to be versatile, easy-to-use, cost-effective and expandable solutions
that combine Internet access and routing, remote access, on-line service
access, and fax capabilities.
On March 31, 1998 the Company, then Global Village Communication, Inc.,
announced an agreement to sell its Modem Business to Boca Research, Inc.
("Boca") and unveiled a new corporate strategy focusing on wide-area data
communications for the small and medium size office. The transaction was
closed June 18, 1998, and the Company's name changed to OneWorld Systems, Inc.
at that time.
Historical Modem Business
During the fiscal year ended March 31, 1998, the Company was actively
engaged in the Modem Business, where it was a leader in the design,
development and marketing of easy-to-use integrated communications products
for personal computers with Windows, Macintosh, OS/2 and DOS operating
systems.
Unit sales volumes and market share of Macintosh compatible computers have
continued to decline over the past year. As a result, during fiscal 1998 the
Company's revenues and gross margin from its products for the Apple Macintosh
family of computers declined. In an attempt to offset this decline, during the
year, the Company introduced a number of modem products compatible with
personal computers utilizing the Windows operating system. However, the
Company was unable to gain sufficient market share in the Windows arena.
During fiscal 1998, a substantial majority of the Company's revenue continued
to be attributable to sales of its Apple Macintosh compatible modem products.
This continued dependence on this declining market, combined with the delay in
purchases of 56 Kbps modems resulting from confusion over an industry standard
and the Company's inability to significantly increase its market share of
Windows compatible modem products resulted in a deterioration in the Company's
financial condition.
The Company determined that remaining an independent modem company was not
financially viable, would require significant infusions of cash with no
assurance of a return to profitability, and that funding the business and the
development and launch of the Company's OneWorld 5000 communications servers
were not simultaneously achievable. This led to the announcement on March 31,
1998 that the Company would sell its Modem Business to Boca.
As a result of the sale to Boca, which was closed June 18, 1998, the Company
will no longer sell its individual use modems or other individual use
communications systems. These products represented a substantial majority of
the Company's revenue in fiscal 1998.
New Focus on Communications Servers
The Company's primary source of revenue in the future will be from the
recently introduced OneWorld 5000 communications server product line. The
Company does not expect to be profitable in the short-term, nor can there be
any assurance that the Company will ever achieve profitability.
13
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The Company's planned launch of its server products is dependent upon the
completion of the development of the product. However, the Company may have
difficulty resolving these issues, or any other issues that may arise, in a
timely manner, which could delay the planned launch of the new OneWorld
Systems communications server product line. Commercial acceptance of these
products is dependent on certain factors including the Company's sales and
marketing efforts, technical reviews by third parties, introductions of new
technologies or standards performance of the Company's distributors and
suppliers and announcements by the Company's competitors. Many of the
Company's future competitors have substantially greater financial, technical,
sales, marketing and other resources, as well as greater name recognition and
a larger customer base, than the Company. OneWorld products will have a
significantly higher selling price than many of the Company's current products
and will require the Company to expand its VAR channel. There can be no
assurance that the Company will be successful in establishing an effective
distribution channel for its new products. As a result, the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as an indication of
future performance.
In the past, the industry in which the Company competed was subject to short
product life cycles. As a result, the Company traditionally experienced a
reduction in the average selling prices of its products as the time from
product introduction elapses. The Company was forced to institute significant
price reductions with respect to substantially all of its products. There can
be no assurances that similar pricing pressures will not lead to reductions in
average selling prices of the Company's new servers.
The Company intends to ship products within a short period after receipt of
an order, consequently, the Company does not expect to have a material backlog
of unfilled orders, and revenues in any quarter will be substantially
dependent on orders booked in that quarter. The Company's expense levels are
based in part on its expectations as to future revenues. Therefore, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall of
demand in relation to the Company's expectations or any material delay of
customer orders would have an almost immediate adverse impact on the Company's
results of operations and liquidity. Fluctuations in operating results may
also result in volatility in the price of the Company's Common Stock.
In addition, announcements by the Company of new products with the potential
to replace current products may cause customers to defer purchasing the
Company's current products which could have a material adverse effect on the
Company's results of operations. As a result of changing technology and market
factors, the Company is subject to the risk that its inventories may rapidly
become obsolete or that the Company may carry quantities of certain products
that exceed current or projected demand. While the Company has written down
inventory that it considers to be excess or obsolete, there can be no
assurance that the Company's write downs will be adequate, and a material
increase in such write-downs and returns over historical rates would have a
material adverse effect on the Company's results of operations and working
capital. There can be no assurance that the Company will be successful in
developing new products or enhancing its current products on a timely basis,
or that such new products or product enhancements will achieve market
acceptance.
Net Revenue
On June 18, 1998, the Company sold its Modem Business to Boca Research. The
Modem Business accounted for substantially all of the Company's revenue during
the last three fiscal years. Consequently, the comparisons below should not be
relied upon as predictors of future performance. Net revenue includes revenue
from gross shipments, licenses and royalties, less reserves for returns and
allowances. Net revenue decreased 31.8% to $61.5 million in fiscal 1998 as
compared to $90.2 million in fiscal 1997 and $137.0 million in fiscal 1996.
The decrease in net revenue for the 1998 fiscal year as compared to the 1997
fiscal year is primarily attributable to decreased shipments of the Company's
TelePort and PC Card notebook (including PowerPort) modem products. Shipments
of these products were adversely affected by the continued weakness in the
market for Apple Computer products, and end-user confusion surrounding the
technology transition to 56 Kbps modems.
14
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Lower unit shipments of Apple computers reduced demand for the Company's
products. In addition, the Company's OEM revenue from Apple was lower in
fiscal 1998 than in fiscal 1997. The fiscal 1997 decrease in net revenue, as
compared to fiscal 1996, was primarily attributable to Apple Computer's repair
program for the Macintosh PowerBook 5300 and 190 models in that year and
reduced shipments of other Macintosh products. The repair program
significantly reduced the number of Apple computers available for the
Company's products.
Aggregate returns and allowances were approximated 10%, 18% and 6% of gross
revenue for fiscal 1998, 1997 and 1996, respectively. The reduction in the
fiscal 1998 rate is primarily due to an unusually high rate in fiscal 1997
related to returns and reserves associated with several slow moving products.
Revenue reserves and allowances are established for estimated future returns
due to stock balancing and discontinued and non-saleable products based on the
Company's past experience and internal forecasts. There can be no assurance
that the Company's historical experience regarding returns and allowances will
continue or that its projections will prove accurate. If the Company
experiences returns in excess of its reserves, the Company's results of
operations could be materially, adversely effected.
International net revenue decreased to $9.3 million or 15% of net revenues
in fiscal 1998 from $13.3 million or 15% of net revenue in fiscal 1997 and
$25.7 million or 19% of net revenues in fiscal 1996. The fiscal 1998 decrease
in international revenue is due primarily to continued weakness in the market
for Apple Computer products and the slow transition to 56 Kbps modems. The
fiscal 1997 decrease was primarily attributable to the decrease in the
Company's sales in the Asia region to Apple Japan.
There can be no assurance that the Company will be able to attain
international demand for the its new OneWorld 5000 communications server
products or that the Company's distributors will be able to effectively meet
that demand. Risks inherent in the Company's international business activities
generally include unexpected changes in regulatory requirements, tariffs and
other trade barriers, costs and risks of localizing products for foreign
countries, longer accounts receivable payment cycles, difficulties in managing
international operations and distributors, potentially adverse tax
consequences, repatriation of earnings, the burdens of complying with a wide
variety of foreign laws and changes in demand resulting from fluctuations in
exchange rates. In addition, the laws of certain foreign countries do not
provide protection for the Company's intellectual property to the same extent
as do the laws of the United States.
Gross Profit
On June 18, 1998, the Company sold its Modem Business to Boca Research. The
Modem Business accounted for substantially all of the Company's revenue during
the last three fiscal years. Consequently, the comparisons below should not be
relied upon as predictors of future performance. Cost of revenue primarily
consists of cost of materials, contract manufacturing costs, manufacturing
overhead expenses, royalty payments, and warranty expenses. The Company's
gross profit as a percentage of net revenue increased to 31% in fiscal 1998
from 11% in fiscal 1997. Gross profit as a percentage of net revenue decreased
in fiscal 1997 from 43% in fiscal 1996. The gross profit increase in fiscal
1998 was primarily attributable to significant inventory reserves for slow
moving products and inventory write-downs recorded in fiscal 1997. The decline
in gross profit in 1997 was primarily attributable to these reserves and
write-downs. Gross profit margins are likely to fluctuate as a result of the
sales mix between higher and lower margin products, the nature and amount of
licensing and royalty income, and changes in distribution channels, as well as
changes in component and production costs, price reductions and reserve
requirements.
Research And Development
On June 18, 1998, the Company sold its Modem Business to Boca Research. The
Modem Business accounted for a significant portion of the Company's expense
structure during the last three fiscal years. Consequently, the comparisons
below should not be relied upon as predictors of future performance. The
15
<PAGE>
A-18
Company's research and development ("R&D") expenses decreased to $9.7 million
in fiscal 1998 from $12.0 million in fiscal 1997 and $14.6 million in fiscal
1996. The decline in fiscal 1998 is primarily the result of a reduction in
personnel costs and increased control of discretionary expenditures. The
decrease in fiscal 1997 was the result of the elimination of R&D expenses
associated with the divestiture of the Company's GlobalCenter subsidiary in
that year. Research and development expenses as a percentage of net revenue
were 16%, 13% and 11% in fiscal 1998, 1997, and 1996, respectively.
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established, in compliance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Software to be Sold, Leased, or Otherwise Marketed." Historically,
software development has been substantially completed concurrently with the
establishment of technological feasibility, and, accordingly, no costs have
been capitalized to date.
Marketing and Sales
On June 18, 1998, the Company sold its Modem Business to Boca Research. The
Modem Business accounted for a significant portion of the Company's expense
structure during the last three fiscal years. Consequently, the comparisons
below should not be relied upon as predictors of future performance. The
Company's marketing and sales expenses decreased to $13.9 million in fiscal
1998 from $28.9 million in fiscal 1997 and increased from $23.0 million in
fiscal 1996. Marketing and sales expenses were 23%, 32%, and 17% of net
revenue in fiscal 1998, 1997, and 1996, respectively. Fiscal 1998 marketing
and sales costs declined primarily as a result of reduced advertising and
promotion expense and a reduction in personnel costs. Fiscal 1997 expenses
increased, as compared to fiscal 1996, due to advertising and promotion costs
associated with new products introduced in that year.
General and Administrative
On June 18, 1998, the Company sold its Modem Business to Boca Research. The
Modem Business accounted for a significant portion of the Company's expense
structure during the last three fiscal years. Consequently, the comparisons
below should not be relied upon as predictors of future performance. General
and administrative expenses decreased to $4.4 million in fiscal 1998 from $7.4
million in fiscal 1997, and increased in fiscal 1997 from $5.7 million in
fiscal 1996. The decrease in fiscal 1998 expenditures is primarily due to a
reduction in legal, bad debt reserve, telecommunications and certain
discretionary expenditures. The increase in general and administrative expense
in fiscal 1997 was primarily due to legal expenses associated with the
settlement of two lawsuits, additional bad debt reserves and other general
operating expenses. General and administrative expenses as a percentage of net
revenue were 7%, 8%, and 4% in fiscal 1998, 1997, and 1996, respectively.
Restructuring Costs
On March 31, 1998 the Company announced an agreement to sell its Modem
Business to Boca Research and its intent to refocus the Company around a new
family of server products. The Company recorded a net restructuring charge of
$240,000 to provide for severance costs associated with a reduction in force
of approximately 25 employees. In December 1996, the Company announced a
restructuring plan to streamline its operations, reduce its workforce and
enable the Company to improve its operating results. The Company recorded a
restructuring charge of $1.3 million related primarily to severance costs,
write-offs of fixed assets and lease abandonments.
Investments--Related Gains and Losses
AirMedia Live, Inc. In the second quarter of fiscal 1997, the Company
completed an equity investment in AirMedia, Inc. ("AirMedia") of $4.1 million.
The Company accounted for its investment in AirMedia using the cost method of
accounting. In July 1997, the Company sold substantially all its investment in
AirMedia to an
16
<PAGE>
A-19
existing AirMedia shareholder for approximately $2.0 million in cash. As a
result, the Company recorded a loss of $2.1 million in the second quarter of
fiscal 1998.
