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UNITED STATES
SECURITIES AND EXCHANGES COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 000-23260
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ONEWORLD SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
State of Incorporation: Delaware
IRS Employer Identification No.: 94-3095680
1144 East Arques Avenue
Sunnyvale, CA 94086-4602
(408) 523-1100
(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, $0.001
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 proceeding 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 Parts
III of this Form 10-K of any amendment to this Form 10-K. [ ]
The 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. Over the Counter Bulletin
Board ("OTCBB") was approximately $12,000,420 as of June 23, 1999.(1)
The number of shares of Common Stock outstanding as of June 23, 1999
was 25,244,293 (2,524,429 giving effect to a one-for-ten reverse split which
will be effective July 6, 1999).
DOCUMENTS INCORPORATED BY REFERENCE
The registrant has incorporated by reference into Part III of this Form
10-K to the extent stated herein portions of the definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on August 31, 1999.
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(1) Excludes 2,657,393 shares of Common Stock held by directors, officers
and affiliates as of June 23, 1999.
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ONEWORLD SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 1999
INDEX
<TABLE>
PART I
<S> <C> <C>
ITEM 1. Business ................................................................................. 3
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 Financial Data .................................................................. 12
ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations .... 13
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk ............................... 22
ITEM 8 Financial Statements and Supplementary Data .............................................. 23
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 38
PART III
ITEM 10. Directors and Executive Officers of the Company .......................................... 39
ITEM 11. Executive Compensation ................................................................... 39
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ........................... 39
ITEM 13. Certain Relationships and Related Transactions ........................................... 39
PART IV
ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K .......................... 39
</TABLE>
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PART I
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IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions
identify such forward-looking statements. These forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward-looking statements. Such risks
and uncertainties include those set forth in Part II, Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the subheading "Additional Risk Factors that Could Affect Operating Results and
Market Price of Stock." Unless required by law, the Company undertakes no
obligation to update publicly any forward-looking statements.
ITEM 1. BUSINESS
OneWorld Systems, Inc. (the "Company", "we" or "us") was founded in
1989 and incorporated in Delaware as Global Village Communication, Inc. We
develop and manufacture products that enhance and simplify wide-area data
communications for the small and medium sized office market. Our OneWorld
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.
On June 18, 1998 we completed the sale of substantially all of the
assets of our single-user modem product operations, including related accounts
receivable, inventory, equipment, intellectual property, and other production
and research and development assets, to Boca Research, Inc. ("Boca"). At that
time, we changed our corporate strategy to focus on wide-area data
communications for small and medium sized offices and changed our name to
OneWorld Systems, Inc.
Until June 18, 1998 we were actively engaged in the single-user modem
business, where we were considered 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. Our products
enabled mobile, home office and networked computer users in small and medium
sized organizations to communicate efficiently via the Internet with colleagues,
customers and suppliers. During this period, we continued to develop and market
single-user modem products which included our Teleport modems for Windows and
Macintosh desktop computers, PC Card modems for Windows notebook computers, PC
Card and PowerPort modems for Macintosh PowerBook notebook computers, products
sold to Apple Computers on an OEM basis and OEM versions of Faxworks single user
fax software. All these products were sold to Boca in June 1998. Prior to June
18, 1998, these products represented substantially all of our revenue. As a
result, we believe that period-to-period comparisons of the results of
operations are not meaningful and should not be relied upon as an indication of
future performance.
We are now wholly focused on our new family of communications servers
targeted to the small and medium sized office market. These server products
combine Internet access and routing, remote access, fax and shared modem
capabilities in a single, easy-to-use product. These products, known as the
OneWorld Network Communications Server family, were announced on June 8, 1998,
and began shipping in September 1998. Our primary source of revenue is now from
these products. Revenue from this product line is dependent upon the commercial
acceptance of the products, which in turn is dependent upon continued
development and technical enhancement of the product, sales and marketing
efforts, technical reviews by independent parties, introductions of new
technologies, performance of our valued added resellers, distributors and
suppliers, and announcements by competitors, among other factors. There can be
no assurance we will be successful in our ongoing development efforts or able to
introduce technical enhancements and/or new features and functionality in a
timely manner. Failure to do so could result in lower customer acceptance of our
products and result in our products falling behind competitors' product
capabilities, which would have a material adverse effect on sales of our
products. Many of our competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base than we do. To sell our new
communications server products will require us to significantly expand our value
added reseller distribution channel, which is different from that of our former
single-user modem product business. There can be no assurances that we will be
successful in the continuing development and maintenance of an effective
distribution channel for our new products. There can be no assurances that the
market place will accept our communications server products. If the sales of our
new products are below expectations, our business, financial condition and
results of operations will be materially adversely affected.
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With the reliance on revenues from our new communications server
products, and our projected expense levels, we do not anticipate profitability
in the near-term. In addition, our industry is continually faced with the threat
of pricing pressure, which could lead to reductions in the average sales prices
for our products and could have a materially adverse affect on gross margins.
There is no assurance that we will ever achieve profitability.
Though we continually seek to further enhance our product offerings and
to develop new products, there can be no assurance that these development
efforts will result in enhanced or timely new product introductions.
Furthermore, there is no certainty that any enhancements or new products will
achieve market acceptance. With the announcement of new or enhanced products
that could potentially replace current products, customers may defer purchasing
currently available products, which could have a materially adverse affect on
our results of operations. Although we write off inventory that is considered
excessive or obsolete, there can be no assurances that the recorded allowances
for such write-offs will be adequate. A material increase in such write-offs and
returns over our expectations could have a material adverse effect on our
results of operations.
TECHNOLOGY AND PRODUCTS
ONEWORLD NETWORK COMMUNICATIONS SERVERS
In September 1998 we began shipping the OneWorld Network Communications
Server family which integrates hardware, server software and client software
elements into a complete solution. Our servers are designed to provide
versatile, easy-to-use, cost effective and expandable solutions that will meet
the growing communication needs of small and medium sized businesses:
Versatility. Our family of network communications servers are designed
to provide the major wide-area data communications functions required by small
and medium sized offices or businesses, including Internet access and routing,
sending and receiving faxes, remote access and modem pooling. These capabilities
solve a number of business problems for our customers.
INTERNET ACCESS AND ROUTING: To provide Internet access for each
employee, a small business often must purchase individual modems and
phone lines for each computer, which can be very costly. Having only
one computer set up in the office to access the Internet for all
employees can result in delayed access to the Internet.
OneWorld Network Communications Servers give all employees on the
network access to the Internet by sharing fewer phone lines via the
OneWorld server. Each employee, at his/her own computer, may dial
out via our server to access their Internet service provider. By
sharing phone lines, a small business can better utilize its
communications equipment while providing shared Internet access to
its employees.
SEND FAX: Faxing is an important part of daily business
communications for companies of all sizes. The usual process is to
write a document on a computer, print it out, put it on a fax
machine and wait until it has gone through. This process takes time
and effort away from other important tasks that employees must
handle during the day.
The OneWorld server simplifies these tasks by letting employees fax
a document directly from their computer, without the hassle of
printing and standing at a fax machine. When the same document needs
to be sent to multiple people, a simple click of a mouse button
takes care of the process without any user intervention. In
addition, our server solutions include award-winning FaxWorks for
Windows and GlobalFax for Macintosh fax software with every OneWorld
Fax Server and Suite Server product. Designed to be easy to use, our
fax software includes everything an employee needs to create fax
cover sheets, send single and multiple faxes and track the progress
of each fax as it occurs.
RECEIVE FAX: Tracking down the faxes that are sent to each employee
can be a frustrating process. Some faxes are misplaced, some faxes
are thrown away and some never show up at your desk when you
urgently need them.
The OneWorld server lets faxes be routed directly to a user's
computer just like email. When a fax is received, it shows up in the
Fax Inbox for immediate viewing by the recipient. In addition, a fax
can be routed to others, can be marked up with notes and highlights
for others to see, and can be filed for future reference. With the
OneWorld server, faxes won't be lost and will be sent to the right
person directly, and in confidence.
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REMOTE ACCESS: Keeping in touch with the office is harder than ever
when you are traveling, working from home or from a client's office.
Often, employees must be able to check their email, get documents
from the company's file server and even fax documents from wherever
they are.
By dialing into the OneWorld server from a remote computer,
employees can easily gain access to the company network. Once the
OneWorld server verifies the user's identity and privileges, the
employee can obtain files, address books, and other information as
though they were actually in the office sitting at their desks. In
addition, the remote employee can dial back out through the OneWorld
server to the company's Internet Service Provider, giving them
access to the web as though they were in the office. As a result,
the remote employee is able to access all the information needed to
keep in communication with co-workers, clients and vendors and keep
business moving.
MODEM POOLING: Employees who must handle specific dial-up functions
such as vendor accounts and payroll processing must have a dedicated
modem and phone line. When they are not handling these functions,
the phone line sits idle.
The OneWorld Network Communications Servers include modem pooling
capabilities that allow all modems in the server to be shared by
everyone on the company's network. Whether the modem is used to dial
up another modem, server phone lines and modems are dynamically
shared between all employees and their specific communications tasks
resulting in the need for fewer phone lines and eliminating the need
for individual modems.
All these functions are offered in a single integrated server solution
including required end-user client software. In addition, our family of
communications servers are the first products to offer all these capabilities
simultaneously to both Windows and Macintosh users.
Expandability. Capacity for future growth has been designed into the
OneWorld Network Communications Servers, allowing customers to expand and
upgrade the functionality of their server while preserving their investment.
Customers may purchase a server with only the functions they need today and
then, at a later date, upgrade to our full suite of functionality through the
simple addition of software. New functionality, such as firewalls and support
for Virtual Private Networks (VPN's), and other new capabilities can be added in
the future through software-only upgrades. To accommodate additional users, a
customer can expand the number of ports in a server, or add additional servers.
To increase bandwidth for faster Internet access, digital interfaces, including
ISDN and DSL, can be added in the future.
Simplicity. These products are designed to be simple to use and easy
for the small office to administer and manage. A Wizard, software designed to
simplify installation and configuration, has been developed to guide the small
office manager through the process of setting up all the communications
functions and user profiles from any PC on the network. Intuitive, graphical
administration software simplifies tasks such as adding or deleting users,
changing configurations and viewing status and usage. All these tasks can be
performed from a central location for single or multiple servers.
Cost Effectiveness. By integrating multiple wide-area data
communications functions, a single OneWorld Network Communications Server can
perform the function of three single-function products for a fraction of the
price. In addition, we have developed a technology called "Dynamic Port
Allocation," that allocates telephone line utilization 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 that users need fewer phone lines and can reduce their monthly
telecommunications costs, one of the largest expenses for small and medium sized
businesses
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The following table shows the currently available products within our
OneWorld Network Communications Server family - Model 5000 series:
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ONEWORLD NETWORK COMMUNICATIONS SERVERS - MODEL 5000
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OneWorld Remote Access Server
(Remote access, Internet routing and network modem with four
56Kbps modems)
One World Fax Server
(Network fax server and network modem with four 56Kbps modems)
OneWorld Suite Server
(All capabilities of the Remote Access and Fax servers with
four 56Kbps modems)
OneWorld Suite Upgrade
(Upgrades the Remote Access or Fax Server to all the
capabilities of the Suite Server)
4 Port Modem Upgrade
(Adds four 56Kbps modems to any of the servers)
We also offer the OneWorld 100 Communications Servers for Macintosh
which provide complete, easy-to-use communications 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 on 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. The OneWorld 100 Fax Server includes both fax and
network modem capabilities, and OneWorld 100 Network Modem Server provides
network modem capabilities.
LEGACY PRODUCTS
During fiscal 1999 we also offered FaxWorks Pro LAN and FaxWorks Server
NT, network fax server software for use in Windows, OS/2 and Windows NT
environments. FaxWorks integrated advanced fax software features into a single
user interface, allowing users to send and receive faxes directly from their
computer on the network. These products were formally discontinued at the end of
calendar 1998.
