<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
=====================
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED 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>
<CAPTION>
<S> <C>
DELAWARE 94-3095680
(State or other jurisdiction of (I.R.S. Employer
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> 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.................................................................17
Item 2. Changes in Securities/Recent Sales of Unregistered Securities.....................17
Item 3. Defaults Upon Senior Securities...................................................17
Item 4. Submission of Matters to a Vote of Security Holders...............................17
Item 5. Other Information.................................................................17
Item 6. Exhibits and Reports on Form 8-K..................................................17
SIGNATURES.........................................................................................17
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
----------------- --------------
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 1,203 $ 3,097
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 equipment, net 316 4,049
Other assets 63 63
------- -------
Total assets $ 5,007 $17,973
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 960 $ 7,625
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> 4
ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 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> 5
ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS 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 operating 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 activities 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 activities:
Sale of modem operations in exchange for note
receivable from Boca Research, Inc. $ 5,855 $ --
Warrants issued to Boca Research, Inc. $ 140 $ --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
<PAGE> 6
ONEWORLD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
OneWorld Systems, Inc. ("OneWorld Systems" or the "Company") provides
simple, easy-to-use wide-area communication solutions to help businesses
communicate efficiently and cost effectively. The Company designs,
develops, manufactures and sells integrated client and server hardware and
software solutions for the growing communication needs of small and
medium-sized businesses and offices. The Company's recently released
OneWorld 5000 communications servers are designed to be versatile,
easy-to-use, cost-effective and expandable solutions that combine Internet
access and routing, remote access, on-line service access, and fax
capabilities. Founded in 1989 as Global Village Communication, Inc.,
OneWorld Systems is the only supplier of communication solutions that
integrate fax services, Internet and remote access for Windows and mixed
Windows/Mac personal computer environments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The interim condensed consolidated financial
statements as of 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>
(in thousands) December 31, 1998 March 31, 1998
----------------- --------------
<S> <C> <C>
Purchased parts $ -- $ --
Work in process -- --
Finished goods 191 2,351
====== ======
Total inventories $ 191 $2,351
====== ======
</TABLE>
6
<PAGE> 7
NOTES TO CONDENSED 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> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
- ----------------------------------------------------
7. EARNINGS PER SHARE
The following table presents the calculation of basic and diluted earnings
per share pursuant to SFAS No. 128:
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
(in thousands, except per share data) 1998 1997 1998 1997
-------- -------- -------- --------
<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 equivalents 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> 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 name recognition and a larger customer
base, than the Company. OneWorld products will not be sold through the same
channels as the Company's modem products were sold. Consequently, the Company
has been required to establish new distribution channels, including expanding
the Company's VAR channel. There can be no assurance that the Company will be
successful in maintaining and expanding an effective distribution channel for
its new products. As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as an indication of future performance.
9
<PAGE> 10
In the past, the industry in which the Company competed was subject to short
product life cycles. As a result, the Company traditionally experienced a
reduction in the average selling prices of its products as the time from product
introduction 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>
(dollars in thousands) Three months ended December 31, Nine months ended December 31,
1998 1997 1998 1997
-------------- ------------- ------------- -------------
<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 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.
10
<PAGE> 11
Revenue reserves and allowances are established for estimated future returns due
to end-user returns, stock balancing and discontinued and nonsellable products
based on the Company's past experience and internal forecasts. There can be no
assurance that the Company's historical experience regarding returns and
allowances will continue or that its projections will prove accurate. If the
Company experiences returns in excess of its reserves, the Company's results of
operations could be materially, adversely effected.
COST AND EXPENSES
On June 18, 1998, the Company sold its modem operations to Boca Research. The
modem operations accounted for substantially all of the Company's gross profit
and a significant portion of its research and development, marketing and sales,
and general and administrative expenses during the prior fiscal year.
Consequently, the comparisons below should not be relied upon as predictors of
future performance.
GROSS PROFIT
Cost of revenue primarily consisted of cost of materials, contract manufacturing
costs, manufacturing overhead expenses, royalty payments and warranty expenses.
The Company's gross profit as a percentage of net revenue was:
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
----------------------- ----------------------
1998 1997 1998 1997
------ ------ ------ ------
(dollars 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 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>
(dollars in thousands) 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
------ ------ ------ ------ ------ ------ ------- -------
<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
11
<PAGE> 12
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.