GlobalCenter, Inc. In April 1996, the Company announced that it had
incorporated its Internet Services Division as a standalone business called
GlobalCenter, Inc. At the same time, the Company announced that UUNET
Technologies, Inc. had acquired a 19.9% equity interest in GlobalCenter. At
that time, the Company no longer had the ability to exercise significant
control over GlobalCenter. Accordingly, the Company no longer consolidated the
results of GlobalCenter and began to account for its investment using the
equity method of accounting. As a result of the refinancing and operating
performance of GlobalCenter during the first quarter of fiscal 1997, the
Company recorded an investment loss of $2.2 million, and reduced the book
value of its investment to zero. In December 1996, GlobalCenter entered into a
definitive merger agreement whereby GlobalCenter and Phoenix-based Primenet
Services for the Internet, Inc. merged, reducing the Company's percentage
ownership below 10%. Accordingly, in the third quarter of fiscal 1997, the
Company began accounting for its investment in GlobalCenter using the cost
method of accounting. In September 1997, the Company agreed to sell its
remaining equity stake in GlobalCenter to an existing shareholder of
GlobalCenter for approximately $3.7 million in cash. As a result the Company
recorded a gain of $3.7 million in the second quarter of fiscal 1998.
Other Income
The Company's net other income increased to $2.6 million in fiscal 1998 from
$800,000 in fiscal 1997. In fiscal 1997, other income decreased to $800,000
from $1.2 million in fiscal 1996. The increase in other income in fiscal 1998
is due to a gain of $2.6 million on repayment of a loan made by the Company
which had previously been fully reserved. The dollar decrease in fiscal 1997
is the result of a decrease in interest income associated with lower cash
balances and an increase in interest expense related to line of credit
borrowings at the time.
Provision for Income Taxes
The combined federal, state and foreign effective income tax rates for
continuing operations were 0% in fiscal 1998, 13% in fiscal 1997, and 30% in
fiscal 1996. The fiscal 1998 and 1997 rates differ from the combined statutory
rates primarily due to the establishment of a full valuation allowance against
the deferred tax assets. The Company's increased foreign activities during
fiscal 1996 was the primary cause of the favorable differential from the
combined statutory rates for that period. In addition, the rates also differ
from the combined statutory rates in effect during these periods as a result
of tax exempt interest, available research credits, and in fiscal 1996, the
utilization of foreign sales corporation tax benefits.
Discontinued Operations
In the second quarter of fiscal 1997, the Company adopted a formal plan to
discontinue its enterprise network server operation based in the United
Kingdom (formerly, the Company's ISDN division). The disposition of the
division has been accounted for as a discontinued operation in accordance with
Accounting Principles Board (APB) Opinion No. 30 and prior period consolidated
financial statements have been restated to reflect the discontinuation of the
enterprise network server operation. The loss from discontinued operations of
$1.8 million and $3.3 million in fiscal years 1997 and 1996, respectively,
represents the operation's operating losses, with no associated tax benefits.
The gain from discontinued operations of $1.3 million in fiscal 1998 (no
income tax effect) is the result of the release of a portion of a reserve
established for contingent liabilities associated with the disposition of the
operation, based on the Company's determination that those particular
contingencies had been resolved. The loss on disposal of discontinued
operations of $2.2 million in fiscal 1997 (no income tax benefit) represents
the cost of disposal of the operation, net of $3.8 million of cash received
from the sale of the operation's assets and a $2.1 million loss from
operations from the measurement date to the disposal date.
17
<PAGE>
A-20
Liquidity and Capital Resources
The Company's cash and short-term investments totaled $3.1 million at March
31, 1998, representing 17% of total assets. Working capital was $0.2 million
at March 31, 1998, and a negative $3.8 million at March 31, 1997, an increase
of $4.0 million. The increase in working capital was primarily due to the
Company's sale of its investments in AirMedia, Inc. and Global Center, Inc.
and the repayment of a loan.
Since its prior fiscal year end, the Company has used approximately $10.7
million in cash to finance both its continuing and discontinued operations. At
March 31, 1998, the Company's principal source of liquidity was $3.1 million
in cash and an unused line of credit which allows the Company to borrow up to
the lower of $5.0 million or 60% of eligible accounts receivable. At March 31,
1998, the Company had no borrowings against this bank line of credit. The
Company does not expect fiscal 1999 capital expenditures to exceed historical
levels.
On March 31, 1998 the Company announced, and on June 18, 1998 closed, the
sale of its Modem Business to Boca Research, Inc. At closing, the Company
received $4.0 million in cash and a note receivable, bearing no interest, due
in two installments of $3.0 million each on September 30, 1998 and December
31, 1998. In conjunction with the closing of the transaction, the Company's
line of credit was suspended as the sale included most of the assets securing
the line. The Company is currently negotiating a new line of credit.
The transaction with Boca included the sale of Company products which
accounted for substantially all of the Company's revenue in fiscal 1998. The
Company's primary source of revenue in the future will be its recently
introduced OneWorld 5000 communications server product family. During the past
year, the Company has experienced significant negative cash flows. The Company
does not expect to be profitable in the short-term and expects to continue to
incur significant negative cash flows. However, the Company currently believes
that its existing cash, proceeds from the sale of the Modem Business to Boca,
including the payment of notes received, and revenue for the OneWorld 5000
products should enable the Company to meet its cash requirements for at least
the next twelve months. The preceding sentence is a forward-looking statement,
and actual results could differ materially from those indicated. A delay in
payment or nonpayment of the notes received from Boca, failure to meet the
Company's expectations for revenue and gross profit from its new products,
operating expenses in excess of expectations, or other unforeseen expenditures
would have a material adverse impact on the Company's financial condition. The
Company may be required to issue additional debt or equity securities which
could substantially dilute the ownership of existing stockholders. Any
shortfall in funding could result in the Company having to curtail the
introduction or development of new products and its entry into new markets,
any of which could have a material adverse affect on the Company's business,
financial condition and results of operations.
See Note 11 to the Consolidated Financial Statements for an additional
discussion of the impact of the sale of the Modem Business on the Company's
financial position.
Year 2000 Issues
The Company is aware of the potential issues facing the Company, its vendors
and its customers with respect to the ability for computer software to
function properly in the year 2000. The Company has assessed the impact on its
corporate information system for Year 2000 issues and has a plan to adopt a
new information system that will accommodate dates after 1999. The Company
believes that after conversion to the new software system, the Year 2000 issue
will not pose significant operational problems for its computer system. The
financial impact of making the required systems changes is not expected to be
material to the Company's financial position, results of operation or cash
flows. The Company has been contemplating a decision to move to another
information system for other business reasons and will resolve any Year 2000
issues by making the conversion.
Additionally, the Company is in the process of reviewing Year 2000 issues
with its customers, suppliers and other business partners. There can be no
assurance made at this time, that all the systems of its customers,
18
<PAGE>
A-21
suppliers and other business partners will be Year 2000 compliant on a timely
basis. If said systems are not compliant, it could have a material adverse
impact on the Company.
The Company has commenced efforts to ensure that all products that the
Company produces will be fully Year 2000 compliant. While this evaluation is
not yet complete, the Company believes that any costs incurred to bring its
products into compliance will not have a material impact on its financial
position, results of operation or cash flows. There can be no assurances,
however, that non-year 2000 compliant products would not result in the loss of
or delay in market acceptance of the Company's products.
Impact of Recently Issued Accounting Standards
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These Statements establish standards for reporting and
displaying comprehensive income and its components; and standards for
reporting financial data of operating segments of enterprises in financial
statements. The adoption of theses Statements is expected to have no impact on
the Company's consolidated financial position, results of operations, or
business practices.
19
<PAGE>
A-22
ITEM 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
----
<S> <C>
(1) Consolidated Financial Statements
Independent Auditors' Report............................................. 21
Consolidated Balance Sheets as of March 31, 1998 and 1997................ 22
Consolidated Statements of Operations for the three years ended March 31,
1998.................................................................... 23
Consolidated Statements Of Stockholders' Equity for the three years ended
March 31, 1998.......................................................... 24
Consolidated Statements Of Cash Flow for the three years ended March 31,
1998.................................................................... 25
Notes To Consolidated Financial Statements............................... 26
(2) Consolidated Financial Statements Schedules for the three years ended
March 31, 1998
Schedule II--Consolidated Valuation and Qualifying Accounts.............. 38
</TABLE>
Schedules other than those listed above have been omitted since they are
either not applicable, not required or the information is included elsewhere
herein.
20
<PAGE>
A-23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
OneWorld Systems, Inc.
We have audited the consolidated financial statements of OneWorld Systems,
Inc. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of OneWorld
Systems, Inc. and subsidiaries as of March 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-
year period ended March 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Mountain View, California
May 18, 1998, except
as to Note 10 which is
as of June 18, 1998
21
<PAGE>
A-24
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
----------------
1998 1997
------- -------
(In thousands,
except share
data)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.................................. $ 3,097 $ 9,687
Accounts receivable, net................................... 8,160 4,324
Inventories, net........................................... 2,351 2,071
Income tax receivable...................................... -- 7,665
Other current assets....................................... 253 343
------- -------
Total curent assets........................................ 13,861 24,090
Property and equipment, net.................................. 4,049 6,929
Investment in AirMedia, Inc.................................. -- 4,043
Other assets................................................. 63 138
------- -------
Total assets............................................. $17,973 $35,200
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable........................................... $ 7,625 $15,971
Line of credit borrowings.................................. -- 4,241
Accrued and other liabilities.............................. 6,003 7,638
------- -------
Total current liabilities.................................. 13,628 27,850
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; none issued and outstanding................... -- --
Common stock, $0.001 par value; 30,000,000 shares
authorized; 17,162,771 and 16,929,690 shares issued and
outstanding............................................... 17 17
Additional paid-in capital................................. 43,246 42,873
Accumulated deficit........................................ (38,918) (35,540)
------- -------
Total stockholders' equity................................. 4,345 7,350
------- -------
Total liabilities and stockholders' equity............... $17,973 $35,200
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
22
<PAGE>
A-25
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------
1998 1997 1996
------- -------- --------
(In thousands, except per
share data)
<S> <C> <C> <C>
Net revenue....................................... $61,468 $ 90,174 $136,941
Cost of revenue................................... 42,204 80,439 77,583
------- -------- --------
Gross profit.................................... 19,264 9,735 59,358
------- -------- --------
Operating expenses:
Research and development........................ 9,727 12,008 14,550
Marketing and sales............................. 13,900 28,900 22,976
General and administrative...................... 4,370 7,367 5,678
Restructuring costs............................. 240 1,298 --
Loss from investment in GlobalCenter, Inc. ..... -- 2,191 --
------- -------- --------
Total operating expenses...................... 28,237 51,764 43,204
------- -------- --------
Income (loss) from operations................. (8,973) (42,029) 16,154
------- -------- --------
Other income (expense), net:
Gain on sale of investment in GlobalCenter,
Inc. .......................................... 3,691 -- --
Loss on sale of investment in AirMedia, Inc..... (2,074) -- --
Interest income................................. 87 411 1,000
Interest expense................................ (154) (248) --
Repayment of loan previously reserved........... 2,600 -- --
Other income.................................... 114 613 154
------- -------- --------
Total other income, net....................... 4,264 776 1,154
------- -------- --------
Income (loss) before income taxes............... (4,709) (41,253) 17,308
Provision for income taxes (benefit)............ -- (5,401) 5,160
------- -------- --------
Income (loss) from continuing operations...... (4,709) (35,852) 12,148
------- -------- --------
Discontinued operations:
Loss from discontinued operations............... -- (1,822) (3,312)
Gain (loss) on disposal of discontinued
operations..................................... 1,331 (2,207) --
------- -------- --------
Income (loss) from discontinued operations.... 1,331 (4,029) (3,312)
------- -------- --------
Net income (loss)............................. $(3,378) $(39,881) $ 8,836
======= ======== ========
Basic per share data:
Income (loss) per share from continuing
operations..................................... $ (0.28) $ (2.13) $ 0.73
Income (loss) per share from discontinued
operations..................................... 0.08 (0.24) (0.20)
------- -------- --------
Net income (loss) per share................... $ (0.20) $ (2.37) $ 0.53
======= ======== ========
Diluted per share data:
Income (loss) per share from continuing
operations..................................... $ (0.28) $ (2.13) $ 0.68
Income (loss) per share from discontinued
operations..................................... 0.08 (0.24) (0.19)
------- -------- --------
Net income (loss) per share................... $ (0.20) $ (2.37) $ 0.49