Prior to the sale to Boca, we produced single-user modems and
proprietary communications software for individual-use systems. These offerings
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 products to Boca. We no longer sell any
of these products.
SALES AND MARKETING
SALES
We distribute our current products through a two-tier distribution
system. Our products are first sold to national distributors, including Ingram
Micro and Tech Data in the United States and Cygcom and EMJ in Canada. These
distributors then resell our product to national and regional value added
resellers and corporate resellers, particularly those with a focus on serving
the small and medium sized office market. We intend to increase the number of
participating value added resellers by implementing recruiting, training and
support programs aimed at these resellers. There can be no assurance that the
Company will be successful in attracting new value added resellers to distribute
our products, or that this distribution channel will be a successful one for us.
Failure to attract new value added resellers or their inability to sell the
products would cause our sales to fall below expectations, and our business,
financial condition and results of operations would be materially adversely
affected.
Our inventories are subject to the risk that they may rapidly become
obsolete or that quantities of certain products may exceed current or projected
demand. While we have continually reserved against inventory that could be
considered excessive or obsolete, no assurance can be made that our allowances
for such write-offs and returns will be adequate. A material increase in such
write-offs and returns over estimated rates could have a material adverse effect
on our results of operations.
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We ship products within a short period after receipt of an order.
Consequently, we do not anticipate a material backlog of unfilled orders, and
revenues in any quarter should be substantially dependent on orders booked in
that quarter. Our expense levels are based in part on expectations as to future
revenues. Therefore, we may be unable to adjust spending in a timely manner to
compensate for any unexpected order or revenue shortfall. Accordingly, any
significant shortfall of demand in relation to our expectations or any material
delay of customer orders would have an almost immediate adverse effect on our
results of operations.
Our two largest customers accounted for approximately 47% and 17%,
respectively, of net revenue in fiscal 1999. Sales to these customers were of
our single-user modem products which were sold to Boca on June 18, 1998. Our
largest customer in fiscal 1999, an original equipment manufacturer, accounted
for approximately 18% of net revenue in fiscal 1998.
International sales represented approximately 46%, 15%, and 15% of net
revenue in fiscal 1999, 1998, and 1997, respectively. Substantially all of these
sales were of our single-user modem products, which were sold to Boca on June
18, 1998.
In addition to domestic sales, OneWorld Communications Servers are sold
in Canada, and may in the future be sold in other countries. Risks inherent in
our international business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, costs and risks of
localizing products for foreign countries, longer accounts receivable payments
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
earnings and from fluctuations in currency exchange rates. In addition, the laws
of certain foreign countries do not provide protections for the Company's
intellectual property to the same extent as do the laws of the United Sates.
MARKETING
Our sales activities are complemented with a range of public relations,
advertising and marketing programs designed to stimulate customer demand. We
believe that reviews and comments by influential trade press, business press,
market analysts and user group leaders have a pronounced impact on demand for
our products. We conduct regular product strategy briefings and new product
previews. Historically, we have enjoyed strong support from the trade press and
have received numerous awards for our products. Additionally, we have
extensively utilize direct marketing, including direct mail, to identify sales
prospects for our products.
We generally provide a one-year warranty on our server products which
provides for the repair or replacement of products determined to be defective.
Therefore, we are exposed to the risk of product returns from distributors,
direct resellers and end-user customers. As part of the sale of the single-user
modem products to Boca, Boca assumed all warranty liabilities for both the
installed and future shipments of the products lines which it purchased.
COMPETITION
The market for our products is intensely competitive and is
characterized by rapidly changing technology, evolving industry communication
standards and frequent new product introductions. A number of competitors,
including Cisco Systems, Shiva, 3Com and Castelle, among others, offer products
that compete with one or more of our communications server products. Our fax
server products compete primarily with dedicated fax servers, stand-alone fax
machines, electronic mail, and centralized fax systems and software produced by
independent manufacturers such as Castelle, AVT and Omtool. Our remote access
servers compete with products from Shiva (recently acquired by Intel), 3Com, and
others who provide dedicated remote access servers and modem pools. Our Internet
access and routing servers compete with competitors such as Cisco and 3Com and
many others who provide a wide range of Internet access devices for all sizes of
companies. In addition, these products also compete with a number of smaller
competitors who are focused on the small to medium sized business market,
including Ramp Networks, Netopia and others. Other companies in the personal
computer industry, such as modem vendors, remote access server vendors,
communications software vendors, fax machine manufacturers and personal computer
manufacturers, could seek to expand their product offerings by designing and
selling products using competitive technology that could render obsolete or have
a material adverse effect on sales of future products.
Many of our competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base, than us. In addition, the market for our
server products can be subject to significant price competition. We may face
increasing pricing pressures from current competitors. Accordingly, there can be
no assurance that we will be able to provide products that compare favorably
with the products of competitors or that competitive pressures will not require
us to further reduce prices. Any material reduction in our products' prices
could
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negatively affect gross profit as a percentage of net revenue and could require
us to increase unit sales in order to maintain net revenue. There can be no
assurance, however, that we would be able to increase unit sales or make up for
a 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 our financial condition and
results of operations.
PROPRIETARY RIGHTS
We rely primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our proprietary rights. We have no patents or patent applications pending. We
seek to protect our hardware, software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. We seek to protect our brand names under trademark and unfair
competition laws. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use proprietary information. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that our means of protecting our proprietary rights
will be adequate or that competitors will not independently develop similar
technology.
Due to the rapid pace of innovation within the communications software
industry, we believe that success in technological leadership is likely to
depend more upon the technological, creative, and marketing skills of our
personnel, our continued innovation, and customer support than on the various
legal means of protecting existing technology.
We are aware of products or services in addition to our own that are
currently marketed under the trademark "OneWorld". There can be no assurance
that litigation with respect to these trademarks will not be instituted by any
third parties. If any such litigation were successful, we could be required to
pay damages and cease all use of a particular trademark. There can be no
assurance that any loss of the right to use a trademark would not reduce sales
of our product. In any event, even if we were successful in any such litigation,
the associated legal and other costs could be substantial. As is customary in
our industry, we from time to time receive communications from third parties
asserting that our products infringe, or may infringe, the proprietary rights of
third parties or seeking indemnification against such infringement. There can be
no assurance that any such claims would not result in protracted and costly
litigation.
RESEARCH AND DEVELOPMENT
Our research and development efforts are primarily focused on software
development, hardware development, and systems integration. Expenditures for
research and development were $5.4 million, $9.7 million, and $12.0 million for
the fiscal years ended March 31, 1999, 1998, and 1997, respectively.
Customer-sponsored research and development was immaterial during these periods.
We believe that future success will depend on our ability to enhance
our current products and 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, we must adapt our
products to the evolving technological standards of the various computer
platforms and new technical standards resulting from increases in data
transmission speed and Internet technology evolution. Any failure to anticipate
or respond adequately to changes in technology and customer preferences or any
significant delay in product development or introduction would have a material
adverse effect on our results of operations. Due in part to the factors
described above, we are subject to the risk that inventories may rapidly become
obsolete or that the quantities carried of certain products exceed current or
projected demand. In addition products as complex as those offered by us may
contain undetected errors or defects when first introduced or as new versions
are released. There can be no assurance that, despite our testing and trials by
current and potential customers, errors will not be found in new products after
commencement of commercial shipments resulting in a delay in market acceptance
or a recall of such products.
MANUFACTURING AND SUPPLIERS
We purchase fully manufactured and tested units from a "turnkey"
manufacturing subcontractor. We believe that although there are a number of
alternative contract manufacturers that could produce our products, it could
take a significant period of time and result in significant additional expense
to qualify an alternative subcontractor and commence manufacturing in the event
of a reduction or interruption of production. Therefore, we are highly
dependent, on a short-term basis, on the continued relationship with our
"turnkey" manufacturing subcontractor and any reduction, interruption, or
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termination of this relationship could have a material adverse effect on our
operating results. Components and manufacturing services are obtained from our
supplier on an as-needed basis.
We have been, and will continue to be, dependent on sole or limited
source suppliers for certain key components used in our products, particularly
chip sets designed and manufactured by Rockwell International and Motorola. We
generally purchase sole or limited source components pursuant to purchase orders
placed from time to time in the ordinary course of business and have no
guaranteed supply arrangements with any sole or limited source suppliers.
Certain component suppliers, such as Rockwell, are also modem manufacturers and,
accordingly, could elect to satisfy their internal supply requirements rather
than fulfill our purchase requirements. In the past we have experienced delays
in product development and difficulties in manufacturing sufficient product to
meet demand due to the inability of certain suppliers to meet our requirements
for key components, and failure to meet such requirements in the future could
have a material adverse effect on our results of operations.
EMPLOYEES
As of March 31, 1999, we employed a total of 43 persons, including 13
in sales, marketing and customer support, 17 in engineering and product
development and 13 in finance, administration and operations. We have one
employee located in Canada. None of our employees are represented by a labor
union or are subject to collective bargaining agreement. We believe that
corporate relations with employees are good. Our future success depends to a
significant extent on our senior management and other key employees, including
key development personnel. The loss of the services of any of these individuals
or group of individuals could have a material adverse effect on our results of
operations. We also believe that our future success will depend in large part on
our ability to attract and retain additional key employees. Competition for such
personnel in the computer industry is intense, and there can be no assurance
that we will be successful in attracting and retaining such personnel.
EXECUTIVE OFFICERS OF THE COMPANY
The current executive officers of OneWorld Systems, Inc. and
their ages as of March 31, 1999 are as follows:
<TABLE>
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Name Age Position
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<S> <C> <C>
Neil Selvin 45 President, Chief Executive Officer and Director
Leonard A. Lehmann 44 Chairman of the Board
Marc E. Linden 38 Senior Vice President & Chief Financial Officer
Marsha Raulston 50 Vice President, Human Resources & Customer Satisfaction
</TABLE>
Neil Selvin has served as President and Chief Executive Officer and
director of OneWorld Systems, Inc. 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 OneWorld
Systems, Inc. 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 a
M.S. and Ph.D. in electrical engineering from Stanford University.
Marc E. Linden became OneWorld Systems' 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.
-9-
<PAGE> 10
Marsha Raulston became OneWorld Systems' 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 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
We lease approximately 128,000 square feet of office space for our
headquarters in Sunnyvale, California. This facility accommodates
administration, finance, sales, marketing, customer satisfaction, engineering,
research and development, and distribution. The lease on the facility carries an
approximate monthly rent of $106,000 and will expire in April 2000. On average
during the fiscal year ended March 31, 1999, approximately 73,000 square feet of
this office space was sublet.
We lease a facility located in Plano, Texas the former location of our
manufacturing and distribution operations, consisting of approximately 24,000
square feet. The lease on this space expires in December 2002 and monthly rent
is approximately $9,975. All of this space has been sublet following the sale of
our single-user modem operations.
We also lease approximately 21,000 square feet of office space in
Marietta, Georgia. This lease expires in January 2000 and the monthly rent is
approximately $18,000. Approximately 16,000 square feet is sublet through the
end of the lease. We also lease one sales office in Canada.
We believe that the committed space is adequate for our current needs
and that additional space sufficient to meet our needs for the foreseeable
future is available on commercially reasonable terms. We have incurred no
significant expenses to date related to the compliance with a variety of
environmental regulations to which our facilities are subject.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we may be involved in legal
proceedings from time to time. As of the date of this submission, OneWorld
Systems, Inc. is not a party to any material litigation and is not aware of any
material pending or threatened litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the
fourth fiscal quarter ended March 31, 1999.
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<PAGE> 11
- --------------------------------------------------------------------------------
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.