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>
(dollars in thousands) 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
----- ---- ----- ----- ----- ----- ----- -----
<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.
12
<PAGE> 13
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).
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
13
<PAGE> 14
on its financial position, results of operation or cash flows. There can be no
assurances, however, that non-year 2000 compliant products would not result in
the loss of or delay in market acceptance of the Company's products.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE PERFORMANCE
In addition to the other information in this Quarterly Report, one should
carefully consider the following factors in evaluating the Company.
PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
The Company believes that its future success will depend on its ability to
develop new products on a timely and cost-effective basis that meet changing
customer needs and respond to emerging industry standards and other
technological changes. In particular, the Company must adapt its products to the
evolving technological standards of the various computer platforms and new
technical standards resulting from increases in data transmission speed and
wireless communication. Any failure by the Company to anticipate or respond
adequately to changes in technology and customer preferences or any significant
delay in product development or introduction would have a material adverse
effect on the Company's results of operations. Due in part to the factors
described above, the Company is subject to the risk that its inventories may
rapidly become obsolete or that the Company may carry quantities of certain
products that exceed current or projected demand. In addition, products as
complex as those offered by the Company may contain undetected errors or defects
when first introduced or as new versions are released. There can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new products after commencement of commercial
shipments resulting in a delay in market acceptance or a recall of such
products.
MARKET ANTICIPATION OF NEW PRODUCTS OR TECHNOLOGIES
Since the environment in which the Company operates is characterized by rapid
new product and technology introductions and generally falling prices for
existing products, the Company's customers may from time to time postpone
purchases in anticipation of such new product introductions or lower prices. If
such anticipated changes are viewed as significant by the market, then this may
have the effect of temporarily slowing overall market demand and negatively
impacting the Company's operating results.
COMPETITION
The market for the Company's products is intensely competitive and is
characterized by rapidly changing technology, evolving industry communication
standards and frequent new product introductions. The Company's OneWorld fax
server products compete primarily with dedicated fax servers, stand-alone fax
machines, electronic mail, centralized fax systems produced by independent
manufacturers such as Right Fax, Omtool, Castelle, as well as printer vendors,
including Apple and NEC, which offer fax capabilities with some of their
products. The Company's OneWorld Remote Access, Suite, Network Modem and Combo
servers compete with the same products in the fax server category, as well as
with remote access server router and modem pool products produced by competitors
such as Cisco Systems, Shiva, 3COM, and others. Other companies in the personal
computer industry could seek to expand their product offerings by designing and
selling products using competitive technology that could render obsolete or have
a material adverse effect on sales of the Company's future products.
Many of the Company's competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base, than the Company. Accordingly, there can
be no assurance that the Company will be able to provide products that compare
favorably with the products of the Company's competitors or that competitive
pressures will not require the Company to reduce its prices. Any material
reduction in the price of the Company's products could negatively affect gross
profit as a percentage of net revenue and could require the Company to increase
unit 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.
14
<PAGE> 15
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 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 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.
15
<PAGE> 16
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(R). 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(R) 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. 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.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Not applicable.
ITEM 2. CHANGES IN SECURITIES/RECENT SALES OF UNREGISTERED SECURITIES - Not
applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - 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.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OneWorld Systems, Inc.
Date: February 12, 1999 /S/Neil Selvin
-------------------------------------
President and Chief Executive Officer
(Principle Executive Officer)
Date: February 12, 1999 /S/Marc E. Linden
-------------------------------------
Senior Vice President Finance and
Chief Financial Officer
(Principle Financial and Accounting
Officer)
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,203
<SECURITIES> 0
<RECEIVABLES> 143
<ALLOWANCES> (25)
<INVENTORY> 191
<CURRENT-ASSETS> 4,628
<PP&E> 3,951
<DEPRECIATION> (3,635)
<TOTAL-ASSETS> 5,007
<CURRENT-LIABILITIES> 3,053
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 1,936
<TOTAL-LIABILITY-AND-EQUITY> 5,007
<SALES> 12,840
<TOTAL-REVENUES> 12,840
<CGS> 9,742
<TOTAL-COSTS> 9,742
<OTHER-EXPENSES> 12,041
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29
<INCOME-PRETAX> (2,649)
<INCOME-TAX> (22)
<INCOME-CONTINUING> (2,627)
<DISCONTINUED> 90
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,627)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