======= ======== ========
Shares used in basic per share computations....... 17,006 16,844 16,529
Dilutive effect of stock options.................. -- -- 1,332
------- -------- --------
Shares used in diluted per share computations..... 17,006 16,844 17,861
======= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
23
<PAGE>
A-26
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------
1998 1997 1996
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Common stock and paid-in capital
Balance, beginning of year...................... $ 42,890 $ 43,243 $40,508
Exercise of stock options....................... 2 575 1,548
Shares issued under Employee Stock Purchase
Plan........................................... 140 367 539
Stock issuance to settle compensation
liability...................................... 231 -- --
Treasury shares acquired........................ -- (1,295) (984)
Tax benefits related to stock plans............. -- -- 1,632
-------- -------- -------
Balance, end of year.......................... $ 43,263 $ 42,890 $43,243
-------- -------- -------
Cumulative translation adjustment
Balance, beginning of year...................... $ -- $ 247 $ 122
Foreign currency translation adjustment......... -- (247) 125
-------- -------- -------
Balance, end of year.......................... $ -- $ -- $ 247
-------- -------- -------
Retained earnings (accumulated deficit)
Balance, beginning of year...................... $(35,540) $ 4,341 $(4,495)
Net income (loss)............................... (3,378) (39,881) 8,836
-------- -------- -------
Balance, end of year.......................... $(38,918) $(35,540) $ 4,341
-------- -------- -------
Total stockholders' equity........................ $ 4,345 $ 7,350 $47,831
======== ======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
24
<PAGE>
A-27
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Operating activities:
Net income (loss).............................. $ (3,378) $(39,881) $ 8,836
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................ 3,206 3,782 2,879
Loss on disposal of property and equipment... 11 220 --
Deferred income taxes........................ -- 3,234 --
(Gain) loss on investments................... (4,217) 2,191 --
Tax benefits related to stock plans.......... -- -- 1,632
Changes in operating assets and liabilities:
Accounts receivable, net..................... (3,836) 7,913 (1,059)
Inventories.................................. (280) 3,627 (1,881)
Income taxes................................. 7,665 (7,665) --
Other current assets......................... 90 1,474 (685)
Accounts payable............................. (8,346) (1,462) 5,968
Accrued and other liabilities................ (1,578) (174) 742
Income taxes payable......................... -- (335) (1,505)
-------- -------- --------
Net cash provided by (used in) operating
activities of:
Continuing operations........................ (10,663) (27,076) 14,927
Discontinued operations...................... (57) 2,977 1,228
-------- -------- --------
Net cash provided by (used in) operating
activities................................ (10,720) (24,099) 16,155
-------- -------- --------
Investing activities:
Proceeds from sale of (investment in)
GlobalCenter, Inc. ........................... 3,691 (1,548) --
Repayment of loan from GlobalCenter, Inc....... 2,600 -- --
Proceeds from sale of (investment in) AirMedia,
Inc. ......................................... 1,969 (4,043) --
Purchases of property and equipment............ (450) (1,802) (6,514)
Proceeds from sale of property and equipment... 113 71 --
Other assets................................... 75 (386) 93
Purchases of short-term investments............ -- (23,217) (78,747)
Proceeds from sales and maturities of short-
term investments.............................. -- 45,036 77,897
-------- -------- --------
Net cash provided by (used in) investing
activities................................ 7,998 14,111 (7,271)
-------- -------- --------
Financing activities:
Borrowings under line of credit................ 2,750 8,000 --
Repayments under line of credit................ (6,991) (3,759) --
Proceeds from issuance of Common Stock, net.... 373 942 2,086
Repurchases of Common Stock.................... -- (1,161) (984)
-------- -------- --------
Net cash provided by financing activities.. (3,868) 4,022 1,102
-------- -------- --------
Effect of foreign currency exchange rate
changes......................................... -- (247) 125
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (6,590) (6,213) 10,111
-------- -------- --------
Cash and cash equivalents at beginning of year... 9,687 15,900 5,789
-------- -------- --------
Cash and cash equivalents at end of year......... $ 3,097 $ 9,687 $ 15,900
======== ======== ========
Supplemental disclosures:
Cash paid during the year for:
Interest..................................... $ 198 $ 211 $ 100
Income taxes................................. $ -- $ -- $ 5,033
Non-cash investing and financing activities:
Non-cash net assets contributed to
GlobalCenter, Inc. ......................... $ -- $ 643 $ --
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
25
<PAGE>
A-28
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary Of Significant Accounting Policies
Description of Business. OneWorld Systems, Inc. ("OneWorld Systems" or the
"Company") (founded in June 1989 as "Global Village Communication, Inc." and
incorporated in Delaware), develops and manufactures products that enhance and
simplify wide area data communications for the small and medium size office
market. The Company's recently introduced OneWorld 5000 communications servers
are designed to be versatile, easy-to-use, cost-effective and expandable
solutions that combine Internet access and routing, remote access on-line
service access, and fax capabilities.
Principles of Consolidation. The accompanying Consolidated Financial
Statements include the accounts of the Company and its wholly owned
subsidiaries. All intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
Cash and Cash Equivalents and Short-Term Investments. Cash and cash
equivalents consist of cash and highly liquid investments such as money market
funds, commercial paper, and U.S. Treasury Bills with maturities of three
months or less at the time of purchase.
Inventories. Inventories are stated at the lower of cost or market. Costs
are calculated using standard cost, which approximates the lower of actual
cost (first-in, first-out method) or market.
Property and Equipment. Property and equipment are recorded at cost less
accumulated depreciation and amortization. Depreciation is calculated using
the straight-line method over the estimated useful lives of the respective
assets, generally three to five years. Leasehold improvements are amortized
over the lesser of the estimated useful lives of the improvements or the lease
term, generally five years.
Fair Value of Financial Instruments. The carrying amounts of cash, cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair values due to the short maturity of those instruments. The
carrying amounts of short-term debt approximates fair value due to the
instrument's variable rate structure.
Product Warranty. The Company warrants its products for up to five years
from date of shipment. A provision for the estimated future costs of warranty
repair or replacement is provided at the time of sale.
Revenue Recognition. Revenue is generally recognized at the time of
shipment. Revenue from sales to distributors and dealers are subject to
agreements allowing limited rights of return and exchange, and price
protection. Accordingly, the Company provides reserves for estimated future
returns, exchanges, and price protection credits in the same period as related
revenue. Revenue from products licensed to original equipment manufacturers
(OEM's) is recognized when sales to end users are reported to the Company.
The Company's revenue recognition policies comply with the provisions of the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 97-2, "Software Revenue Recognition."
Software Development Costs. Development costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological
26
<PAGE>
A-29
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
feasibility has been established. Through March 31, 1998, software development
has been substantially completed concurrent with the establishment of
technological feasibility, and, accordingly, no costs have been capitalized to
date.
Income Taxes. The Company accounts for income taxes under the asset and
liability method of accounting. Under the asset and liability method, deferred
tax assets and liabilities are recognized based on the expected future tax
consequences of events that have been recognized in the Company's consolidated
financial statements or tax returns.
Accounting for Stock-Based Compensation. The Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation" effective for the fiscal year ended
March 31, 1997. SFAS No. 123 establishes a fair market value method of
accounting for stock-based employee compensation plans. As allowed under the
provisions of SFAS No. 123, the Company chose to continue the intrinsic value
based method for stock-based employee compensation plans and provide pro forma
disclosures of results and results per share as if the accounting provisions
of SFAS No. 123 has been adopted. As the Company has elected to adopted only
disclosure requirements of SFAS No. 123.
Net Income (Loss) Per Share. Net income (loss) per share data has been
computed using net income (loss), the weighted average number of shares of
Common Stock, and common equivalent shares from stock options outstanding
(when dilutive using the treasury stock method). The Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share"
effective December 28, 1997. SFAS requires presentation of basic per share
and, for companies with complex capital structures, diluted per share data.
Basic earnings per share ("EPS") excludes dilution and is computed by dividing
net income (loss) available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS includes
dilution and net income per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. For the years ended March 31, 1998 and March 31, 1997, "in-the-money"
dilutive options of approximately 820,000 and 2.3 million respectively, were
not included in the calculation of diluted EPS as they were considered
antidilutive. The Company has restated income (loss) per share for all periods
presented in the accompanying consolidated financial statements to reflect net
income (loss) per share on both a basic and a diluted basis.
Foreign Currency Translation. All assets and liabilities denominated in
foreign currencies are translated at the exchange rate on the balance sheet
date. Revenues, costs, and expenses are translated at average rates of
exchange prevailing during the period. Translation adjustments are accumulated
as a separate component of stockholders' equity. Gains and losses resulting
from foreign currency transactions and realized translation adjustments are
included in the consolidated statements of operations.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. The
Company reviews long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds its fair value.
Further, long-lived assets and certain identifiable intangibles that are to be
disposed of, which are not covered by Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations--Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," are required to be reported at the lower of the
asset's carrying amount or its fair value less cost to sell. To date the
Company has made no such adjustments.
27
<PAGE>
A-30
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications. Certain amounts in prior years' consolidated financial
statements have been reclassified to conform with the fiscal 1998 consolidated
financial statement presentation.
Note 2. Balance Sheet Components
<TABLE>
<CAPTION>
March 31,
-----------------
1998 1997
-------- -------
(In thousands)
<S> <C> <C>
Accounts receivable:
Trade accounts receivable.................................. $ 9,470 $10,712
Less allowance for returns and doubtful accounts........... (1,310) (6,388)
-------- -------
Net accounts receivable.................................. $ 8,160 $ 4,324
======== =======
Inventories:
Purchased parts............................................ $ -- $ 199
Work in process............................................ -- 369
Finished goods............................................. 2,351 1,503
-------- -------
Total inventories........................................ $ 2,351 $ 2,071
======== =======
Property and equipment:
Computer, test, and production equipment................... $ 10,229 $ 9,847
Furniture and fixtures..................................... 2,726 3,193
Leasehold improvements..................................... 2,428 2,428
-------- -------
15,383 15,468
Less accumulated depreciation and amortization............. (11,334) (8,539)
-------- -------
Total property and equipment, net........................ $ 4,049 $ 6,929
======== =======
Accrued and other liabilities:
Warranty and other product related obligations............. $ 2,859 $ 2,090
Accrued compensation and benefits.......................... 766 740
Other...................................................... 2,378 4,808
-------- -------
Total accrued and other liabilities...................... $ 6,003 $ 7,638
======== =======
</TABLE>
Note 3. Acquisitions And Divestitures
AirMedia Live, Inc. In the second quarter of fiscal 1997, the Company
completed an equity investment in AirMedia, Inc. ("AirMedia") of $4.1 million
The Company accounted for its investment in AirMedia using the cost method of
accounting. In July 1997, the Company sold its investment in AirMedia to an
existing AirMedia shareholder for approximately $2.0 million in cash. As a
result, the Company recorded a loss of $2.1 million in the second quarter of
fiscal 1998.
GlobalCenter, Inc. In April 1996, the Company announced that it had
incorporated its Internet Services Division as a standalone business called
GlobalCenter, Inc. ("GlobalCenter"). At the same time, the Company announced
that UUNET Technologies, Inc. had acquired a 19.9% equity interest in
GlobalCenter. At that time, the Company no longer had the ability to exercise
significant control over GlobalCenter. Accordingly, the Company no longer
consolidated the results of GlobalCenter and began to account for its
investment using the equity method of accounting. As a result of the
refinancing and operating performance of GlobalCenter during
28
<PAGE>
A-31
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the first quarter of fiscal 1997, the Company recorded an investment loss of
$2.2 million, and reduced the book value of its investment to zero. In
December 1996, GlobalCenter entered into a definitive merger agreement whereby
GlobalCenter and Phoenix-based Primenet Services for the Internet, Inc. merged
reducing the Company's percentage ownership below 10%. Accordingly, in the
third quarter of fiscal 1997, the Company began accounting for its investment
in GlobalCenter using the cost method of accounting. In September 1997, the
Company agreed to sell its remaining equity stake in GlobalCenter to an
existing shareholder of GlobalCenter for approximately $3.7 million in cash.
As a result the Company recorded a gain of $3.7 million in the second quarter
of fiscal 1998. In addition, during the course of the year the Company was
repaid a loan (plus interest due) of $2.6 million from GlobalCenter which had
been previously reserved against.
KNX Limited. In January 1996, the Company acquired KNX Limited, a leading
UK-based provider of ISDN remote access products. The transaction was effected
through the exchange of shares of Common Stock of the Company for all
outstanding shares of KNX Limited. In total, the Company issued, or reserved
for issuance on exercise of options, 1,365,951 shares of the Company's Common
Stock. The acquisition of KNX was accounted for using the pooling-of-interests
method of accounting.