Our Common Stock is traded on the Over the Counter Bulleting Board
("OTCBB") under the symbol "OWLD." We have not paid dividends to date on our
Common Stock, and we do not anticipate paying any cash dividend on the Common
Stock in the foreseeable future. On June 23, 1999 we announced that stockholders
approved and the Board of Directors subsequently adopted a one-for-ten reverse
split effective July 6, 1999. The following table sets for the range of high and
low closing prices for the Common Stock, retroactively adjusted for the reverse
split:
<TABLE>
<CAPTION>
Low Sales Price High Sales Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Fiscal 1999
First Quarter $ 5.63 $ 12.19
Second Quarter 2.81 7.19
Third Quarter 1.25 5.00
Fourth Quarter 1.56 5.31
Fiscal 1998
First Quarter $ 14.38 $ 46.25
Second Quarter 16.88 35.63
Third Quarter 10.00 35.75
Fourth Quarter 9.06 27.19
</TABLE>
On March 31, 1999, there were approximately 325 holders of record of
the Company's Common Stock. This number does not include beneficial owners of
Common Stock whose share are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
-11-
<PAGE> 12
ITEM 6 SELECTED FINANCIAL DATA
The following selected financial information for the years ended March
31, 1995 through March 31, 1999 is derived from our consolidated financial
statements, which have been audited by our independent auditors. The information
set forth below is qualified by reference to and should be read in conjunction
with the Consolidated Financial Statements and related noted 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,
-------------------------------------------------------------------
In thousands, except per share data 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(2)
Net revenue $ 13,067 $ 61,468 $ 90,174 $ 136,941 $ 80,021
Income (loss) from operations (11,548) (8,973) (42,029) 16,154 (3,239)
Income (loss) from continuing operations (5,152) (4,709) (35,852) 12,148 (6,206)
Income (loss) from discontinued operations(1) 90 1,331 (4,029) (3,312) (1,466)
Net income (loss) (5,062) (3,378) (39,881) $ 8,836 $ (7,672)
Basic earnings per share:(3)
Income (loss) from continuing operations $ (2.90) $ (2.77) $ (21.29) $ 7.35 $ (4.24)
Net income (loss) $ (2.85) $ (1.99) $ (23.68) $ 5.35 $ (5.24)
Shares used in computing income (loss) per share 1,779 1,701 1,684 1,653 1,463
Diluted earnings per share:(3)
Income (loss) from continuing operations $ (2.90) $ (2.77) $ (21.29) $ 6.80 $ (4.24)
Net income (loss) $ (2.85) $ (1.99) $ (23.68) $ 4.95 $ (5.24)
Shares used in computing income (loss) per share 1,779 1,701 1,684 1,786 1,463
BALANCE SHEET DATA
Working capital (deficit) $ 9,100 $ 233 $ (3,760) $ 36,402 $ 28,468
Total assets 12,128 17,973 35,200 72,035 53,722
Total liabilities 2,592 13,628 27,850 24,204 17,587
Stockholders' equity $ 9,536 $ 4,345 $ 7,350 $ 47,831 $ 36,135
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The selected financial data has been derived from, and should be read in
conjunction with, the related Consolidated Financial Statements.
(1) In the second quarter of fiscal 1997, the Company adopted a
formal plan to discontinue the operations of its enterprise
network server operation in the United Kingdom (formerly the
Company's ISDN Division). Therefore the results for the ISDN
division are classified as discontinued operations on the
Company's Consolidated Statements of Operation, and prior
periods have been restated accordingly.
(2) In the first quarter of fiscal 1999, the Company sold its
single-user modem operations and refocused its efforts on
communication server products. Results of operations prior to
and including June 1998 are primarily related to the Company's
former single user modem business. Financial results after that
date are primarily attributable to the Company's new
communications server product offerings.
(3) On June 23, 1999, we announced that our stockholders approved
and the Board of Directors subsequently adopted a one-for-ten
reverse split effective July 6, 1999. Earnings per share data
has been retroactively restated to adjust for the effect of the
reverse split.
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<PAGE> 13
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IMPORTANT NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions
identify such forward-looking statements. These forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward-looking statements. Such risks
and uncertainties include those set forth in Part II, Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the subheading "Additional Risk Factors that Could Affect Operating Results and
Market Price of Stock." Unless required by law, the Company undertakes no
obligation to update publicly any forward-looking statements.
OVERVIEW
OneWorld Systems, Inc. was founded in 1989 and incorporated in Delaware
as Global Village Communication, Inc. We develop and manufacture products that
enhance and simplify wide-area data communications for the small and medium
sized office market. Our OneWorld 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.
On June 18, 1998 we completed the sale of substantially all of the
assets of our single user modem product offerings, including related accounts
receivable, inventory, equipment, intellectual property, and other production
and research and development assets to Boca Research, Inc. ("Boca"). At that
time, we changed our corporate strategy to focus on wide-area data
communications for small and medium sized offices and changed our name to
OneWorld Systems, Inc.
Until June 18, 1998 we were actively engaged in the single-user modem
business, where we were considered a leader in the design, development and
marketing of easy-to-use integrated communications products for personal
computers with Windows, Macintosh, OS/2 or DOS operating systems.
We are now entirely focused on our new family of communications
server products targeted to the small and medium sized office market. These
server products combine Internet access and routing, remote access, fax and
shared modem capabilities in a single, easy-to-use product. These products,
known as the OneWorld family of Network Communications Servers, were announced
on June 8, 1998, and began shipping in September 1998. Our primary source of
revenue is now from these products. Revenue from this product line is dependent
upon the commercial acceptance of the products, which in turn depends on
continued development and technical enhancement of the product, sales and
marketing efforts, technical reviews by independent parties, introductions of
new technologies, performance of our valued added resellers, distributors and
suppliers, and announcements by competitors, among other factors. There can be
no assurance we will be successful in our ongoing development efforts or able to
introduce technical enhancements and/or new features and functionality in a
timely manner. Failure to do so could result in lower customer acceptance of our
products and result in our products falling behind competitors' product
capabilities, which would have a material adverse effect on sales of our
products. Many of our competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base than we do. To sell our new
communications server products will require us to significantly expand our value
added reseller distribution channel which is different from that of our former
single-user modem product business. There can be no assurance that we will be
successful in the continuing development and maintenance of an effective
distribution channel for our new products. There can be no assurance that the
marketplace will accept our communications server products. If the sales of our
new products are below expectations, our business, financial condition and
results of operations will be materially adversely affected.
With the reliance on revenues from our new communications server
products and our projected expense levels, we do not anticipate profitability in
the short-term. In addition, our industry in continually faced with the threat
of pricing pressure, which could lead to reductions in the average sales prices
for our products and could have a materially adverse affect on gross margins.
There is no assurance that we will ever achieve profitability.
Though we continually seek to further enhance our product offerings and
to develop new products, there can be no assurance that these development
efforts will result in enhanced or timely new product introductions.
Furthermore, there is no certainty that any enhancements or new products will
achieve market acceptance. With the announcement of new or enhanced products
that could potentially replace current products, customers may defer purchasing
currently available products, which could have a materially adverse affect on
our results of operations. Although we write off inventory that is
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<PAGE> 14
considered excess or obsolete, there can be no assurance that the recorded
allowances for such write-offs will be adequate. A material increase in such
write-offs and returns over our expectations could have a material adverse
effect on our results of operations.
In March 1999 we completed a financing pursuant to a Unit Purchase
Agreement, whereby we received $10.1 million in exchange for the issuance of
8,060,000 (806,000 giving effect to the one-for-ten reverse split effective July
6, 1999) shares of Common Stock and 3,100,000 shares of Preferred Stock.
Investors included certain affiliates of Integral Capital Partners, certain
affiliates of Hambrecht and Quist, and Kevin Compton, a member of the Board of
Directors.
On June 22, 1999 our stockholders approved the proposed amendment to
our Certificate of Incorporation to effectuate either a one-for-seven,
one-for-ten, or one-for-fourteen reverse stock split. On June 23, 1999, our
Board of Directors subsequently adopted a one-for-ten reverse split ratio
effective July 6, 1999. The effect of the reverse split has been accounted for
where indicated throughout this document.
RESULTS OF OPERATIONS
The following table sets forth the percentages of revenues represented
by certain items in the Company's Consolidated Statements of Operations for the
periods indicated:
<TABLE>
<CAPTION>
Fiscal year ended March 31,
-----------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue 100.0 % 100.0 % 100.0 %
Cost of revenue 75.4 68.7 89.2
-----------------------------
Gross profit 24.6 31.3 10.8
-----------------------------
Operating expenses
Research and development 41.2 15.8 13.3
Marketing and sales 42.4 22.6 32.0
General and administrative 26.2 7.1 8.2
Restructuring costs 3.1 0.4 1.4
Loss from investment in GlobalCenter, Inc. -- -- 2.4
-----------------------------
Total operating expenses 113.0 45.9 57.4
-----------------------------
Loss from operations (88.4) (14.6) (46.6)
-----------------------------
Other income, net 48.8 6.9 0.9
-----------------------------
Loss before income taxes (39.6) (7.7) (45.7)
Income tax benefit 0.2 -- 6.0
-----------------------------
Loss from continuing operations (39.4) (7.7) (39.8)
-----------------------------
Income (losss) from discontinued operations 0.7 2.2 (4.5)
-----------------------------
Net loss (38.7) (5.5) (44.2)
-----------------------------
</TABLE>
NET REVENUE
On June 18, 1998, the Company sold its single-user modem operations to
Boca Research, Inc. This operation accounted for substantially all of the
Company's revenues in the current and previous fiscal years. Consequently, the
comparisons below should not be relied upon as predictors of future performance.
Net revenues include revenue from gross shipments, licenses and
royalties, less returns and allowances.
<TABLE>
<CAPTION>
Fiscal year ended March 31,
------------------------------
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Total net revenue $13,067 $61,468 $90,174
Percentage decrease compared to prior fiscal year -79% -32%
- ----------------------------------------------------------------------------------
</TABLE>
The decrease in net revenue for fiscal 1999 as compared to fiscal 1998
was primarily attributable to our sale of the modem operation. We sold no modem
business products after the close of the transaction with Boca on June 18, 1998.
Net revenue for fiscal year 1999 was comprised of the sale of single-user modem
products though June 18, 1998, our retained legacy products, including FaxWorks
Pro LAN products which were formally discontinued during the quarter ended
December 31, 1998, and the new OneWorld Network Communications Servers. The
decrease in net revenue for fiscal 1998 as compared to the fiscal 1997 is
primarily attributable to decreased shipments of our Teleport and PC Card
notebook (including PowerPort) modem products subsequently sold to Boca.
-14-
<PAGE> 15
Aggregate returns and allowances were approximately 10%, 10% and 18% of
gross revenues for fiscal years 1999, 1998 and 1997, respectively. Returns
remained flat from fiscal 1998 to 1999, the reduction from fiscal 1997 to 1998
was primarily due to unusually high rates of returns and reserves for several
slow moving products. We established reserves and allowances to estimate future
returns due to end-user returns, stock balancing and discontinued and
non-saleable products based on the Company's past experience and internal
forecasts. Until such time that we have sufficient experience to accurately
estimate product returns for our new OneWorld Network Communications Servers, we
will defer revenue recognition until cash payment is received. 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 revenues decreased to $6.1 million in fiscal 1999 from
$9.3 million in fiscal 1998 and from $13.3 million in 1997. As percentage of net
revenue, international revenue increased to 46% in 1999 from 15% in 1998 and 15%
in 1997. The increase in the relative proportion of international revenue in
fiscal 1999 is due to large international OEM shipments to Apple Computer of
modem products prior to the sale of the single-user modem operations. The
absolute decrease in international revenue is primarily due to the sale of our
single-user modem business on June 18, 1998. We are focusing on sales of our
new servers in the United States and Canada only. Therefore, we anticipate a
decrease in the proportion of significant international net revenues in the near
future. There can be no assurance that we will be able to attain international
demand for the new OneWorld Network Communications Server products or that our
distributors will be able to effectively meet that demand. The preceding
sentence discussing the anticipated levels of international revenue is a
forward-looking statement, and international net revenues could differ
materially, due to the risks disclosed in Part II, Item 7, under the heading
"Additional Risk Factors That Could Affect Operating Results and Market Price of
Stock".