In the second quarter of fiscal 1997, the Company adopted a formal plan to
discontinue its enterprise network server operation based in the United
Kingdom (formerly, the Company's ISDN division). The disposition of the
division has been accounted for as a discontinued operation in accordance with
Accounting Principles Board (APB) Opinion No. 30 and prior period consolidated
financial statements have been restated to reflect the discontinuation of the
enterprise network server operation. The loss from discontinued operations of
$1.8 million and $3.3 million in fiscal years 1997 and 1996, respectively,
represents the operation's operating losses, with no associated tax benefits.
The gain from discontinued operations of $1.3 million in fiscal 1998 (net
income tax effect of zero) is the result of the release of a portion of a
reserve established for contingent liabilities associated with the disposition
of the operation based on the Company's determination that some of these
contingencies had been resolved. The loss on disposal of discontinued
operations of $2.2 million in fiscal 1997 (net income tax effect of zero)
represents the estimated cost of disposal of the operation, net of $3.8
million of cash received from the sale of the operation's assets and a $2.1
million loss from operations from the measurement date to the disposal date.
Note 4. Line of Credit
As of March 31, 1998, the Company's borrowings under its line of credit were
subject to the terms of a forbearance agreement it negotiated with its bank in
April 1997 which expires in April 1999. Borrowings under the forbearance
agreement bear interest at the bank's prime rate plus 2.5% (11.0% at March 31,
1998 and 13.5% at March 31, 1997.) Total borrowings are limited to the lesser
of $5,000,000 or 60% of eligible accounts receivable, as defined, and are
collateralized by all of the Company's assets. The agreement contains various
covenants and restrictions, including restrictions on the Company's ability to
pay dividends or effect mergers or acquisitions. As of March 31, 1998, there
were no borrowings under this line of credit and the Company was in compliance
with all covenants and restrictions (see Note 10).
Note 5. Commitments and Contingencies
Lease Commitments. The Company leases facilities under noncancelable
operating leases expiring in January 2000, April 2000, and December 2002. The
lease expiring in April 2000 has a renewal option for an additional five-year
term. Space associated with this lease has been subleased for various periods
through April 2000.
29
<PAGE>
A-32
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments as of March 31, 1998 are:
<TABLE>
<CAPTION>
Lease Sublease Net Lease
Payments Income Payments
-------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
Fiscal year ending March 31,
1999.......................................... $1,643 $(1,316) $ 327
2000.......................................... 1,644 (1,039) 605
2001.......................................... 176 -- 176
Thereafter.................................... 90 -- 90
------ ------- ------
Total future minimum lease commitments.......... $3,553 $(2,355) $1,198
====== ======= ======
</TABLE>
Rent expense, net of sublease income, was approximately $0.5 million, $1.2
million, and $1.4 million for the fiscal years ended March 31, 1998, 1997, and
1996, respectively.
Legal Matters. The Company is a party to certain lawsuits and claims arising
out of the normal conduct of its business. These claims generally relate to
commercial transactions, patent infringements, and employment matters. While
the ultimate resolution of such suits or other proceedings against the Company
cannot be predicted with certainty, management expects that these matters will
not have a material adverse effect on the financial position or results of
operations of the Company.
Note 6. Stockholders' Equity
Common And Preferred Stock. As of March 31, 1998, the number of Common and
Preferred Stock shares authorized was 30,000,000 and 5,000,000, respectively.
The classes, series, rights, and preferences of the Preferred Stock may be
established by the Company's Board of Directors.
On January 5, 1996, the Company issued approximately 1,400,000 shares of
Common Stock as part of the consideration for the acquisition of KNX Limited
(see Note 3).
On January 19, 1998, the Company issued approximately 142,000 shares of
Common Stock as settlement of a compensation liability incurred upon the
acquisition of KNX Limited (see Note 3).
Common Stock Issued And Outstanding.
<TABLE>
<CAPTION>
March 31,
---------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Shares issued and outstanding beginning
of period.............................. 16,929,690 16,744,837 16,167,429
Exercise of stock options............. 15,702 288,967 583,711
Shares issued under employee stock
purchase plan........................ 74,987 74,386 63,229
Treasury shares acquired.............. -- (178,500) (69,532)
Shares issued to settle compensation
liability............................ 142,392 -- --
---------- ---------- ----------
Shares issued and outstanding end of
period............................... 17,162,771 16,929,690 16,744,837
========== ========== ==========
</TABLE>
Stock Option Plan. The Company has adopted a stock option plan (the "Plan")
under which incentive stock options may be granted to employees and officers,
and non-qualified (supplemental) stock options may be granted to employees,
officers, directors, and consultants to purchase an aggregate of 5,600,000
shares of
30
<PAGE>
A-33
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock. Options may be granted at an exercise price of at least 100% of
the fair market value of Common Stock at the date of grant, or for
supplemental options, at an exercise price not less than 85% of the fair
market value of such stock at the date of grant. All options expire no later
than 10 years after the date of grant and generally vest over 4 or 5 years
with 20% to 25% vesting after one year and the balance vesting monthly over
the remaining 3 to 4 years. As of March 31, 1998, options to purchase 754,673
shares of Common Stock were exercisable under the Plan.
Director's Plan. In January 1994, the Company adopted the 1994 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan"). The Directors' Plan
provides for automatic grants of options to purchase shares of Common Stock to
non-employee directors of the Company at or above the fair market value of the
Common Stock on the date of grant. The Company has reserved a total of 200,000
shares of the Company's Common Stock for issuance upon the exercise of options
granted pursuant to the Directors' Plan. Options granted under the Directors'
Plan expire 10 years following the grant and vest in five annual installments
commencing on the date of grant and are contingent upon the continuous service
of the director. As of March 31, 1998, options representing 45,831 shares were
exercisable under the Directors' Plan.
A summary of the combined stock option activity under the Plan and
Directors' Plan is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
---------- -------------- ---------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of
year.................... 2,485,435 $2.76 2,315,955 $ 9.25 2,350,444 $ 4.66
Granted.................. 894,301 2.32 1,779,330 5.78 1,011,485 15.64
Exercised................ (15,507) 0.11 (288,967) 1.99 (583,711) 2.70
Canceled................. (1,073,133) 2.80 (1,320,883) 10.00 (462,263) 8.24
Repriced--granted........ -- -- 1,762,384 4.68 -- --
Repriced--canceled....... -- -- (1,762,384) 10.96 -- --
---------- ----- ---------- ------ --------- ------
Outstanding--end of
year.................... 2,291,096 $2.60 2,485,435 $ 2.76 2,315,955 $ 9.25
========== ===== ========== ====== ========= ======
Weighted average fair
value of options,
calculated under
SFA No. 123 (see below).. $1.80 $ 2.47 $ 9.64
===== ====== ======
</TABLE>
The following table summarizes information as of March 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Number Life Price Number Price
- ------------------------ --------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.0400 - $ 3.0000............. 945,338 8.19 $1.5506 234,402 $0.5892
$3.0625 - $ 3.0625............. 1,186,925 8.31 $3.0625 526,015 $3.0625
$3.3750 - $14.8800............. 158,833 8.45 $5.4419 40,087 $7.7579
--------- ---- ------- ------- -------
$0.0400 - $14.8800............. 2,291,096 8.27 $2.6036 800,504
========= ==== ======= =======
</TABLE>
31
<PAGE>
A-34
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee Stock Purchase Plan. In December 1993, the Company adopted the 1993
Employee Stock Purchase Plan (the "Purchase Plan") reserving 400,000 shares of
Common Stock for issuance under the Purchase Plan. The Purchase Plan provides
a means by which employees may purchase the Company's Common Stock through
payroll deductions, of up to 10% of their compensation, at a price per share
equal to the lower of (i) 85% of the fair market value of a share of Common
Stock on the first day of each annual offering; or (ii) 85% of the fair market
value of a share of Common Stock on the date of purchase. As of March 31,
1998, 269,027 shares had been purchased under the Purchase Plan.
Common Stock Reserved For Future Issuance.
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
Exercise of stock options...................................... 3,662,590
Employee stock purchase plan................................... 130,973
---------
Total reserved shares........................................ 3,793,563
=========
</TABLE>
Accounting for Stock-Based Compensation Under SFAS No. 123. At March 31,
1998, the Company had three stock-based compensation plans, which are
described above. Since the Company applies APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock plans, no compensation cost has been recognized for such plans because
the exercise price of stock options is the fair value at the date of grant.
Had compensation cost for the Company's stock plans been determined based on
the fair value at the grant dates for awards under those plans consistent with
the method prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net results and per share results would have
changed to the pro forma amounts indicated below (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- ------------------
As As As
Reported Pro Forma Reported Pro Forma Reported Pro Forma
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)....... $(3,378) $(5,584) $(39,881) $(42,976) $8,836 $6,820
Basic net income (loss)
per share.............. $ (0.20) $ (0.33) $ (2.37) $ (2.55) $ 0.53 $ 0.41
Diluted net income
(loss) per share....... $ (0.20) $ (0.33) $ (2.37) $ (2.55) $ 0.49 $ 0.38
</TABLE>
The fair value of each option grant and Purchase Plan share issuable is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions for grants in 1998 and 1997,
respectively: no dividend yield is expected for all years; expected volatility
of 106% and 96%; risk-free interest rates of 5.24% and 6.25%; and expected
lives of 3 years and 4 years.
Pro forma net results reflect only options granted in 1996 through 1998.
Therefore the full impact of calculating compensation cost for the Company's
stock option plans under SFAS No. 123 is not reflected in the pro forma net
results, amounts presented above as compensation cost is reflected over a
stock options vesting period and compensation cost for options granted prior
to April 1, 1995 is not considered.
Note 7. Restructuring Costs
On March 31, 1998, the Company announced its agreement to sell the assets of
its Modem Business to Boca Research ("The Agreement") and refocus the Company
for product offerings in the small to medium sized office networking market.
As a result the Company recorded a net restructuring charge of $240,000
related primarily to severance costs of 25 employees. The Company estimated
that the majority of the termination benefits would be paid during the first
fiscal quarter of 1999.
32
<PAGE>
A-35
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1996, the Company announced a restructuring plan to streamline
its operations, reduce its workforce and enable the Company to improve its
operating results. The Company recorded a restructuring charge of $1.3 million
related primarily to severance costs ($270,000), write-offs of fixed assets
and purchased software ($490,000), a lease abandonment ($340,000) and other
one-time charges associated with the plan ($200,000). At March 31, 1998 the
restructuring accrual balance associated with the December 1996 decision was
approximately $40,000 and related primarily to remaining lease payments and
miscellaneous costs associated with the Company's Atlanta facility.
Note 8. Income Taxes
The components of income tax expense (benefit) from continuing operations
are displayed in the following table. No income tax expense or benefit has
been recorded in any of the results of discontinued operations.
<TABLE>
<CAPTION>
Year ended March
31,
--------------------
1998 1997 1996
---- ------- ------
(In thousands)
<S> <C> <C> <C>
Current:
Federal............................................. $ -- $(8,637) $2,749
State............................................... -- 2 677
Total Current..................................... -- (8,635) 3,426
Deferred:
Federal............................................. -- 2,845 46
State............................................... -- 389 56
---- ------- ------
Total Current..................................... -- 3,234 102
---- ------- ------
Charge in lieu of income tax associated with exercise
of stock options..................................... -- -- 1,632
---- ------- ------
$ -- $(5,401) $5,160
==== ======= ======
</TABLE>
The Company has gross deferred tax assets of approximately $26.9 million as
of March 31, 1998 and $25.6 million as of March 31, 1997. The deferred tax
assets are primarily comprised of net operating loss carryovers, tax credits,
and reserves and accruals recorded for financial reporting purposes which are
not allowed as tax deductions in the current periods in which they were
recorded. As of March 31, 1998 and 1997, the Company had established a full
valuation allowance against its deferred tax assets based on the belief that
there was sufficient uncertainty regarding the realizability of the deferred
tax assets.
The difference between the effective income tax rate and the U.S. federal
statutory income tax rate for continuing operations is as follows:
<TABLE>
<CAPTION>
Year ended
March 31,
------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Statutory federal income tax rate........................ (34)% (34)% 35 %
State tax, net of federal benefit........................ -- -- 5 %
Loss without tax benefit................................. 38 % 25% --
Foreign sales corporation benefit........................ -- -- (2)%
Tax exempt interest...................................... -- -- (2)%
Research and experimental tax credit..................... (6)% (2)% (4)%
Other.................................................... 2 % (2)% (2)%
--- --- ---
-- (13)% 30 %
=== === ===
</TABLE>
33
<PAGE>
A-36
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company acquired SofNet, Inc., in August 1994. As of the acquisition
date, SofNet had federal and Georgia net operating loss carryforwards of $9.3
million which expire through 2009. The federal net operating loss is subject
to an annual limitation approximating $0.8 million as a result of an
"ownership change" as defined in Section 382 of the Internal Revenue Code. Any
unused annual limitation can be carried forward to subsequent years. In
addition, the SofNet operating losses can only be used to offset future
earnings of SofNet as a result of separate return limitation rules.
Additionally, as of March 31, 1998, the Company had net operating loss
carryforwards of approximately $48.4 million for federal income tax purposes,
of which, $33.8 million expire in 2012 and $14.6 million expire in 2013. Net
operating loss carryforwards for California income tax purposes total
approximately $19.9 million, of which $13.9 will expire in 2002 and $6.0
million expire in 2003.
At March 31, 1998, the Company had unused research and development credits
of approximately $1.0 million for federal income tax purposes, which expire
through 2013, and $440,000 for California income tax purposes which will
carryforward indefinitely. There are also alternative minimum tax credits of
approximately $530,000 available to reduce future federal income taxes, which
will carryforward indefinitely.
Note 9. Customers And Credit Concentrations
The Company sells primarily to distributors, dealers, and OEMs in North
America, Europe, and the Pacific Rim. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses, and such actual losses
have been within management's expectations.
The following table summarizes the annual percentage contribution to
revenues by customers whose revenues exceed 10% of total revenues:
<TABLE>
<CAPTION>
Percentage
Percentage of of Accounts
Revenues Year Receivable
Ended March as of March
31, 31,
---------------- -------------
1998 1997 1996 1998 1997
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Customer A.................................... 28% 21% 33% 37% 16%
Customer B.................................... 18% 11% 1% 19% --%
Customer C.................................... 7% 11% 4% 4% 13%
</TABLE>
Customers A and C are distributors; Customer B is an OEM.
The Company's international sales for the fiscal years ended March 31, 1998,
1997, and 1996 represented approximately 15%, 15%, and 19% of net revenue,
respectively.
Note 10. Net Assets Held For Sale
On March 31, 1998, the Company signed an Asset Purchase Agreement ("the
Agreement") with Boca Research, Inc., a Florida corporation, and its wholly
owned subsidiary Boca Global, Inc., a Florida corporation (together "Buyer").
Pursuant to the terms of the Agreement, the Company will sell to Buyer
substantially all of the Company's assets related to the Company's single user
modem product offerings including accounts receivable, inventory, property and
equipment, intellectual property, and other production and research and
development assets (the "Modem Business"). Additionally, the Company issued to
the Buyer a Warrant to
34
<PAGE>
A-37
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase up to 425,000 shares of the Company's Common Stock at $1.0003 per
share. In consideration for these assets, the Buyer will assume certain of the
Company's liabilities related to the Modem Business, including all product
warranty, upgrade and support liabilities, as well as related accounts payable
obligations. The Buyer shall pay to the Company $10.0 million in cash, payable
in installments. Upon the close of the transaction the Buyer will deliver an
initial payment of $4.0 million and a non-interest bearing promissory note for
$6.0 million payable in two equal installments on September 30, 1998 and
December 31, 1998. Shareholder approval was required for the completion of the
transaction. Such approval was obtained at a Special Meeting of Stockholders
of the Company, and the transaction closed on June 18, 1998 (the "Closing
Date"). The transaction will be accounted for as an asset sale in the first
quarter of fiscal 1999.
In conjunction with the closing of the transaction, the Company's line of
credit (see Note 4) was suspended as the sale included most of the assets
securing the line. The Company is currently negotiating a new line of credit.
Note 11. Unaudited Pro Forma Consolidated Financial Data--Sale Of Modem
Business
Unaudited Pro Forma Consolidated Financial Data. The following unaudited pro
forma condensed consolidated balance sheet at March 31, 1998, and the
discussion of the unaudited pro forma condensed consolidated statements of
operations data for the fiscal year ended March 31, 1998 give pro forma effect
to the estimated financial impact of the sale of the Modem Business. The pro
forma condensed consolidated balance sheet at March 31, 1998 gives pro forma
effect to the sale of the Modem Business as if the transaction it contemplates
was consummated on March 31, 1998. The discussion of the unaudited pro forma
condensed consolidated statements of operations data for the fiscal year ended
March 31, 1998 present the results of operations of the Company as if the
transaction contemplated in the sale of the Modem Business occurred on April
1, 1997.
The pro forma information is based on the historical consolidated financial
statements of the Company giving effect to the assumptions and adjustments set
forth in the following notes and discussions. The overall assumption has been
made that the effect of the sale of the Modem Business would have been to
transfer the substantial majority of the Company's products and operating
activities and associated revenues, assets (excluding cash and any tax related
benefits) and liabilities, and a significant amount of related expenses to the
Buyer. The Company would have retained primarily its OneWorld, FaxWorks Pro
and Pro LAN, FocalPoint and NewsCatcher products, the development efforts
associated with its new family of communications server products and corporate
general and administrative activities, and associated revenues, expenses,
assets and liabilities, henceforth referred to as the "Retained Business".
The unaudited pro forma condensed financial data and discussions have been
prepared by Company management and are not necessarily indicative of how the
Company's balance sheet and operating results would have been presented had
the transaction contemplated in the Agreement been consummated on the assumed
dates, nor are they necessarily indicative of the presentation of the
Company's balance sheet and statements of operations for any future period.
35
<PAGE>
A-38
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited Pro Forma Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
March 31, 1998
----------------------------------
Company Pro Forma Pro Forma
Historical Adjustments Results
---------- ----------- ---------
(in thousands)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................. $ 3,097 $ 4,000 (A) $ 7,097
Accounts receivable, net.................. 8,160 (7,845)(B) 315
Inventories, net.......................... 2,351 (2,351)(B) --
Notes receivable.......................... -- 5,860 (A) 5,860
Other current assets...................... 253 (83)(B) 170
-------- ------- --------
Total curent assets..................... 13,861 (419) 13,442
Property and equipment, net................. 4,049 (1,376)(C) 2,673
Other assets................................ 63 63
-------- ------- --------
Total assets............................ $ 17,973 $(1,795) $ 16,178
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.......................... $ 7,625 $(6,666)(D) $ 959
Accrued and other liabilities............. 6,003 (1,888)(E) 4,115
-------- ------- --------
Total current liabilities............... 13,628 (8,554) 5,074
Stockholders' equity:
Common stock.............................. 17 17
Additional paid-in capital................ 43,246 234 (F) 43,480
Retained earnings (accumulated deficit)... (38,918) 6,525 (F) (32,393)
-------- ------- --------
Total stockholders' equity.............. 4,345 6,759 11,104
-------- ------- --------
Total liabilities and stockholders'
equity................................. $ 17,973 $(1,795) $ 16,178
======== ======= ========
</TABLE>
- --------
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet
(A) The Company will receive consideration of $10.0 million on the Closing
Date. The consideration will be in the form of $4.0 million in cash on the
Closing Date, and a Promissory Note for $6.0, of which $3.0 million is
payable on September 30, 1998 and $3.0 million on December 31, 1998. As
the note is non-interested bearing, its value has been discounted assuming
a rate of 6% per annum
These pro forma calculations assume that had the transaction been
consummated on March 31, 1998 the purchase price would not have been
reduced based upon the net current asset position at that time.
(B) As stipulated in the Agreement, the Buyer will purchase all of the
Company's current assets related to its Modem Business with the exception
of cash, tax assets, assets related to the Retained Business and certain
corporate assets. This adjustment represents the net value of those assets
which would have been transferred to the Buyer as well as the elimination
of certain reserves associated with those assets as they would no longer
be required by the Company.
(C) The Agreement stipulates that the Buyer will purchase Property and
Equipment associated with the Company's Modem Business as well as that
associated with the Company's facility in Sunnyvale, California
36
<PAGE>
A-39
if Buyer elects to assume the lease (the Buyer has elected not to assume the
lease). This adjustment represents an estimate of the net book value of the
Property and Equipment that is to be transferred to the Buyer.
(D) As stipulated in the Agreement, the Buyer will assume all of the Company's
liabilities related to its Modem Business with the exception of employee
related liabilities, tax liabilities, liabilities related to the Retained
Business and certain corporate liabilities. This adjustment represents the
net value of the Accounts Payable portion of those liabilities which would
have been assumed by the Buyer as well as certain other liabilities which
would not have been assumed by the Buyer that would have been eliminated by
the consummation of the transaction.
(E) As stipulated in the Agreement, the Buyer will assume all of the Company's
liabilities related to its Modem Business with the exception of employee
related liabilities, tax liabilities, liabilities related to the Retained
Business and certain corporate liabilities. This adjustment represents the
net value of the Accrued and other portions of those liabilities which
would have been assumed by the Buyer as well as certain other liabilities
which would not have been assumed by the Buyer that would have been
eliminated by the consummation of the transaction. In addition, this
adjustment includes an accrual of $1.4 million for estimated expenses
related to the transaction.
(F) This adjustment represents the amount of the gain that would have been
realized had the transaction been consummated on March 31, 1998, including
assumed valuation of the warrant issued to the Buyer. No income tax expense
associated with the gain has been assumed, given the Company's available
tax benefits. The actual amount of the gain will not be determined until
after the actual Closing Date and will be accounted for in the first
quarter of fiscal 1999. While the Company expects to realize a substantial
gain upon closing the transaction, that gain may be materially different
than the amount of this pro forma adjustment.
Discussion of the Unaudited Pro Forma Condensed Consolidated Statements of
Operations Data. The assets being purchased by the Buyer include products which
represent the overwhelming majority of the Company's consolidated revenues. For
the year ended March 31, 1998 these products accounted for approximately 95% of
the Company's reported net revenues. Had the transactions contemplated in the
Agreement been consummated on April 1, 1997, the Company's net revenues would
have been reduced by approximately these amounts.
Similarly, these products represent the overwhelming majority of the
Company's gross profit. For the year ended March 31, 1998 these products
accounted for approximately 88% of the Company's reported gross profit. Had the
transactions contemplated in the Agreement been consummated on April 1, 1997,
the Company's gross profits would have been reduced by these amounts.
The operations of the Modem Business being sold to the Buyer are not separate
from, nor are they accounted for separately from, the other activities of the
Company. There are numerous instances of shared resources including facilities,
management, systems, development, marketing and sales personnel and corporate
general and administrative functions. Therefore, the Company is unable to
accurately estimate the operating expenses associated with the assets being
purchased by the Buyer.
The aforementioned operating results also do not consider the amount of any
gain or loss on the transaction itself that would have been realized had the
transaction been consummated on April 1, 1997. The Company expects to realize a
substantial gain upon closing, however that gain may be materially different
than that estimated in these pro forma statements.
37
<PAGE>
A-40
SCHEDULE II
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Year end March 31,
--------------------------
1998 1997 1996
------- -------- -------
(In thousands)
<S> <C> <C> <C>
Allowance for returns and doubtful accounts
Balance beginning of period....................... $ 6,388 $ 1,854 $ 1,807
Additions charged to costs and expenses........... 1,387 20,090 8,268
Deductions........................................ (6,465) (15,556) (8,221)
------- -------- -------
Balance end of period............................. $ 1,310 $ 6,388 $ 1,854
======= ======== =======
Warranty and other product-related obligations
Balance beginning of period....................... $ 2,090 $ 1,503 $ 1,559
Additions charged to costs and expenses........... 1,855 2,774 4,479
Deductions........................................ (1,086) (2,187) (4,535)
------- -------- -------
Balance end of period............................. $ 2,859 $ 2,090 $ 1,503
======= ======== =======
</TABLE>
ITEM 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure.
Not applicable.
38
<PAGE>
A-41
PART III
ITEM 10. Directors and Executive Officers of the Company.
The Company's definitive Proxy Statement will be filed with the Securities
and Exchange Commission in Connection with the solicitation of proxies for the
Company's Annual Meeting of Stockholders to be held on August 20, 1998 (the
"Proxy Statement"). Certain information required by this item is incorporated
by reference from the information contained in the Proxy Statement under the
caption "Election of Directors." For information regarding executive officers
of the Company, see Part I of this Form 10-K under the caption "Executive
Officers of the Company."
ITEM 11. Executive Compensation.
The information required by this item will be contained in the Company's
definitive Proxy Statement under the caption "Executive Compensation" and is
incorporated by reference herein.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item will be contained in the Company's
definitive Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management" and is incorporated by reference herein.
ITEM 13. Certain Relationships and Related Transactions.
The information required by this item will be contained in the Company's
definitive Proxy Statement under the caption "Certain Transactions" and is
incorporated by reference herein.
39
<PAGE>
A-42
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a) Financial Statements and Schedule
The Financial Statements and Schedule filed as part of this Annual Report on
Form 10-K are listed in the index under Item 8.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
March 31, 1998.
(c) Exhibits
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Document Page
------- ----------------------- ------------
<C> <S> <C>
2.1 Asset Purchase Agreement by and among Boca Global Inc.,
Boca Research, Inc. and the Company, dated as of March
31, 1998
3.1 Amended and Restated Certificate of Incorporation of
OneWorld Systems, Inc.
3.2 Form of Bylaws of Global Village Communication Delaware *
4.1 Reference is made to Exhibits 3.1 through 3.2 *
4.2 Amended and Restated Investor Rights Agreements among *
the Company and certain other person named therein,
dated as of May 26, 1992
4.3 Employee Shareholder Agreement between the Company and *
certain stockholders of the Company, as amended, and
related schedule
4.4 Common Stock Purchase Agreement between the Company and *
other parties named therein, dated as of October 2,
1989
4.5 Series A Junior Preferred Stock Exchange Agreement *
between the Company and other parties named therein,
dated as of May 14, 1991
4.6 Series B Preferred Stock Purchase Agreement between the *
Company and other parties named therein, dated as of
May 14, 1991
4.7 Warrant to Purchase 31,395 Shares of Series B Preferred *
granted by the Company to Dominion Ventures, dated as
of November 27, 1991
4.8 Series C Preferred Stock Purchase Agreement between the *
Company and other parties named therein, dated as of
May 26, 1992
10.1 Form of Indemnity Agreement entered into between the *
Company and its directors and officers, with related
schedules
10.2 1991 Stock Option Plan, as amended (the "Option Plan") *
10.3 Form of Incentive Stock Option under the Option Plan *
10.4 Form of Supplemental Stock Option under the Option Plan *
10.5 1993 Employee Stock Purchase Plan *
10.10 Distribution Agreement between the Company and Ingram *
Micro, dated as of February 16, 1993
10.12 1994 Non-Employee Directors' Stock Option Plan, *
including Form of Supplemental Stock Option
</TABLE>
40
<PAGE>
A-43
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Document Page
------- ----------------------- ------------
<C> <S> <C>
10.16++ Lease Agreement between Herman Christensen Jr. and *
Raymond P. Christensen and the Company dated July 14,
1994
10.17++ Management Incentive Plan
23.1 Consent of KPMG Peat Marwick LLP
25.1 Power of Attorney (see page 37 of Form 10-K)
27.1 Financial Data Schedule
</TABLE>
- --------
* Filed as a exhibit to the Registrant's Registration Statement of Form S-1
(Registration No 33-73878 as amended) and incorporate by reference hereby.
+ The Company has received confidential treatment with respect to portions of
these Exhibits.
++ The Company has requested confidential treatment with respect to portions
of this document.
41
<PAGE>
A-44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Company has duly caused this Form 10-K Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized on June 29, 1998.
OneWorld Systems, Inc.
/s/ Neil Selvin
By: _________________________________
Neil Selvin
President, Chief Executive
Officer and Director
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Neil Selvin and Marc E. Linden jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to the Form 10-K Annual
Report, and to file the same, with exhibits thereto and other documents in
connections therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Leonard A. Lehmann Chairman of the Board June 29, 1998
____________________________________
Leonard A. Lehmann
/s/ Neil Selvin President, Chief Executive June 29, 1998
____________________________________ Officer and Director
Neil Selvin (Principle Executive
Officer)
/s/ Marc E. Linden Senior Vice President and June 29, 1998
____________________________________ Chief Financial Officer
Marc E. Linden (Principle Financial and
Accounting Officer)
/s/ Kevin R. Compton Director June 29, 1998
____________________________________
Kevin R. Compton
/s/ Eugene Eidenberg Director June 29, 1998
____________________________________
Eugene Eidenberg
/s/ Kenneth A. Goldman Director June 29, 1998
____________________________________
Kenneth A. Goldman
</TABLE>
42
<PAGE>
A-45
[This page intentionally left blank]
43
<PAGE>
ANNEX B
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 December 31, 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)
<TABLE>
<S> <C>
Delaware 94-3095680
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
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 January 31, 1999 was
17,432,325.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
B-2
ONEWORLD SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 December 31, 1998 and
March 31, 1998.................................................... 3
Condensed Consolidated Statements of Operations for the three and
nine months ended December 31, 1998 and 1997..................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 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.................................................. 18
Item 2. Changes in Securities/Recent Sales of Unregistered Securities...... 18
Item 3. Defaults Upon Senior Securities.................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................ 18
Item 5. Other Information.................................................. 18
Item 6. Exhibits and Reports on Form 8-K................................... 18
Signatures................................................................... 19
</TABLE>
2
<PAGE>
B-3
PART I. Financial Information
Item 1. Condensed Consolidated Financial Statements
ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
ASSETS
------
Current assets $1,203 $ 3,097
Cash and cash equivalents..............................
Note receivable from Boca Research, Inc. .............. 2,955 --
Accounts receivable, net............................... 118 8,160
Inventories, net....................................... 191 2,351
Other current assets................................... 161 253
------ -------
Total current assets................................. 4,628 13,861
Property and equiment, net............................... 316 4,049
Other assets............................................. 63 63
------ -------
Total assets......................................... $5,007 $17,973
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities $ 960 $ 7,625
Accounts payable.......................................
Accrued and other liabilities.......................... 2,093 6,003
------ -------
Total current liabilities............................ 3,053 13,628
Stockholders' equity..................................... 1,954 4,345
------ -------
Total liabilities and stockholders' equity........... $5,007 $17,973
====== =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
<PAGE>
B-4
ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended December ended December
31, 31,
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue................................ $ 122 $16,185 $12,840 $49,192
Cost of revenue............................ 64 11,358 9,742 33,712
------- ------- ------- -------
Gross profit............................. 58 4,827 3,098 15,480
------- ------- ------- -------
Operating expenses:
Research and development................. 850 2,099 4,469 7,243
Sales, general and administrative........ 1,584 4,446 7,168 13,900
Restructuring costs...................... -- -- 404 --
------- ------- ------- -------
Total operating expenses............... 2,434 6,545 12,041 21,143
------- ------- ------- -------
Loss from operations................... (2,376) (1,718) (8,943) (5,663)
------- ------- ------- -------
Other income, net:
Gain on sale of modem operations......... -- -- 6,128 --
Gain on sale of investments.............. -- -- -- 1,617
Other income, net........................ 61 111 166 412
------- ------- ------- -------
Total other income, net................ 61 111 6,294 2,029
------- ------- ------- -------
Loss before income taxes................. (2,315) (1,607) (2,649) (3,634)
Income tax benefit....................... -- -- 22 --
------- ------- ------- -------
Loss from continuing operations........ (2,315) (1,607) (2,627) (3,634)
------- ------- ------- -------
Discontinued operations:
Income from discontinued operations...... -- -- 90 --
Gain on disposal of discontinued
operations, net of income taxes......... -- 1,331 -- 1,331
------- ------- ------- -------
Net loss................................... $(2,315) $ (276) $(2,537) $(2,303)
======= ======= ======= =======
Basis per share data:
Loss per share from continuing
operations.............................. $ (0.13) $ (0.09) $ (0.15) $ (0.21)
Income per share from discontinued
operations.............................. -- 0.07 0.01 0.07
------- ------- ------- -------
Net loss per share..................... $ (0.13) $ (0.02) $ (0.14) $ (0.14)
======= ======= ======= =======
Diluted per share data:
Loss per share from continuing
operations.............................. $ (0.13) $ (0.09) $ (0.15) $ (0.21)
Income per share from discontinued
operations.............................. -- 0.07 0.01 0.07
------- ------- ------- -------
Net loss per share..................... $ (0.13) $ (0.02) $ (0.14) $ (0.14)
======= ======= ======= =======
Shares used in computing per share amounts:
Basic.................................... 17,179 16,981 17,174 16,965
Diluted.................................. 17,179 16,981 17,174 16,965
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
<PAGE>
B-5
ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months
ended December
31,
----------------
1998 1997
------- -------
<S> <C> <C>
Operating activities:
Net loss.............................................................................. $(2,537) $(2,303)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization....................................................... 691 2,512
Gain on sale of modem operations.................................................... (6,128) --
Gain on sale of investments......................................................... -- (1,617)
Loss on disposal of property and equipment.......................................... 2 121
Changed in operating activities:
Accounts receivable, net.......................................................... (1,007) (5,078)
Inventories....................................................................... 28 (811)
Income taxes...................................................................... -- 7,665
Other current assets.............................................................. 31 (145)
Accounts payable.................................................................. 910 (4,218)
Accrued and other liabilities..................................................... (671) (1,476)
------- -------
Net cash used in operating activities of:
Continuing operations............................................................... (8,681) (5,350)
Discontinued operations............................................................. (184) (55)
------- -------
Net cash used in opertating activities............................................ (8,865) (5,405)
======= =======
Investing activities:
Proceeds from sale of modem operations................................................ 7,000 --
Proceeds from sale of investments..................................................... -- 5,660
Proceeds from sale of property and equipment.......................................... 28 --
Purchases of property and equipment................................................... (66) (303)
Other assets.......................................................................... -- 84
------- -------
Net cash provided by investing activites.......................................... 6,962 5,441
======= =======
Financing activities:
Proceeds from issue of common stock................................................... 9 141
Repayments under line of credit....................................................... -- (4,241)
------- -------
Net cash used in financing activities............................................. 9 (4,100)
======= =======
Net decrease in cash and cash equivalents............................................. (1,894) (4,064)
Cash and cash equivalents at beginning of period...................................... 3,097 9,687
------- -------
Cash and cash equivalents at end of period............................................ $ 1,203 $ 5,623
======= =======
Supplemental disclosures
Cash paid during the period for:
Interest............................................................................ $ 206 $ 172
Income taxes........................................................................ $ 19 $ --
Non-cash investing and financing acivities:
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>
B-6
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO 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 December 31, 1998 and for the three and nine months ended
December 31, 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 in the past
were 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
prior interim periods are not indicative of the results to be expected for any
future period.
Revenue Recognition. Revenue from the Company's OneWorld network
communications servers is recognized when the product is shipped pursuant to
an end-user order; that is, when product is shipped from a distributor to a
value added reseller (VAR) or systems integrator, or when shipped directly to
an end-user by OneWorld. Certain of the Company's products are subject to
limited rights of return. Until such time as the Company has sufficient
experience to accurately estimate product returns, the Company will defer
revenue recognition until cash payment is received.
Earnings Per Share. The Company adopted Statement of Financial 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 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.
Inventories. Inventories are stated at the lower of first-in, first-out cost
or market. Finished goods consisted of onsight inventory and inventory at
distributors. Inventories consisted of:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(in thousands)
<S> <C> <C>
Purchased parts..................................... $-- $ --
Work in process..................................... -- --
Finished goods...................................... 191 2,351
---- ------
Total inventories................................. $191 $2,351
==== ======
</TABLE>
6
<PAGE>
B-7
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Line of Credit
The Company does not currently have a 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.
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 was recorded at $5.855 million. The difference
between the recorded value and the face value of the note is being recognized
as interest income over the life of the note. The installment payment due on
September 30, 1998 was received October 2, 1998. The balance due on this note
as of December 31, 1998 was $2.955 million. The installment payment due on
December 31, 1998 was renegotiated before its due date and pursuant to that
agreement, the Company received $2.0 million on January 4, 1999 and a final
payment of $800,000 on February 2, 1999. The remaining balance due of $200,000
will be offset in the fourth fiscal quarter against an equal amount due Boca
by the Company pursuant to an agreement between the parties made at the time
sale of the modem business was completed.
During the quarter ended June 30, 1998, the Company recorded a net gain of
$6.1 million, representing the full effect of the sale of the modem operations
to Boca. 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 December 31, 1998. For the nine months ended
December 31, 1998, these products accounted for approximately 96% of the
Company's reported net revenue and 91% 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.
6. Restructuring Costs
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 employee related costs (approximately $247,000),
lease abandonment (approximately $88,000), and fixed asset write-offs
(approximately $69,000) associated with the shift in business strategy and
transition to OneWorld Systems. At December 31, 1998 the accrued restructure
costs balance was approximately $144,000 comprised primarily of lease
abandonment costs.
7
<PAGE>
B-8
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO 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 Nine months
ended December ended December
31, 31,
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Net loss from continuing operations.... $(2,315) $(1,607) $(2,627) $(3,634)
Income from discontinued operations.... -- 1,331 90 1,331
------- ------- ------- -------
Net loss............................. $(2,315) $ (276) $(2,537) $(2,303)
======= ======= ======= =======
Weighted average shares used in:
Basic per share computations......... 17,179 16,981 17,174 16,965
Dilutive effect of stock options..... -- -- -- --
------- ------- ------- -------
Diluted per share computations....... 17,179 16,981 17,174 16,965
======= ======= ======= =======
Anti-dilutive common stock equivalants
not included in the diluted per share
computations:
"In the money"dilutive stock
options............................. 105 313 165 362
======= ======= ======= =======
Basic per share data:
Loss per share from continuing
operations.......................... $ (0.13) $ (0.09) $ (0.15) $ (0.21)
Income per share from discontinued
operations.......................... -- 0.07 0.01 0.07
------- ------- ------- -------
Net loss per share................... $ (0.13) $ (0.02) $ (0.14) $ (0.14)
======= ======= ======= =======
Diluted per share data:
Loss per share from continuing
operations.......................... $ (0.13) $ (0.09) $ (0.15) $ (0.21)
Income per share from discontinued
operations.......................... -- 0.07 0.01 0.07
------- ------- ------- -------
Net loss per share................... $ (0.13) $ (0.02) $ (0.14) $ (0.14)
======= ======= ======= =======
</TABLE>
8
<PAGE>
B-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 network
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 and prior fiscal years.
The Company's primary source of revenue in the future will be from its newly
released OneWorld network 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 family of network 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 family of network
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. In October, 1998 the Company began shipping the OneWorld 5000 Fax Server
and the OneWorld 5000 Remote Access Server. The Company's planned shipment of
other versions and enhancements 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 additions
to the OneWorld network 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
9
<PAGE>
B-10
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.
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 elapsed. 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 revenue in any quarter will be substantially dependent
on shipments and/or 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 current and previous fiscal years. Consequently, the comparisons below
should not be relied upon as predictors of future performance.
Net revenue includes revenue from gross shipments, licenses and royalties,
less reserves for returns and allowances.
<TABLE>
<CAPTION>
Three
months
ended Nine months
December ended
31, December 31,
----------- -------------
1998 1997 1998 1997
---- ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C>
Total net revenue.............................. 122 16,185 12,840 49,192
=== ====== ====== ======
Percent decrease compared to prior fiscal year
period........................................ -99% -74%
</TABLE>
The decrease in net revenue for the third quarter of fiscal 1999 and the
nine months ended December 31, 1998 as compared to the same period in fiscal
1998 was primarily attributable to the Company's sale of its
10
<PAGE>
B-11
modem operations. The Company sold no modem business products after the close
of the transaction with Boca Research on June 18, 1998. Net revenue for the
three month period ended December 31, 1998 was attributable to sale of the
Company's legacy products as well as sale of the Company's new OneWorld
network communications servers. In addition, during the quarter there was a
benefit to revenue associated with higher than anticipated sell through and
lower than expected returns of the Company's FaxWorks Pro LAN products which
were formally discontinued during the quarter.
During the quarter ended December 31, 1998, the Company's largest customer
accounted for approximately 29% of the Company's net revenue.
There was no International net revenue for the third quarter ended December
31, 1998, a decrease from $2.2 million or 14% of net revenue for the third
quarter of fiscal 1998. For the nine month period ended December 31, 1998
international revenue decreased 2% to $6.2 million or 48% of net revenues from
$6.3 million or 13% of net revenues for the same period in fiscal 1998. The
decrease in international revenue in both periods was primarily due to the
Company's sale of its modem operations 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.
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 Nine months ended
December 31, December 31,
------------------ ------------------
1998 1997 1998 1997
--------- ---------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net revenue.................... 122 16,185 12,840 49,192
Cost of revenue................ 64 11,358 9,742 33,712
------- ---------- -------- --------
Gross profit................... 58 4,827 3,098 15,480
------- ---------- -------- --------
Gross profit percentage of net
revenue....................... 48% 30% 24% 31%
------- ---------- -------- --------
</TABLE>
The gross margin increase in the third quarter of fiscal 1999 as compared to
the third 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.
During the quarter ended December 31, 1998 there was a benefit to gross margin
associated with higher than anticipated sell through and
11
<PAGE>
B-12
lower than expected returns of the Company's FaxWorks Pro LAN products which
were formally discontinued during the quarter. The gross profit margin
decrease between the nine months ended December 31, 1998 compared to the nine
months ended December 31, 1997 was primarily attributable to price reductions
on certain of the Company's modem products sold during the first fiscal
quarter of 1999, an increase in lower margin OEM modem business sold during
the first fiscal quarter of 1999, 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>
Three months ended December
31, Nine months ended December 31,
----------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- --------------- ---------------
% of net % of net % of net % of net
$ revenue $ revenue $ revenue $ revenue
----- -------- ----- -------- ------ -------- ------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Research and
development............ 850 697% 2,099 13% 4,469 35% 7,243 15%
Marketing and sales..... 777 637% 3,634 22% 4,412 34% 10,637 22%
General and
administrative......... 807 661% 812 5% 2,756 21% 3,263 7%
Restructure costs....... -- --% -- --% 404 3% -- --%
----- ----- ------ ------
Total operating
expenses............. 2,434 6,545 12,041 21,143
===== ===== ====== ======
</TABLE>
Research and Development
Research and development expenses for the third quarter of fiscal 1999
decreased 60% compared to the third quarter of fiscal 1998. Research and
development expenses decreased 38% for the nine months ended December 31, 1998
as compared to the same nine month 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.
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 79% between the third quarter of
fiscal 1999 and the third quarter of fiscal 1998, and decreased 59% when
comparing the nine month periods ended December 31 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 to Boca Research.
General and Administrative
General and administrative expenses decreased 1% when comparing the
quarterly results for the third quarter of fiscal 1999 to the third quarter of
fiscal 1998 and 16% when comparing the results for the nine month period ended
December 31, 1998 to the nine month period ended December 31, 1997. The
decrease was primarily attributable to a reduction in personnel costs
associated with the sale of the modem operations.
12
<PAGE>
B-13
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 associated with the transition
to OneWorld Systems (see note 6 of the Notes to Condensed Consolidated
Financial Statements).
Net Other Income
<TABLE>
<CAPTION>
Nine months ended December
Three months ended December 31, 31,
--------------------------------------- -----------------------------
1998 1997 1998 1997
------------------- ------------------- -------------- --------------
% of net % of net % of net % of net
$ revenue $ revenue $ revenue $ revenue
------- ----------- ------- ----------- ----- -------- ----- --------
(dollars in thousands)
<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 3%
Other income, net....... 61 --% 111 1% 166 1% 412 1%
------- ------- ----- -----
Total other income,
net.................. 61 111 6,294 2,029
======= ======= ===== =====
</TABLE>
Other net income for the three and nine month periods ended December 31,
1998 consisted primarily of imputed interest income on the note receivable
from Boca Research. Net other income in the nine month period ended December
31, 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).
Additionally, other net income for the nine month period ended December 31,
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 third quarter of fiscal 1999 was zero,
unchanged from the third quarter of fiscal 1998. The effective tax rate for
the nine month period ended December 31, 1998 was 1%, an increase from zero
for the nine month period ended December 31, 1997. The increase relates to
refunds of prior periods state income taxes.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $1.2 million at December 31,
1998, representing 24% of total assets. The Company's working capital was $1.6
million at December 31, 1998 as compared to $0.2 million at March 31, 1998, an
increase of $1.4 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 December 31, 1998, the Company's principal source of liquidity was $1.2
million in cash and future receipts from of the note receivable from Boca
Research, Inc. (see note 5 of the Notes to Condensed Consolidated Financial
Statements).
During December 1998, the Company and Boca Research reached an agreement to
restructure the remaining obligations owing to the Company whereby the Company
would receive $2.0 million on January 4, 1999 and the balance of the note, on
February 2, 1999. The Company received both these payments as scheduled (also
see note 5 of the Notes to Condensed Consolidated Financial Statements).
13
<PAGE>
B-14
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. To meet its cash needs, the Company will require additional
sources of capital. The Company may be required to issue additional debt or
equity securities which could substantially dilute the ownership of existing
stockholders. There can be no assurances that the Company will be successful
in raising additional capital, or doing so on terms which will be favorable or
acceptable to the Company. Any shortfall in funding could result in the
Company having to curtail its current operations, the introduction or
development of new products and its entry into new markets, any of which could
have an immediate material adverse affect on the Company's business, financial
condition and results of operations. The Company's funding requirements may
change at any time due to various factors, including the Company's operating
results, 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.
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.
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.
14
<PAGE>
B-15
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 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
15
<PAGE>
B-16
network 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 network 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 network 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
16
<PAGE>
B-17
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology.
The Company believes that, due to the rapid pace of innovation within the
communications software industry, the Company's success in establishing and
maintaining a technological leadership position is likely to depend more upon
the technological and creative skills of its personnel, continued innovation,
its marketing skills and customer support than on the various legal means of
protecting its existing technology.
The Company is aware of products in addition to its own that are marketed
under the trademark "OneWorld." There can be no assurance that litigation with
respect to these trademarks will not be instituted by any third parties. If
any such litigation were successful, the Company could be required to pay
damages and cease all use of a particular trademark. There can be no assurance
that any loss of the right to use a trademark would not reduce sales of the
Company's products. In any event, even if the Company were successful in any
such litigation, the legal and other costs associated with such litigation
could be substantial. As is customary in the Company's industry, the Company
from time to time receives communications from third parties asserting that
the Company's products infringe, or may infringe, the proprietary rights of
third parties or seeking indemnification against such infringement. There can
be no assurance that any such claims would not result in protracted and costly
litigation. The Company anticipates that the duration of its trademarks will
be perpetual.
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.
The Company has been notified by Nasdaq that it does not meet certain
requirements for continued listing on the Nasdaq National Market. The Company
has attended a hearing where it presented a compliance plan to address these
deficiencies in listing requirements and is currently awaiting a decision by
Nasdaq. Any delisting action has been stayed pending the outcome of this
hearing. Delisting from the Nasdaq National Market could result in a lower
average trading volume of the Company's Common Stock, which in turn could lead
to an increase in stock price volatility.
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.
17
<PAGE>
B-18
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 network server
only in the United States and Canada and currently has no near term plans for
addressing other international markets for these products. If the Company were
to offer the OneWorld network communications server internationally, there can
be no assurance that the Company will be able to attain international demand
for 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.
18
<PAGE>
B-19
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--Not applicable.
Item 5. Other Information--Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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 December 31, 1998.
19
<PAGE>
B-20
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.
<TABLE>
<C> <S>
Date: February 12, 1999 /s/ Neil Selvin
___________________________________________
(Principle Executive Officer)
Date: February 12, 1999 /s/ Marc E. Linden
___________________________________________
Senior Vice President Finance and
Chief Financial Officer
(Principle Financial and Accounting
Officer)
</TABLE>
20
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B-21
[THIS PAGE INTENTIONALLY LEFT BLANK]
21
<PAGE>
ANNEX C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) February 24, 1999
OneWorld Systems, Inc.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
Delaware 000-23260 94-3095680
(State or Other Jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
</TABLE>
<TABLE>
<S> <C>
1144 East Arques Avenue, Sunnyvale, CA 94086
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(408) 523-1100
(Registrant's Telephone Number, Including Area Code)
(Former name or former address, if changed since last report.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
C-2
ITEM 5. OTHER EVENTS
On February 24, 1999, March 3, 1999 and March 10, 1999, OneWorld Systems,
Inc. issued the press releases which are attached hereto as exhibits.
<TABLE>
<C> <S>
Exhibit 5.1 Press Release issued February 24, 1999--OneWorld Systems Reports
Delisting from Nasdaq Stock Market
Exhibit 5.2 Press Release issued March 3, 1999--OneWorld Systems Announces
$10 Million In New Financing
Exhibit 5.3 Press Release issued March 10, 1999--OneWorld Systems Closes $10
Million in Financing
</TABLE>
2
<PAGE>
C-3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ONEWORLD SYSTEMS, INC.
/s/ Neil Selvin
By: _________________________________
Neil Selvin
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 11, 1999
3
<PAGE>
C-4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Document Page
-------- ------------
<C> <S> <C>
5.1 Press Release issued February 24, 1999 OneWorld 3
Systems Reports Delisting from Nasdaq Stock Market
5.2 Press Release issued March 3, 1999 OneWorld Systems 4
Announces $10 Million In New Financing
5.3 Press Release issued March 10, 1999 OneWorld Systems 8
Closes $10 Million in Financing
</TABLE>
4
<PAGE>
C-5
EXHIBIT 5.1
[OneWorld Systems Logo]
FOR IMMEDIATE RELEASE
Contact:
Heidi Palmer
OneWorld Systems, Inc.
Phone: (408)523-2204
Email: heidi [email protected]
OneWorld Systems Reports Delisting from Nasdaq Stock Market
SUNNYVALE, Calif.,--February 24, 1999--OneWorld Systems,(TM) Inc. (Nasdaq:
OWLD) reported today that it has been notified of Nasdaq's decision to delist
the company's Common Stock from the Nasdaq National Market(TM) due to the
failure to meet certain listing requirements. Such notice was received today
following the close of the market and is effective immediately. The Company
anticipates the trading of its Common Stock will transition to the Over the
Counter (OTC) Bulletin Board.
About OneWorld Systems
OneWorld Systems, Inc. is headquartered in Sunnyvale, California and
develops and manufactures products that enhance and simplify wide-area data
communications for the small and medium size office markets. OneWorldTM 5000
Communications Servers are designed to be versatile, easy to use, cost-
effective and expandable as small offices grow. For more information, visit
the company's website at http://www.oneworldsystems.com, or call toll-free in
North America at 1-877-697-2677.
# # #
Note to Editors: OneWorld is a registered trademark and OneWorld Systems and
the OneWorld Systems logo are trademarks of OneWorld Systems, Inc., which may
be registered in some countries. All other brand names and trademarks
mentioned in this document are properties of their respective owners.
5
<PAGE>
C-6
EXHIBIT 5.2
[OneWorld Systems Logo]
FOR IMMEDIATE RELEASE
Contact:
Heidi Palmer
OneWorld Systems, Inc.
Phone: (408)523-2204
Email: heidi [email protected]
ONEWORLD SYSTEMS ANNOUNCES $10 MILLION IN NEW FINANCING
Integral Capital Partners and Hambrecht & Quist Are Lead Investors
SUNNYVALE, Calif.,--March 3, 1999--OneWorld Systems,(TM) Inc. (OTCBB: OWLD)
announced today that it will receive $10 million in financing from Integral
Capital Partners, a leading technology investment firm based in Menlo Park,
California, and from Hambrecht & Quist, a leading investor and underwriter for
technology growth companies. Kevin Compton, partner at Kleiner Perkins
Caufield & Byers, is also participating in this financing.
In a private placement, the company is selling 620,000 Units at a cost of
approximately $16.30 per unit. Each Unit consists of 13 shares of newly issued
and unregistered Common Stock, and 5 shares of newly issued and unregistered
Series A Preferred Stock. Each share of Series A Preferred Stock is
convertible into 10 shares of the Company's Common Stock. The transaction is
expected to close in the next few days upon the routine exchange of final
documents.
"Our investment approach is to invest in companies that are in exploding
market segments and who are changing the rules of the game," said Roger
McNamee, general partner of Integral Capital Partners. "According to IDC/LINK,
there are over 1.1 million small businesses with local area networks and that
number is expected to double by the year 2001. OneWorld Systems has a long-
standing history of making communications products that are more integrated
and fundamentally easier to use than competing products. Armed with hot new
products and a new team of investors, OneWorld is poised to rewrite the rules
in small business data communications," McNamee added.
OneWorld Systems Closes $10 Million in New Financing
"Hambrecht & Quist, making its first investment from its new Access
Technology Partners, L.P. fund, is excited about the investment and business
opportunity represented by OneWorld Systems," said Daniel H. Case III,
Chairman and CEO, Hambrecht & Quist. "We believe in OneWorld's products and
the market opportunity they have to provide sophisticated 'big business'
communications solutions without the 'big business' costs and complexities. We
think that the management team understands the unique network communications
needs of small business and believe that OneWorld's servers can, and will, be
widely adopted," Case added.
"The OneWorld Systems management team has the knowledge and depth of
experience to make the company a market leader in the small business network
communications segment," said Kevin Compton, partner at Kleiner Perkins
Caufield & Byers, and a member of the company's Board of Directors since 1992.
"The OneWorld Network Communications Server products are designed specifically
for small business, have the capabilities that small businesses require today,
and provide a platform for growth and scalability. This infusion of capital
will boost OneWorld Systems' ability to capture the attention, and sales, of
the small business as they enter a new, more sophisticated stage of
communications for their growing businesses," Compton added.
6
<PAGE>
C-7
"We are extremely pleased to have such prestigious financial investors as
Integral Capital and Hambrecht & Quist," said Neil Selvin, president and chief
executive officer, OneWorld Systems. "This additional financing will fuel our
growth and allow us to continue to expand our channel sales, marketing and R&D
efforts. We anticipate implementing new channel partner programs, increasing
direct marketing activities and developing awareness building campaigns over
the next year. We are executing our business plan and look forward to working
closely with our new investors," said Selvin.
"We have already experienced success in several small business vertical
markets, including such diverse industries as advertising agencies and state
and local government. For example, premier advertising agencies such as
Goodby, Silverstein & Partners in San Francisco and TBWA Chiat/Day Toronto,
have adopted the OneWorld Network Communications Server for their wide area
communications needs. In the government market, The City of Stockton,
California and the Riverside County (California) Transportation Commission
have adopted the OneWorld server for remote access and fax communications. The
unique capabilities of the OneWorld products will give each of these
organizations the ability to expand services, increase communications speed,
and add user support as they continue to grow," said Selvin.
OneWorld Systems Closes $10 Million in New Financing
OneWorld Servers Provide Big Business Communications without the Big Business
Costs
The OneWorld Network Communications Server product family has several unique
features that implement communications technologies specifically with the
needs of the growing office in mind:
Versatile--A company can choose the communications services that are needed
now (desktop faxing, remote access, Internet access and/or network modem) and
upgrade to additional communications services as they need them.
Expandable--Equipped with four 56K analog modems in all models, the OneWorld
servers are expandable to eight 56K analog modems, ISDN or T1 connectivity as
a company's needs grow.
In addition, the OneWorld Network Communications Servers includes several
features that reflect the company's attention to a small business' sensitivity
to capital costs and monthly expenses:
Multi-function Server--Because the OneWorld Servers integrate multiple
communications functions into one product, it costs dramatically less than
purchasing individual fax, remote access, Internet routing and network modem
equipment. Some estimates indicate that the OneWorld Servers are half the
price of what a collection of competitive, single-function solutions cost.
Dynamic Port Allocation--By dynamically sharing analog telephone lines among
all fax, remote access, Internet routing and data communications traffic,
fewer phone lines are needed and are used more efficiently instead of being
dedicated to one type of function and sitting idle when not being used by that
function.
Client Software--Small businesses don't want to pay again and again to
increase the number of users of a product as their business grows. The award-
winning FaxWorksTM and GlobalFaxTM fax software applications are included at
no extra charge, with unlimited client usage.
Client Support--The OneWorld Network Communications Servers are the only
full function communications servers to support all of the key communications
functions for both Windows and Macintosh users on the network.
OneWorld Systems Closes $10 Million in New Financing
Administration Software--Small businesses don't always have the expertise,
or the time, to learn multiple administration software packages for all of
their communications equipment. The OneWorld servers are easy to administer
through a single, intuitive, user interface that lets a network administrator
add, delete or modify all communications services for all users all in one
place.
7
<PAGE>
C-8
All-inclusive--The OneWorld Network Communications Servers include all the
hardware, software and modems needed to get started. Businesses just need to
provide the phone lines!
About OneWorld Systems
OneWorld Systems, Inc. is headquartered in Sunnyvale, California and
develops and manufactures products that enhance and simplify wide-area data
communications for the small and medium size office markets. OneWorld Network
Communications Servers combine desktop faxing, remote access and Internet
access in a single server and are designed to be versatile, easy to use, cost-
effective and expandable as small offices grow. Formerly known as Global
Village Communication, the company is traded on the Over The Counter Bulletin
Board (OTCBB) under the ticker symbol OWLD. For more information, visit the
company's website at http://www.oneworldsystems.com.
Portions of this news release contain forward-looking statements. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties.
The Company has no significant revenues at present and is incurring losses.
In order to market its products successfully, the Company will have to develop
and expand its Value-Added Reseller channel. Commercial acceptance of the
Company's products is also 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. In addition, the
Company may face pricing pressure, which could lead to reductions in the
average sales prices for the Company's products and could have a material
adverse effect on gross margins. There is no assurance that the Company will
ever achieve significant revenues or profitability.
# # #
Note to Editors: OneWorld is a registered trademark and OneWorld Systems and
the OneWorld Systems logo are trademarks of OneWorld Systems, Inc., which may
be registered in some countries. All other brand names and trademarks
mentioned in this document are properties of their respective owners.
8
<PAGE>
C-9
EXHIBIT 5.3
[OneWorld Systems Logo]
FOR IMMEDIATE RELEASE
Contact:
Heidi Palmer
OneWorld Systems, Inc.
Phone: (408)523-2204
Email: heidi [email protected]
ONEWORLD SYSTEMS CLOSES $10 MILLION IN FINANCING
SUNNYVALE, Calif.,--March 10, 1999--OneWorld Systems(TM), Inc. announced
today that it has closed its $10 million financing from Integral Capital
Partners, a leading technology investment firm based in Menlo Park,
California, and from Hambrecht & Quist, a leading investor and underwriter for
technology growth companies. Kevin Compton, partner at Kleiner Perkins
Caufield & Byers, also participated in this financing.
In the private placement, the company sold 620,000 Units at a cost of $16.30
per Unit. Each Unit consisted of 13 shares of newly issued and unregistered
Common Stock, and 5 shares of newly issued and unregistered Series A Preferred
Stock. Each share of Series A Preferred Stock is convertible into 10 shares of
the Company's Common Stock.
About OneWorld Systems
OneWorld Systems, Inc. is headquartered in Sunnyvale, California and
develops and manufactures products that enhance and simplify wide-area
communications for the small and medium size office markets. OneWorld Network
Communications Servers combine desktop faxing, remote access and Internet
access in a single server and are designed to be versatile, easy to use, cost-
effective and expandable as small offices grow. Formerly known as Global
Village Communication, the company is traded on the Over The Counter Bulletin
Board (OTCBB) under the ticker symbol OWLD. For more information, visit the
company's website at http://www.oneworldsystems.com.
# # #
Note to Editors: OneWorld is a registered trademark and OneWorld Systems and
the OneWorld Systems logo are trademarks of OneWorld Systems, Inc., which may
be registered in some countries. All other brand names and trademarks are
properties of their respective owners.
9
<PAGE>
C-10
[This page intentionally left blank]
10
<PAGE>
OneWorld Systems, Inc.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Proxy for the June 22, 1999 Special Meeting of Stockholders
The undersigned stockholder of OneWorld Systems, Inc., a Delaware corporation,
hereby acknowledges receipt of the Notice of Special Meeting of Stockholders and
the Proxy Statement, each dated May 20, 1999, and hereby appoints Neil Selvin
and Marc Linden and each of them, proxies and attorneys-in-fact, with full power
to each of substitution, on behalf and in the name of the undersigned, to
represent the undersigned at the Special Meeting of Stockholders of OneWorld
Systems, Inc., to be held on June 22, 1999 at 3:00 p.m., local time, at the
Company's headquarters located at 1144 East Arques Avenue, Sunnyvale,
California, and at any adjournment or adjournments thereof, and to vote all
shares of Common Stock and Series A Preferred Stock which the undersigned would
be entitled to vote, if then and there personally present, on the matters set
forth below.
[X] Please mark votes as in this example.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED,
IT WILL BE VOTED FOR PROPOSAL 1, AND IN THE DISCRETION OF THE PROXIES AS
TO OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
1. To approve alternative amendments to the Company's Certificate of
Incorporation (only one of which will be implemented by the Board of
Directors) to effectuate either a one-for-seven, one-for-ten, or one-for-
fourteen reverse stock split with respect to all issued and outstanding
shares of the Company's Common Stock. Please note that approval of this
proposal will trigger automatic conversion of 50% of the outstanding
shares of Series A Preferred Stock into Common Stock (which will
represent 38% of the outstanding Common Stock after such conversion). For
more information see the table on page 5 of the attached Proxy Statement.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
GRANT [ ] WITHHOLD [ ]
[ ] MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW
(Please sign exactly as your name appears on the
stockholder list. If shares are held jointly, each
holder should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full
title as such. If a corporation, please sign in full
corporate name by the president or other authorized
officer. If a partnership, sign in partnership name by
authorized person.)
Dated: _________________________, 1999
__________________________________________________
Printed name of Stockholder(s)
__________________________________________________
Signature
__________________________________________________
Signature, if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE