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. Our gross profit as a percentage of net revenue was:
Fiscal year ended March 31,
----------------------------------
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------
Net revenue $13,067 $61,468 $90,174
Cost of revenue 9,850 42,204 80,439
----------------------------------
Gross profit $ 3,217 $19,264 $ 9,735
----------------------------------
Gross profit percentage of net revenue 25% 31% 11%
----------------------------------
The gross profit margin decrease between fiscal year 1999 compared to
fiscal year 1998 was primarily attributable to price reductions on certain of
our single-user 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.
The gross profit increase from 11% in fiscal 1997 to 31% in fiscal 1998 was
primarily attributable to significant inventory reserves for slow moving
products and inventory write-downs recorded in 1997. 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 a percentage of revenue
changes in component and production costs, price reductions and reserve
requirements. We anticipate gross profit margin as a percentage of revenue in
the future will be higher than historical levels due to the higher gross profit
margin as a percentage of revenue realized on our new OneWorld Network
Communications Servers. The proceeding sentence discussing future gross profit
margins is a forward looking statement, and profit margins could differ
materially, due to the risks disclosed in Part II, Item 7, under the heading
"Additional Risk Factors That Could Affect Operating Results and Market Price of
Stock".
-15-
<PAGE> 16
EXPENSES
Operating expenses were comprised of the following:
<TABLE>
<CAPTION>
Fiscal year ended March 31,
-------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------- ------------------------ -----------------------
% of net % of net % of net
$ revenue $ revenue $ revenue
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Research and development $ 5,386 41.2% $ 9,727 15.8% $12,008 13.3%
Marketing and sales 5,545 42.4 13,900 22.6 28,900 32.0
General and administrative 3,430 26.2 4,370 7.1 7,367 8.2
Restructuring costs 404 3.1 240 0.4 1,298 1.4
Loss from investment in GlobalCenter, Inc. -- -- -- -- 2,191 2.4
------- ------- -------
Total operating expenses $14,765 $28,237 $51,764
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
RESEARCH AND DEVELOPMENT
Research and development expenses for fiscal 1999 decreased 45%
compared to fiscal 1998. The decrease in research and development expenses is
primarily related to reductions in headcount and manufacturing support costs
resulting from the sale of our single-user modem operations to Boca. The decline
in fiscal year 1998 from fiscal 1997 was primarily the result of a reduction in
personnel costs and increased control of discretionary expenditures. 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
concurrent with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized to date.
MARKETING AND SALES
Marketing and sales expenses decreased 60% between fiscal 1999 and
fiscal 1998, and decreased 52% between fiscal 1998 with fiscal 1997. 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 single-user modem operations to Boca Research. The fiscal
1998 decline was also attributed to a reduction in advertising and promotion
expenses and personnel costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 21% between fiscal 1999
and fiscal 1998 and 41% between fiscal 1998 and fiscal 1997. The fiscal 1999
decrease was primarily attributable to a reduction in personnel costs associated
with the sale of the single-user modem operations. The 1998 decrease in
expenditures was primarily the result of a reduction in legal, bad debt,
telecommunications, and certain discretionary expenditures.
RESTRUCTURING COSTS
On March 31, 1998, we announced a fundamental shift in business
strategy to focus our efforts on our new line of communications servers for
small and medium size offices and a change of our name to OneWorld Systems, Inc.
At that time, we recorded a net restructuring charge of $240,000 to provide for
severance costs associated with a reduction in force of approximately 25
employees. During the first fiscal quarter of 1999, the Company recorded an
additional restructuring charge of approximately $404,000 related primarily to
severance costs for 8 employees ($247,000), rent and facilities costs ($88,000),
and fixed asset impairments ($69,000) associated with the transition to OneWorld
Systems. At March 31, 1999 the accrued restructuring costs balance associated
with the March 1998 restructuring was approximately $82,000 and relates
primarily to the remaining lease payment of the Plano, Texas facility.
-16-
<PAGE> 17
NET OTHER INCOME
<TABLE>
<CAPTION>
Fiscal year ended March 31,
--------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------- ------------------------ ------------------
% of net % of net % of net
$ revenue $ revenue $ revenue
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C>
Gain on sale of modem business $ 6,175 47.3% $ -- --% $ -- --%
Gain on sale of investment in GlobalCenter, -- -- 3,691 6.0 -- --
Loss on sale of investment in AirMedia, Inc. -- -- (2,074) -3.4 -- --
Interest income 215 1.6 87 0.1 411 0.5
Interest expense (30) -0.2 (154) -0.3 (248) -0.3
Repayment of loan previously reserved -- -- 2,600 4.2 -- --
Other income 14 0.1 114 0.2 613 0.7
-------------------------------------------------------------------------
Total other income, net $ 6,374 48.8% $ 4,264 6.9% $ 776 0.9%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SALE OF MODEM BUSINESS
On June 18, 1998, we completed the sale of our modem operations to Boca
Research, Inc. During the quarter ended June 30, 1998, we recorded a net gain of
$6.128 million and during the quarter ended March 31, 1999 recorded an
additional gain of $47,000 representing the release of reserves for
contingencies determined to be fully resolved. The full effect of the sale of
the modem operations to Boca was a net gain of $6.175 million.
Included in the sale were substantially all of our assets related to
our single-user modem and software product offerings. Additionally, we issued to
Boca Research a five year Warrant to purchase up to 425,000 (42,500 giving
effect to the one-for-ten reverse split) shares of our Common Stock at
approximately $1.00 ($10.00 giving effect to the reverse split) per share. In
consideration for these assets, Boca assumed certain of our 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, which was recorded at
$5.855 million. The difference between the recorded value and the face value of
the note was recognized as interest income over the life of the note. As of
March 31, 1999, we received payments of interest and principal of $5.8 million.
The remaining balance due of $200,000 was offset against an equal amount due
Boca by us pursuant to an agreement between the parties made at the time sale of
the modem business was completed.
The assets purchased by Boca included products which represented the
overwhelming majority of our revenues and gross profit. These products did not
contribute to our reported net revenue or gross profit after June 18, 1998. For
the year ending March 31, 1999, these products accounted for approximately 94%
of our reported net revenue and 87% of reported gross profit, and for the year
ended March 31, 1998, these products accounted for approximately 95% of our
reported net revenue and approximately 88% of reported gross profit.
SALE OF INVESTMENT IN AIRMEDIA LIVE, INC.
In the second quarter of fiscal 1997, we completed an equity investment
in AirMedia, Inc. ("AirMedia") of $4.1 million. We accounted for this investment
in AirMedia using the cost method of accounting. In July 1997, we sold
substantially all our investment in AirMedia to an existing AirMedia shareholder
for approximately $2.0 million in cash. As a result, we recorded a loss of $2.1
million in the second quarter of fiscal 1998.
SALE OF INVESTMENT IN GLOBALCENTER, INC.
In April 1996, we announced that we had incorporated our Internet
Services Division as a standalone business called GlobalCenter, Inc. At the same
time, we announced that UUNET Technologies, Inc. had acquired a 19.9% equity
interest in GlobalCenter. At that time, we no longer had the ability to exercise
significant control over GlobalCenter. Accordingly, we no longer consolidated
the results of GlobalCenter and began to account for our 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, we recorded
an investment loss of $2.2 million, and reduced the book value of our 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 our percentage ownership below 10%. Accordingly,
in the third quarter of fiscal 1997, we began accounting for our investment in
GlobalCenter using the cost method of accounting. In September 1997, we agreed
to sell our remaining equity stake in GlobalCenter to an existing shareholder of
GlobalCenter for approximately $3.7 million in cash. As a result we recorded a
gain of $3.7 million in the second quarter of fiscal 1998.
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<PAGE> 18
OTHER NET INCOME
Other net income earned during the fiscal year ended March 31, 1999
consisted primarily of imputed interest income on the note receivable from Boca.
In addition to the net gain on investments earned in fiscal 1998, other net
income included a $2.6 million repayment on a loan made by us which had
previously been fully reserved. The fluctuation in interest income between the
years presented is the result of lower cash balances and increases in line of
credit borrowings during fiscal year 1998 and the interest earned on the note
receivable from Boca during fiscal 1999.
PROVISION FOR INCOME TAXES
The combined federal, state and foreign effective income tax rates for
continuing operations were 0% in fiscal 1999, 0% in fiscal 1998, and 13% in
fiscal 1997. The rates differ from the combined statutory rates primarily due to
the establishment of a full valuation allowance against the deferred tax assets.
DISCONTINUED OPERATIONS
We adopted a formal plan to discontinue our enterprise network server
operation based in the United Kingdom in the second fiscal quarter of 1997. The
disposition of the operation was accounted for as a discontinued operation in
accordance with Accounting Principles Board (APB) Opinion No. 30, and
accordingly, we restated all prior period consolidated financial statements to
reflect the discontinuance of the operation. The gain of $90,000 (no income tax
effect) in fiscal year 1999 represents the reversal of certain accruals for
estimated disposal costs which were not incurred. The gain of $1.3 million (no
income tax effect) reported in fiscal year 1998 is the result of a release of a
reserve established for contingent liabilities associated with the disposition
of the operation. We determined that those particular contingencies reserved had
been resolved.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and short-term investments totaled $11.2 million at March 31,
1999, representing 92% of total assets. This represents an increase of $8.1
million from March 31, 1998, when cash and short-term investments totaled $3.1
million, or 17% of total assets.
Working capital was $9.1 million at March 31, 1999 and $0.2 million at
March 31, 1998, an increase of $8.9 million. The increase in working capital was
primarily due to the Company's sale of its single-user modem operations to Boca
in June 1998 and an investment of $10.1 million pursuant to a Unit Purchase
Agreement between the Company and certain investors, completed in March 1999.
Since last fiscal year end, we have used approximately $11.7 million in
cash to finance both our continuing and discontinued operations. At March 31,
1999, our principal source of liquidity was $11.2 million in cash and short term
investments. We do not expect fiscal 2000 capital expenditures to exceed
historical levels.
Our primary source of revenue in the future will be derived from our
OneWorld Network Communications Servers. During the past year, we have
experienced significant negative cash flows from operations. Revenue from our
new products have not yet reached levels sufficient to offset operating
expenses. As such, we do not expect to be profitable in the short-term and
expect to continue to incur significant negative cash flows from operations.
However, we currently believe that existing cash and revenue for the new server
products should enable us to meet our 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, due to the risks disclosed
in Part II, Item 7, under the heading "Additional Risk Factors That Could Affect
Operating Results and Market Price of Stock". Failure to meet our expectations
for revenue and gross profit from our new products, operating expenses in excess
of expectations, or other unforeseen expenditures would have a material adverse
impact on our financial condition. We may be required to issue additional debt
or equity securities which could substantially dilute the ownership of existing
stockholders. Any shortfall in funding could result in us having to curtail the
introduction or development of new products and our entry into new markets, any
of which could have a material adverse affect on our business, financial
condition and results of operations.
-18-
<PAGE> 19
YEAR 2000 ISSUES
We are aware of the potential risk of Year 2000 software failures. We
have commenced, but not yet completed, our evaluation of the Year 2000 issue,
and are in the process of identifying the areas in which we may have exposure in
the systems utilized by us to operate our business, systems used by key
suppliers and customers, and products we produce.
In fiscal 1999, we assessed the impact of Year 2000 issues on our
internal systems and determined that components of our corporate information
system would not accommodate dates after 1999. During the first quarter of the
fiscal year ending March 31, 2000, we completed an upgrade to this system which
we believe will ensure that it is Year 2000 compliant. In addition, we have
determined that certain of our telecommunications systems and desktop computer
applications programs are not Year 2000 compliant and will have to be upgraded
or replaced. We are in the process of implementing a corrective plan of action.
Concurrent with performing the above steps, we will make certain
investments in systems, applications and products to address Year 2000 issues.
We have not tracked internal resources dedicated to the resolution of the Year
2000 issue and, therefore, are unable to quantify internal costs incurred to
date that are associated with the Year 2000 issue. We have, however, hired
external consultants to resolve internal information system issues related to
the resolution of the Year 2000 issue. No identifiable expenditures for these
consultants were incurred through March 31, 1999. Approximately $75,000 of
consulting fees related to the upgrade of our internal information system will
be recorded during the first fiscal quarter of 2000. Expenditures to resolve
Year 2000 issues are not expected to be material, and are expected to be funded
through cash generated from operations.
We are also in the process of reviewing our Year 2000 exposure from our
customers, suppliers and other business partners. There can be no assurance that
all the systems of our customers, suppliers and other business partners will be
Year 2000 compliant on a timely basis, or at all. If these third parties'
systems are not compliant, we could experience delays in customers' orders or in
obtaining supplies, materials and finished products from our vendors, which
could have a material adverse affect on our business, financial condition and
results of operations.
We have commenced efforts to ensure that all products that we currently
produce will be fully Year 2000 compliant. We believe that hardware related Year
2000 problems have been identified and resolved. Preliminary internal testing of
our software has been completed with no issues detected. We do, however, intend
to hire external consultants to conduct more comprehensive formal testing of our
software products which may reveal Year 2000 issues which we have not identified
thus far. We believe that any costs incurred to bring our products into
compliance will not have a material impact on our financial position, results of
operation or cash flows. Despite our efforts in the worst-case scenario,
non-Year 2000 compliant products could result in the loss of or delay in market
acceptance of our products, which would likely result in a material adverse
effect upon our business, financial condition and results of operations. If such
a scenario were to occur, our contingency plan would be to work internally and
with outside consultants as needed to make such products Year 2000 compliant as
soon as possible. There can be no assurance, however, that such contingency plan
will provide an effective solution to any such Year 2000 issues in a timely
manner, or at all.
Our plan to complete our Year 2000 modifications is based upon
management's best estimates, which were derived utilizing numerous assumptions
of future events, including continued availability of certain resources and
other factors. There can be no assurance that these estimates will be achieved,
and actual results could differ materially from those plans. Specific factors
that might cause such material differences included the availability and cost
of personnel trained in this area, and the ability to locate and correct all
relevant computer codes.
SUBSEQUENT EVENTS
On June 22, 1999, at a special meeting, our stockholders approved the
proposed amendment to our Certificate of Incorporation to effectuate either a
one-for-seven, one-for-ten, or one-for-fourteen reverse stock split. On June 23,
1999 our Board of Directors set a reverse split ratio of one-for-ten effective
July 6, 1999. The effect of the reverse split has been accounted for where
indicated throughout this document. The effect of the reverse split will also
trigger the automatic conversion of 50% of the outstanding Series A Preferred
Stock.
ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET PRICE OF
STOCK
In addition to the other information in this Annual Report, one should
carefully consider the following factors in evaluating us.
PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
We believe that our future success will depend on our ability to
enhance our current products and develop new products on a timely and cost
effective basis that meet changing customer needs and respond to emerging
industry standards and other technological changes. In particular, we must adapt
our products to the evolving technological standards of the various computer
platforms and new technical standards resulting from increases in data
transmission speed and Internet technology evolution. Any failure to anticipate
or respond adequately to changes in technology and customer preferences or any
significant delay in product development or introduction would have a material
adverse effect on our results of operations. Due in part to the factors
described above, we are subject to the risk that inventories may rapidly become
obsolete or that the quantities carried of certain products exceed current or
projected demand. In addition products as complex as those offered by us may
contain undetected errors or defects when first introduced or as new versions
are released. There can be no assurance that, despite our testing and trials by
current and potential customers, errors will not be found in new products after
commencement of commercial shipments resulting in a delay in market acceptance
or a recall of such products.
MARKET ANTICIPATION OF NEW PRODUCTS OR TECHNOLOGIES
Since the environment in which we operate is characterized by rapid new
product and technology introductions and generally falling prices for existing
products, our customers may from time to time postpone purchases in anticipation
of such
-19-
<PAGE> 20
new product introductions or lower prices. If the market views such anticipated
changes as significant, then this may have the effect of temporarily slowing
overall market demand and adversely impacting our operating results.
COMPETITION
The market for our products is intensely competitive and is
characterized by rapidly changing technology, evolving industry communication
standards and frequent new product introductions. A number of competitors,
including Cisco Systems, Shiva, 3Com and Castelle, among others, offer products
that compete with one or more of our communications server products. Our fax
server products compete primarily with dedicated fax servers, stand-alone fax
machines, electronic mail, and centralized fax systems and software produced by
independent manufacturers such as Castelle, AVT and Omtool. Our remote access
servers compete with products from Shiva (recently acquired by Intel), 3Com, and
others who provide dedicated remote access servers and modem pools. Our Internet
access and routing servers compete with competitors such as Cisco and 3Com and
many others who provide a wide range of Internet access devices for all sizes of
companies. In addition, these products also compete with a number of smaller
competitors who are focused on the small to medium sized business market,
including Ramp Networks, Netopia and others. Other companies in the personal
computer industry, such as modem vendors, remote access server vendors,
communications software vendors, fax machine manufacturers and personal computer
manufacturers, could seek to expand their product offerings by designing and
selling products using competitive technology that could render obsolete or have
a material adverse effect on sales of future products.
Many of our competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base, than we. In addition, the market for our
server products can be subject to significant price competition. We may face
increasing pricing pressures from current competitors. Accordingly, there can be
no assurance that we will be able to provide products that compare favorably
with the products of competitors or that competitive pressures will not require
us to further reduce prices. Any material reduction in our products' prices
could negatively affect gross profit as a percentage of net revenue and could
require us to increase unit sales in order to maintain net revenue. There can be
no assurance, however, that we would be able to increase unit sales or make up
for a shortfall. Any failure to increase unit sales or make up for a shortfall
in net revenue would have a material adverse effect on our financial condition
and results of operations.
DEPENDENCE ON MANUFACTURERS
We purchase fully manufactured and tested units from a "turnkey"
manufacturing subcontractor. We believe that although there are a number of
alternative contract manufacturers that could produce our products, it could
take a significant period of time and result in significant additional expense
to qualify an alternative subcontractor and commence manufacturing in the event
of a reduction or interruption of production. Therefore, we are highly
dependent, on a short-term basis, on the continued relationship with our
"turnkey" manufacturing subcontractor and any reduction, interruption, or
termination of this relationship could have a material adverse effect on our
operating results. Components and manufacturing services are obtained from our
supplier on an as-needed basis.
We have been, and will continue to be, dependent on sole or limited
source suppliers for certain key components used in our products, particularly
chip sets designed and manufactured by Rockwell International and Motorola. We
generally purchase sole or limited source components pursuant to purchase orders
placed from time to time in the ordinary course of business and have no
guaranteed supply arrangements with any sole or limited source suppliers.
Certain component suppliers, such as Rockwell, are also modem manufacturers and,
accordingly, could elect to satisfy their internal supply requirements rather
than fulfill our purchase requirements. In the past we have experienced delays
in product development and difficulties in manufacturing sufficient product to
meet demand due to the inability of certain suppliers to meet our requirements
for key components, and failure to meet such requirements in the future could
have a material adverse effect on our results of operations.
RELIANCE ON VALUE ADDED RESELLERS
We distribute our 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. We intend to increase the number of participating value added resellers
by implementing recruiting, training and support programs aimed at these
resellers. There can be no assurance that the Company will be successful in
attracting new value added resellers to distribute our products, or that this
distribution channel will be a successful one for us. Failure to attract new
value added resellers or their inability to sell the products would cause our
sales to fall below expectations, and our business, financial condition and
results of operations would be materially adversely affected.
-20-
<PAGE> 21
DEPENDENCE ON KEY PERSONNEL
Our future success depends to a significant extent on our senior
management and other key employees, including key development personnel. The
loss of the services of any of these individuals or group of individuals could
have a material adverse effect on our results of operations. We also believe
that our future success will depend in large part on our ability to attract and
retain additional key employees. Competition for such personnel in the computer
industry is intense, and there can be no assurance that we will be successful in
attracting and retaining such personnel. If we were to fail to replace or retain
our key employees or attract additional key employees, our results of operations
could be materially adversely effected.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We rely primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our proprietary rights. We have no patents or patent applications pending. We
seek to protect our hardware, software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. We seek to protect our brand names under trademark and unfair
competition laws. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or to obtain
and use proprietary information. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
There can be no assurance that our means of protecting our proprietary rights
will be adequate or that competitors will not independently develop similar
technology.
Due to the rapid pace of innovation within the communications software
industry, we believe that success in technological leadership is likely to
depend more upon the technological, creative, and marketing skills of our
personnel, our continued innovation, and customer support than on the various
legal means of protecting existing technology.
We are aware of products or services in addition to our own that are
currently marketed under the trademark "OneWorld". There can be no assurance
that litigation with respect to these trademarks will not be instituted by any
third parties. If any such litigation were successful, we could be required to
pay damages and cease all use of a particular trademark. There can be no
assurance that any loss of the right to use a trademark would not reduce sales
of our product. In any event, even if we were successful in any such litigation,
the associated legal and other costs could be substantial. As is customary in
our industry, we from time to time receive communications from third parties
asserting that our products infringe, or may infringe, the proprietary rights of
third parties or seeking indemnification against such infringement. There can be
no assurance that any such claims would not result in protracted and costly
litigation.
VOLATILITY OF STOCK PRICE
The market price of our Common Stock has been volatile and trading
volumes have been relatively low. Factors such as variations in the our revenue,
operating results and cash flow and announcements of technological innovations
or price reductions by us, our competitors, or providers of alternative products
could cause the market price of our Common Stock to fluctuate substantially. In
addition, the stock markets have experienced significant price and volume
fluctuations that have particularly affected technology-based companies and
resulted in changes in the market prices of the stocks of many companies that
have not been directly related to the operating performance of those companies.
Such broad market fluctuations may adversely affect the market price of our
Common Stock.
Effective February 25, 1999 we were delisted from the Nasdaq National
Market(R). Our Common Stock is currently is traded on the Over the Counter
Bulleting Board ("OTCBB"). Because of the structure of this market, our Common
Stock may be subject to an increase in stock price volatility.
ANTI-TAKEOVER PROVISIONS
Our Board of Director's has the authority to issue up to 5,000,000
shares of Preferred Stock (of which 3,100,000 shares have been issued and are
outstanding) and to determine the price, rights, preferences and privileges of
those shares without any further vote or action by the stockholders. The rights
of the holders of our Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. While we have no present intention to issue additional shares of
Preferred Stock, any such issuance could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of ours. In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which could have the effect
of delaying or preventing a change of control of us. Furthermore, certain
provision of our Certificate of Incorporation may have the effect
-21-
<PAGE> 22
of delaying or preventing changes in control or our management, which could
adversely affect the market price of the our Common Stock.
UNCERTAIN INTERNATIONAL DEMAND
We are concentrating sales of our new OneWorld Network Communications
Servers only in the United States and Canada and currently have no near term
plans for addressing other international markets for these products. If we were
to offer our OneWorld Network Communications Servers internationally, there
can be no assurance that we will be able to attain international demand for our
products or that our distributors will be able to effectively meet that demand.
Risks inherent in our international business activities generally include
unexpected changes in regulatory requirements, tariffs and other trade barriers,
costs and risks of localizing products for foreign countries, longer accounts
receivable payment cycles, difficulties in managing international operations 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 our intellectual
property to the same extent as do the laws of the United States.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from interest rate changes, foreign currency
fluctuations, and changes in the market values of our investments.
INTEREST RATE RISKS.
We invest our excess cash in debt instruments of the U.S. Government
and its agencies, and in high-quality corporate issuers and, by policy, limit
the amount of credit exposure to any one issue. We attempt to protect and
preserve our invested funds by limiting default, market and reinvestment risk.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations due to changes in interest rates and we may suffer losses
in principal if forced to sell securities that have declined in market value due
to changes in interest rates.
The effect of interest rate fluctuations on us in fiscal 1999 was not
material, nor do we currently anticipate it will be so in fiscal 2000.
FOREIGN CURRENCY RISK.
We pay expenses of our international operations in local currencies.
Our international operations are subject to risks typical of an international
business, including, but not limited to: differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors.
We are also exposed to foreign exchange rate fluctuations as they
relate to foreign sales. While our international sales are denominated in US
Dollars, as exchange rates vary, the effective price, that is the price as
translated into local currency, of our product to a foreign customer may vary.
This change in price could in turn impact the overall level of our foreign
sales, or cause us to adjust our US Dollar price to compensate for the change.
Accordingly, our future results could be materially adversely impacted by
changes in these or other factors.
The effect of foreign exchange rate fluctuations on us in fiscal 1999
was not material, nor do we currently anticipate it will be so in fiscal 2000.
INVESTMENT RISK.
We currently have no equity investments.
-22-
<PAGE> 23
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(1) CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report ......................................................................24
Consolidated Balance Sheets as of March 31, 1999 and 1998 .........................................25
Consolidated Statement of Operations for the Three Years Ended March 31, 1999 .....................26
Consolidated Statements of Stockholders' Equity for the Three Years Ended March 31, 1999 ..........27
Consolidated Statements of Cash Flow for the Three Years Ended March 31, 1999 .....................28
Notes to Consolidated Financial Statements ........................................................29
(2) CONSOLIDATED FINANCIAL STATEMENTS
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.
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of 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 have also 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 it 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, 1999 and 1998 and the results of their operations and
their cash flows for each of the years in the three-year period
ended March 31, 1999 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.
/s/ KPMG LLP
Mountain View, California
May 4, 1999, except
as to Note 11 which is
as of June 23, 1999
-24-
<PAGE> 25
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
---------------------
(In thousands, except share data) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,175 $ 3,097
Accounts receivable, net 79 8,160
Inventories, net 184 2,351
Other current assets 254 253
------------------------
Total current assets 11,692 13,861
Property and equipment, net 268 4,049
Other assets 168 63
------------------------
Total assets $ 12,128 $ 17,973
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 796 $ 7,625
Accrued and other liabilities 1,796 6,003
------------------------
Total current liabilities 2,592 13,628
------------------------
Stockholders' equity:
Convertible preferred stock, $0.001 par value (involuntary
liquidation preference of $8,304,900); 5,000,000 shares
authorized; 3,100,000 and none issued and outstanding 3 --
Common stock, $0.001 par value; 30,000,000 shares authorized;
2,524,429 and 1,716,277 shares issued and outstanding 25 17
Additional paid-in capital 53,488 43,246
Accumulated deficit (43,980) (38,918)
------------------------
Total stockholders' equity 9,536 4,345
------------------------
Total liabilities and stockholders' equity $ 12,128 $ 17,973
========================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-25-
<PAGE> 26
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
March 31,
----------------------------------------
(In thousands, except per share data) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue $ 13,067 $ 61,468 $ 90,174
Cost of revenue 9,850 42,204 80,439
----------------------------------------
Gross profit 3,217 19,264 9,735
----------------------------------------
Operating expenses:
Research and development 5,386 9,727 12,008
Marketing and sales 5,545 13,900 28,900
General and administrative 3,430 4,370 7,367
Restructuring costs 404 240 1,298
Loss from investment in GlobalCenter, Inc. -- -- 2,191
----------------------------------------
Total operating expenses 14,765 28,237 51,764
----------------------------------------
Loss from operations (11,548) (8,973) (42,029)
----------------------------------------
Other income (expense), net:
Gain on sale of modem business 6,175 -- --
Gain on sale of investments -- 1,617 --
Interest income 215 87 411
Interest expense (30) (154) (248)
Other income 14 2,714 613
----------------------------------------
Total other income, net 6,374 4,264 776
----------------------------------------
Loss before income taxes (5,174) (4,709) (41,253)
Income tax benefit 22 -- 5,401
----------------------------------------
Loss from continuing operations (5,152) (4,709) (35,852)
----------------------------------------
Discontinued operation:
Income (loss) from discontinued operations 90 -- (1,822)
Gain (loss) on disposal of discontinued operations -- 1,331 (2,207)
----------------------------------------
Income (loss) from discontinued operations 90 1,331 (4,029)
----------------------------------------
Net loss $ (5,062) $ (3,378) $(39,881)
========================================
Basic and diluted earnings per share:
Shares used in the computation of net income (loss) per share 1,779 1,701 1,684
========================================
Loss from continuing operations $ (2.90) $ (2.77) $ (21.29)
Income (loss) from discontinued operations 0.05 0.78 (2.39)
----------------------------------------
Net loss $ (2.85) $ (1.99) $ (23.68)
========================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-26-
<PAGE> 27
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Convertible Other Total Total
Preferred Common Paid-in Accumulated Comprehensive Stockholders' Comprehensive
(In thousands) Stock Stock Capital Deficit Income Equity Loss
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1996 $ -- $ 17 $ 43,226 $ 4,341 $ 247 $ 47,831
Exercise of stock options -- -- 575 -- -- 575
Shares sold under Employee
Stock Purchase Plan -- -- 367 -- -- 367
Net loss -- -- -- (39,881) -- (39,881) $(39,881)
Treasury shares acquired -- -- (1,295) -- -- (1,295)
Foreign currency adjustment -- -- -- -- (247) (247) (247)
-----------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1997 $ -- $ 17 $ 42,873 $(35,540) $ -- $ 7,350 $(40,128)
-----------------------------------------------------------------------------------------------
Exercise of stock options -- -- 2 -- 2
Shares sold under Employee
Stock Purchase Plan -- -- 140 -- 140
Net loss -- -- -- (3,378) -- (3,378) (3,378)
Stock issued to settle
compensation liability -- -- 231 -- 231
-----------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 -- $ 17 $ 43,246 $(38,918) $ -- $ 4,345 $ (3,378)
-----------------------------------------------------------------------------------------------
Stock issued under Unit
Purchase Agreement 3 8 10,093 -- -- 10,104
Issue of Stock Warrant
to Boca Research, Inc. -- -- 140 -- -- 140
Shares sold under Employee
Stock Purchase Plan -- -- 9 -- -- 9
Net loss -- -- -- (5,062) -- (5,062) (5,062)
-----------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 $ 3 $ 25 $ 53,488 $(43,980) $ -- $ 9,536 $ (5,062)
===============================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-27-
<PAGE> 28
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
March 31,
-------------------------------------
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,062) $ (3,378) $(39,881)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 760 3,206 3,782
Gain on sale of modem business (6,175) -- --
Loss on disposal of property and equipment 2 11 220
Gain (loss) on investments -- (4,217) 2,191
Deferred income taxes -- -- 3,234
Changes in operating assets and liabilities:
Accounts receivable, net (968) (3,836) 7,913
Inventories, net 35 (280) 3,627
Deferred and prepaid income taxes -- 7,665 (7,665)
Other current assets (62) 90 1,474
Accounts payable 746 (8,346) (1,462)
Accrued and other liabilities (766) (1,578) (174)
Income taxes payable -- -- (335)
-------------------------------------
Net cash used in operating activities of:
Continuing operations (11,490) (10,663) (27,076)
Discontinued operations (184) (57) 2,977
-------------------------------------
Net cash used by operating activities (11,674) (10,720) (24,099)
-------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of modem business 9,800 -- --
Proceeds from sale of (investments in ) investments -- 5,660 (5,591)
Repayment of loan from GlobalCenter -- 2,600 --
Purchases of property and equipment (84) (450) (1,802)
Proceeds from sale of property and equipment 28 113 71
Other assets (105) 75 (386)
Purchases of short term investments -- -- (23,217)
Proceeds from sale of short term investments -- -- 45,036
-------------------------------------
Net cash provided by investing activities 9,639 7,998 14,111
-------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 9 373 942
Proceeds from Unit Purchase Agreement 10,104 -- 0
Borrowings under (repayments of) line of credit -- (4,241) 4,241
Repurchases of Common Stock -- -- (1,161)
-------------------------------------
Net cash provided (used) by financing activities 10,113 (3,868) 4,022
-------------------------------------
Effect of foreign currency translation -- -- (247)
-------------------------------------
Net increase (decrease) in cash and cash equivalents 8,078 (6,590) (6,213)
-------------------------------------
Cash and cash equivalents at beginning of year 3,097 9,687 15,900
-------------------------------------
Cash and cash equivalents at end of year $ 11,175 $ 3,097 $ 9,687
=====================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 206 $ 198 $ 211
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 $ -- $ --
Non-cash net assets contributed to GlobalCenter, Inc. $ -- $ -- $ 643
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-28-
<PAGE> 29
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 1989 and incorporated in Delaware as Global Village
Communication, Inc.), develops and manufactures products that enhance and
simplify wide-area data communications for the small and medium sized office
market. The Company's OneWorld Network Communications Servers are designed to be
versatile, easy-to-use, cost-effective and expandable solutions that combine
Internet access and routing, remote access, modem pool and fax capabilities.
PRINCIPLES OF CONSOLIDATION The accompanying Consolidated Financial Statements
include accounts of the Company and its wholly owned subsidiaries. All
intercompany accounts have been eliminated in consolidation.
USE OF ESTIMATES The preparation of consolidated financial statements in
conformity with generally accepted accounting principles required 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 of
less at the time or purchase. Cash equivalents amounted to $10.5 million and
$601,000 as of March 31, 1999 and March 31, 1998, respectively.
INVENTORIES Inventories are stated at the lower of cost or market. Costs are
calculated using a standard cost, which approximates the lower of actual cost on
a 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 value of cash, cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair values due to the short maturity of those instruments.
PRODUCT WARRANTY The Company warrants its products for up to three years from
the date of purchase. A provision for the estimated future costs of warranty
repair or replacement is provided at the time of sale.
REVENUE RECOGNITION Revenue from the Company's new network communications server
products 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 a limited right of
return. Until such time as the Company has sufficient experience to accurately
estimate product returns for its new servers, the Company will defer revenue
recognition until cash payment is received.
SOFTWARE DEVELOPMENT COSTS Development costs incurred in the research and
development of new or enhanced software products are expensed as incurred
until technological feasibility has been established. Through March 31, 1999,
software development efforts have been substantially completed concurrent with
the establishment of technological feasibility, and, accordingly, no costs have
been capitalized to date.
ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has elected to adopt only
the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation" by which the Company provides pro forma disclosures of results and
results per share of the fair market value method of accounting for employee
stock-based compensation. As allowed by SFAS 123, the Company will continue to
account for employee stock-based compensation using the intrinsic value method
of accounting.
-29-
<PAGE> 30
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
INCOME TAXES The Company accounts for income taxes under the asset and liability
method of accounting. Under this method, deferred income tax assets and
liabilities are recognized based upon the expected future consequences of events
that have been recognized in the Company's consolidated financial statements or
tax returns.
NET LOSS PER SHARE Net loss per share has been computed using the weighted
average number of shares of common stock outstanding in accordance with SFAS No.
128, "Earnings per Share." The Company incurred a net loss for all periods
presented, therefore, "in the money" dilutive options of approximately 179,000,
820,000 and 2.3 million for the years ended March 31, 1999, March 31, 1998 and
March 31, 1997, respectively were not included in the computation on a diluted
basis because they were antidilutive.
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 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.
COMPREHENSIVE NET LOSS Comprehensive net loss includes net earnings adjusted
for certain revenues, expenses, gains and losses that are excluded from net
loss under generally accepted accounting principles.
SEGMENT INFORMATION The Company adopted Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" (FAS 131) in the fiscal year ended March 31, 1999. To date, the
Company has viewed the Company's operations as primarily one segment, computer
data communication hardware and software. As a result, the financial information
disclosed herein, materially represents all of the financial information related
to the Company's principle operating segment.
RECLASSIFICATIONS Certain amounts in the prior years' consolidated financial
statements have been reclassified to conform with the fiscal 1999 consolidated
financial statement presentation.
- --------------------------------------------------------------------------------
NOTE 2. BALANCE SHEET COMPONENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31,
----------------------
(In thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ACCOUNTS RECEIVABLE
Trade accounts receivable $ 111 $ 9,470
Less allowance for returns and doubtful accounts (32) (1,310)
- --------------------------------------------------------------------------------
Net accounts receivable $ 79 $ 8,160
================================================================================
INVENTORY
Purchased parts $ -- $ --
Work in progress -- --
Finished goods 184 2,351
- --------------------------------------------------------------------------------
Total inventory $ 184 $ 2,351
================================================================================
PROPERTY AND EQUIPMENT
Computers, test and production equipment $ 2,434 $ 10,229
Furniture and fixtures 982 2,726
Leasehold improvements -- 2,428
- --------------------------------------------------------------------------------
3,416 15,383
Less accumulated depreciation and amortization (3,148) (11,334)
- --------------------------------------------------------------------------------
Total property and equipment, net $ 268 $ 4,049
================================================================================
ACCRUED AND OTHER LIABILITIES
Warranty and other product related obligations $ 201 $ 2,859
Accrued compensation and benefits 179 766
Due to distributors 331 --
Accrued legal and accounting 273 165
Due to lessees 191 --
Accrued discontinued operations costs 186 370
Accrued rent 146 251
Accrued restructure 134 440
Other 155 1,152
- --------------------------------------------------------------------------------
Total accrued and other liabilities $ 1,796 $ 6,003
================================================================================
</TABLE>
-30-
<PAGE> 31
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
NOTE 3 SALE OF MODEM BUSINESS
- --------------------------------------------------------------------------------
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 (42,500 giving effect to the one-for-ten reverse split)
shares of the Company's Common Stock at approximately $1.00 ($10.00 giving
effect to the on-for-ten reverse split) per share. In consideration for these
assets, Boca assumed certain of the Company's liabilities related to the modem
operations, paid the Company $4.0 million in cash, and delivered a non-interest
bearing promissory note for $6.0 million payable in two equal installments on
September 30 and December 31, 1998, which was recorded at $5.855 million. The
difference between the recorded value and the face value of the note was
recognized as interest income over the life of the note. The installment payment
due on September 30, 1998 was received October 2, 1998. 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
was offset 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 on the
sale of the modem business of $6.128 million and during the quarter ended March
31, 1999 recorded an additional gain of $47,000 representing the release of
reserves determined to be fully resolved. The full effect of the sale of the
modem operations to Boca was a net gain of $6.175 million. 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 after June 18, 1998. For the year
ended March 31, 1999, these products accounted for approximately 95% of the
Company's reported net revenue and 87% 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.
- --------------------------------------------------------------------------------
NOTE 4 DISCONTINUED OPERATIONS
- --------------------------------------------------------------------------------
In the second quarter of fiscal 1997, the Company adopted a formal plan to
discontinue its enterprise network server operation in the United Kingdom
(formerly, the Company's ISDN division.) The disposition of the division was
accounted for as a discontinued operation in accordance with Accounting
Principles Board (APB) Opinion No. 30 and prior period financial statements were
restated to reflect the discontinuance. The loss from discontinued operations of
$1.8 million in fiscal year 1997 represents the operation's operating loss, with
no associated tax benefit. The gain on disposal of discontinued operations of
$90,000 and $1.3 million in fiscal years 1999 and 1998, respectively, with no
associated tax benefit, results from the release of a portion of certain
reserves established for contingent liabilities associated with the disposition
of the operation based upon the Company's determination that these contingencies
have been resolved. The loss on disposal of discontinued operations of $2.2
million in fiscal year 1997, with no associated tax benefit, 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 5 RESTRUCTURING COSTS
- --------------------------------------------------------------------------------
As of March 31, 1999, the Company's total accrued restructuring costs balance
was approximately $134,000 and is comprised primarily of the remaining lease
liabilities on two of its facilities.
-31-
<PAGE> 32
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On March 31, 1998 the Company announced its agreement to sell its modem business
to Boca and refocus the Company's product offerings into the small and medium
sized office networking market. At that time, 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. During the first fiscal
quarter of 1999, the Company recorded an additional restructuring charge of
approximately $404,000 related primarily to severance costs for 8 employees
($247,000), rent and facilities costs ($88,000), and fixed asset impairments
($69,000) associated with the transition to OneWorld Systems. At March 31, 1999
the accrued restructuring costs balance associated with the March 1998
restructuring was approximately $82,000 and relates primarily to the remaining
lease payment of the Plano, Texas facility.
In December 1996, the Company announced a restructuring plan to streamline its
operations, reduce its workforce and enable the Company to improve its operating
results. At that time the Company recorded a restructuring charge of $1.3
million related primarily to severance costs, write-offs of fixed assets and
purchased software, a lease abandonment and other one-time charges associated
with the plan. At March 31, 1999 the restructuring accrual balance associated
with the December 1996 restructuring was approximately $52,000 and relates
primarily to the remaining lease payments of the Marietta, Georgia facility.
- --------------------------------------------------------------------------------
NOTE 6 SALE OF INVESTMENTS
- --------------------------------------------------------------------------------
AIRMEDIA LIVE, INC. In the second quarter of fiscal 1997, the Company completed
an equity investment in AirMedia, Inc. ("AirMedia") of $4.1 million The Company
accounted for its investment in AirMedia using the cost method of accounting. In
July 1997, the Company sold its investment in AirMedia to an existing AirMedia
shareholder for approximately $2.0 million in cash. As a result, the Company
recorded a loss of $2.1 million in the second quarter of fiscal 1998.
GLOBALCENTER, INC. In April 1996, the Company announced that it had incorporated
its Internet Services Division as a standalone business called GlobalCenter,
Inc. ("GlobalCenter"). At the same time, the Company announced that UUNET
Technologies, Inc. had acquired a 19.9% equity interest in GlobalCenter. At that
time, the Company no longer had the ability to exercise significant control over
GlobalCenter. Accordingly, the Company no longer consolidated the results of
GlobalCenter and began to account for its investment using the equity method of
accounting. As a result of the refinancing and operating performance of
GlobalCenter during the first quarter of fiscal 1997, the Company recorded an
investment loss of $2.2 million, and reduced the book value of its investment to
zero. In December 1996, GlobalCenter entered into a definitive merger agreement
whereby GlobalCenter and Phoenix-based Primenet Services for the Internet, Inc.
merged reducing the Company's percentage ownership below 10%. Accordingly, in
the third quarter of fiscal 1997, the Company began accounting for its
investment in GlobalCenter using the cost method of accounting. In
September1997, 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.
- --------------------------------------------------------------------------------
NOTE 7 CUSTOMERS AND CREDIT CONCENTRATIONS
- --------------------------------------------------------------------------------
During the period of time that the Company operated its modem business, the
Company sold its products to distributors, dealers, and OEMs in North America,
Europe, and the Pacific Rim. The Company now sells its network server products
in the United States and Canada primarily to distributors.
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 percentage of total revenues from these customers
that accounted for 10% or more of total revenue for any of the years presented.
-32-
<PAGE> 33
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Percentage of Revenues Percentage of Accounts Receivable
Year Ended March 31, as of March 31,
-------------------------- ---------------------------------
1999 1998 1997 1999 1998
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Customer A 17% 28% 21% 0% 37%
Customer B 47% 18% 11% 0% 19%
Customer C 6% 7% 11% 0% 4%
</TABLE>
Customers A and C are distributors; Customer B is an OEM.
The Company's international sales for the fiscal year ended March 31, 1999, 1998
and 1997 represented approximately 46%, 15% and 15% of net revenue,
respectively. The Company's international sales are derived primarily from
Europe and the Pacific Rim. The international sales for 1999, approximately 46%
of net revenue were primarily derived from an OEM contract in Europe which was
sold with the Company's modem assets on June 18, 1998.
- --------------------------------------------------------------------------------
NOTE 8 COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
LEASE COMMITMENTS The Company leases three facilities under noncancelable
leases. The lease of the facility located in Marietta Georgia will expire in
January 2000. All future lease payments on this building have been recognized
and recorded as restructuring costs pursuant to the December 1996 restructuring
(see Note 5 of Notes to Consolidated Financial Statements.) Similarly, the
future lease payments on the lease of the Plano, Texas facility, which will
expire in December 2002, have been recognized and recorded as a component of the
March 1998 restructuring (see Note 5 of Notes to Consolidated Financial
Statements.) The lease of the Company's headquarters in Sunnyvale, California
will expire in April, 2000 and has a renewal option for an additional five-year
term. Excess space in each of the facilities has been sublet for various periods
through the term of the Company's respective leases.
The future minimum lease payments and sublease income of the Company's lease on
its Sunnyvale, California lease as of March 31, 1999 are:
<TABLE>
<CAPTION>
Lease Sublease Net Lease
(In thousands) Payments Income Payments
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year 2000 1,334 (1,653) (319)
2001 52 (18) 34
Thereafter -- -- --
- -------------------------------------------------------------------------
Total future minimum lease commitment 1,386 (1,671) (285)
- -------------------------------------------------------------------------
</TABLE>
Rent expense net of sublet income was approximately $0.3 million, $0.5 million,
and $1.2 million for the fiscal years ended March 31, 1999, 1998 and 1997,
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 9 STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
PREFERRED STOCK As of March 31, 1999, 5,000,000 shares of preferred stock were
authorized. The Company's Board of Directors may establish the classes, series,
rights, and preferences of the Preferred Stock.
-33-
<PAGE> 34
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On March 3, 1999 the Company entered into a Unit Purchase Agreement between the
Company and certain investors including certain affiliates of Integral Capital
Partners, certain affiliates of Hambrecht & Quist, and Kevin Compton, a member
of the Board of Directors. Pursuant to this agreement the Company sold 620,000
units of equity, each consisting of 13 newly issued and unregistered shares of
Common Stock and 5 newly issued and unregistered shares of Series A Convertible
Preferred Stock. A total of 3,100,000 shares of Series A Convertible Preferred
Stock, $0.001 par value, was issued and remained outstanding as of March 31,
1999. The Series A Convertible Preferred Stock is initially convertible into
shares of the Company's Common Stock at a rate of 10 (1 giving effect to the
one-for-ten reverse split) shares of Common Stock for each share of preferred
stock. Although the holder may convert the preferred stock at any time, the
shares will automatically convert without the holders' option upon the
occurrence of certain events. The first such event, a mandatory conversion of
50% of the Series A Preferred Stock will take place upon the reverse split of
the Company's Common Stock to be effective July 6, 1999. The remaining Preferred
Stock will automatically convert in four equal amounts based upon our Common
Stock achieving certain closing prices. Certain rights are extended to the
Series A Preferred Stock that are not extended to the Common Stockholders
including: (i) the right to receive cumulative dividends of $0.2679 per share
per annum accruing from the date of issue when and if declared by the Board of
Directors; (ii) liquidation distribution preferences of $2.679 per share for
each share held and amount equal to all declared but unpaid dividends, if any;
(iii) redemption rights equal to $2.679 plus all declared and unpaid dividends;
and (iv) voting rights on an as-converted basis with the holders of Common Stock
on all matters submitted to the holders of the Common Stock.
PREFERRED STOCK ISSUED AND OUTSTANDING
<TABLE>
<CAPTION>
March 31,
-------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares issued and outstanding, beginning of year -- -- --
Shares issued pursuant to the Unit Purchase Agreement 3,100,000 -- --
- ---------------------------------------------------------------------------------------
Shares issued and outstanding, end of year 3,100,000 -- --
=======================================================================================
</TABLE>
COMMON STOCK As of March 31, 1999, 30,000,000 shares of Common Stock were
authorized.
The following share amounts have been restated to give effect to the one-for-ten
reverse split. (See Note 11).
On January 19, 1998, the Company issues approximately 14,200 shares of Common
Stock pursuant to the Stock Purchase Agreement between the Company and the KNX,
Ltd. Pension Scheme as settlement of a liability incurred upon the acquisition
of KNX, Ltd.
On March 3, 1999 the Company issued 806,000 shares of Common Stock pursuant to
the Unit Purchase Agreement between the Company and certain investors including
certain affiliates of Integral Capital Partners, certain affiliates of Hambrecht
& Quist, and Kevin Compton, a member of the Board of Directors.
COMMON STOCK ISSUED AND OUTSTANDING
<TABLE>
<CAPTION>
March 31,
----------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares issued and outstanding, beginning of year 1,716,277 1,692,969 1,674,484
Shares issued pursuant to the Unit Purchase Agreement 806,000 -- --
Shares issued under the employee stock purchase plan 2,034 7,499 7,439
Exercise of stock options 118 1,570 28,896
Shares issued to settle compensation liability -- 14,239 --
Treasury shares acquired -- (17,850)
- -------------------------------------------------------------------------------------------------------
Shares issued and outstanding, end of year 2,524,429 1,716,277 1,692,969
=======================================================================================================
</TABLE>
-34-
<PAGE> 35
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
STOCK OPTION PLAN The Company adopted a stock option plan (the "Plan") under
which incentive stock options may be granted to employees and officers, and
non-qualified (supplemental) options may be granted to employees, officers,
directors, and consultants to purchase an aggregate of 720,000 shares of Common
Stock. Options may be granted at an exercise price of at least 100% of the fair
market value of Common Stock at the date of grant, or for supplemental options,
at an exercise price not less than 85% of the fair market value of such stock at
the date of grant. All options expire no later than 10 years after the date of
grant and generally vest over 4 to 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, 1999, options to purchase 16,929 shares of Common Stock were
exercisable under the Plan.
DIRECTORS' 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 fair market value of the
Common Stock on the date of grant. The Company has reserved a total of 20,000
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 contingent upon the continuous service of
the director.
As of March 31, 1999, no options 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,
--------------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 229,110 $ 26.00 248,544 $ 27.60 231,596 $ 92.50
Granted 361,525 6.60 89,430 23.20 177,933 57.80
Exercised (118) 2.80 (1,570) 1.10 (28,897) 19.90
Cancelled (225,724) 15.40 (107,294) 28.00 (132,088) 100.00
Repriced - granted 136,661 7.20 -- -- 176,238 46.80
Repriced - cancelled (136,661) 25.10 -- -- (176,238) 109.60
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 364,793 $ 6.60 229,110 $ 26.00 248,544 $ 27.60
====================================================================================================================================
Weighted average fair value of options,
calculated under SFAS No. 123 (see below) $ 5.00 $ 18.00 $ 24.70
====================================================================================================================================
</TABLE>
The following table summarizes information as of March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------
Weighted Average
Remaining Contractual Weighted Average Weighted Average
Range of Exercise Prices Number Life Exercise Price Number Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.5000 to $ 5.0000 59,879 8.20 $ 3.007 14,829 $ 1.534
$ 7.1880 to $ 7.1880 303,244 8.39 $ 7.188 688 $ 7.188
$10.0000 to $147.5000 1,670 5.14 $ 37.006 1,412 $ 17.481
- --------------------------------------------------------------------------------------------------------------------
$ 1.5000 to $147.5000 364,793 8.34 $ 6.638 16,929 $ 3.094
====================================================================================================================
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN In December 1993, the Company adopted the 1993
Employee Stock Purchase Plan (the "Purchase Plan") reserving 40,000 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, a price equal to the lower of
(i) 85% of the fair market value of a share of Common Stock on the date of
commencement of participation in the offering; or (ii) 85% of the fair market
value of a share of Common Stock on the date of purchase. 28,937 shares of
Common Stock have been purchased under the Purchase Plan as of March 31, 1999.
STOCK WARRANTS In connection with the Company's sale of its modem business to
Boca Research, Inc. (see Note 3), the Company issued to Boca a warrant to
purchase up to 42,500 shares of the Company's Common Stock at approximately
$10.00 per share, which were valued at $140,000 and recorded in additional paid
in capital. The warrant will expire in June 2003. As of March 31, 1999 all
warrants remain outstanding.
-35-
<PAGE> 36
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
<TABLE>
<CAPTION>
Shares
-----------------------------------------------------
<S> <C>
Exercise of stock options 568,641
Employee stock purchase plan 11,064
Stock Warrants 42,500
-----------------------------------------------------
Total reserved shares 622,205
=====================================================
</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.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock plans,
therefore no compensation costs have been recognized for such plans.
Had compensation costs for the Company's stock plans been determined based on
fair value at the grant dates for awards under those plans consistent with the
method prescribed in SFAS No, 123, "Accounting for Stock-Based Compensation,"
the Company's net loss and net loss per share would have changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -------------------------
(In thousands, except per share data) As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $ (5,063) $ (6,151) $ (3,378) $ (5,584) $ (39,881) $ (42,976)
Basic and diluted net loss per share $ (2.85) $ (3.46) $ (1.99) $ (3.28) $ (23.68) $ (25.52)
=========================================================================================================================
</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 1999 and 1998,
respectively: no dividend yield is expected for all years; expected volatility
of 128% and 106%; risk free interest rates of 5.40% and 5.24%; and expected
lives of 1 year and 3 years.
- --------------------------------------------------------------------------------
NOTE 10 INCOME TAXES
The components of income tax expense (benefit) from continuing operations are
displayed in the following table. No income tax expense or benefit has been
recorded in any of the results of discontinued operations.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $(8,637)
State 22 -- 2
- -----------------------------------------------------------------
Total current 22 -- (8,635)
- -----------------------------------------------------------------
Deferred:
Federal -- -- 2,845
State -- -- 389
- -----------------------------------------------------------------
Total deferred -- -- 3,234
- -----------------------------------------------------------------
$ 22 $ -- $(5,401)
- -----------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------
(In thousands) 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward, federal and state 26,104 21,336
Tax credits, federal and state 2,183 2,014
Other (200) 3,514
---------------------------------
28,087 26,864
Less valuation allowance (28,087) (26,864)
- -------------------------------------------------------------------------------------------------
Net deferred tax asset - -
=================================================================================================
</TABLE>
As of March 31, 1999 and 1998, the Company has established a full valuation
allowance against its deferred tax assets based on the belief that there was
sufficient uncertainty regarding the ability to realize 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:
-36-
<PAGE> 37
ONEWORLD SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate (34)% (34)% (34)%
State tax, net of federal benefit -- % -- % -- %
Loss without tax benefit 41 % 38 % 25 %
Research and experimental tax credit (7)% (6)% (2)%
Other -- % 2 % (2)%
- --------------------------------------------------------------------
Effective income tax rate -- % -- % (13)%
====================================================================
</TABLE>
The Company acquired SofNet, Inc. in August 1994. As of the acquisition date,
SofNet had federal and Georgia net operating loss carryforwards of $9.3 million,
which expire through 2009. The federal net operating loss is subject to an
annual limitation approximating $0.8 million as a result of the 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, 1999, the Company had net operating loss
carryforwards of approximately $69.0 million for federal income tax purposes, of
which, $20.6 million expire in 2019, $14.6 million expire in 2013,and $33.8
million expire in 2012. The federal net operating loss may be subject to an
annual limitation as a result of the Unit Purchase Agreement dated March 3,
1999, which may be deemed an ownership change as defined in Section 382 of the
Internal Revenue Code. The limitation, if required, would limit the annual
utilization of the accumulated net operating loss. Net operating loss
carryforwards for California income tax purposes total approximately $20.8
million, of which $4.1 million expire in 2004, $2.8 million expire in 2003, and
$13.9 million expire in 2002.
At March 31, 1999, The Company had unused research and development credits of
approximately $1.4 million for federal income tax purposes, which expire through
2019, and approximately $715,000 for California income tax purposes which will
carry-forward indefinitely.
- --------------------------------------------------------------------------------
Note 11 Subsequent Events
- --------------------------------------------------------------------------------
On June 22, 1999 our stockholders approved the proposed amendment to our
Certificate of Incorporation to authorize the Board of Directors to adopt a
reverse split. On June 23, 1999 the Board of Directors approved a one-for-ten
reverse split ratio effective July 6, 1999. The effect of the reverse split has
been accounted for where indicated throughout these financial statements.
-37-
<PAGE> 38
SCHEDULE II
OneWorld Systems, Inc. and Subsidiaries
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
March 31,
--------------------------------------
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for returns and doubtful accounts
Balance beginning of period $ 1,310 $ 6,388 $ 1,854
Additions charged to costs and expenses 328 1,387 20,090
Deductions (592) (6,465) (15,556)
Relieved due to sale of modem business (1,014) -- --
--------------------------------------
Balance end of period $ 32 $ 1,310 $ 6,388
- ------------------------------------------------------------------------------------------
Warranty and other product-related obligations
Balance beginning of period $ 2,859 $ 2,090 $ 1,503
Additions charged to costs and expenses 280 1,855 2,774
Deductions (178) (1,086) (2,187)
Relieved due to sale of modem business (2,760) -- --
--------------------------------------
Balance end of period $ 201 $ 2,859 $ 2,090
- ------------------------------------------------------------------------------------------
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
-38-
<PAGE> 39
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
the information set forth in the section entitled "Election of Directors"
contained in the Company's Proxy Statement for its 1999 Annual Meeting of
Stockholders, to be filed by the Company with the Securities and Exchange
Commission within 120 days of the end of the Company's fiscal year ended March
31, 1999, except that the information required by this item concerning the
executive officers of the Company is incorporated by reference to the
information set forth in the section entitled "Executive Officers of the
Company" at the end of Part I, Item 1 of this Form 10-K.
ITEM 11 EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information set forth in the section entitled "Executive Compensation"
contained in the Company's Proxy Statement for its 1999 Annual Meeting of
Stockholders to be filed by the Company with the Securities and Exchange
Commission within 120 days of the end of the Company's fiscal year ended March
31, 1999.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information set forth in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" contained in the Company's Proxy Statement for
its 1999 Annual Meeting of Stockholders to be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year ended March 31, 1999.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information set forth in the section entitled "Certain Transactions"
contained in the Company's Proxy Statement for its 1999 Annual Meeting of
Stockholders to be filed by the Company with the Securities and Exchange
Commission within 120 days of the end of the Company's fiscal year ended March
31, 1999.
- --------------------------------------------------------------------------------
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
On March 11, 1999 the Company filed a Form 8-K in which the Company
presented three press releases: February 24, 1999 - OneWorld Systems
Reports Delisting from Nasdaq Stock Market, March 3, 1999 -OneWorld
Systems Announces $10 Million in New Financing, and March 10, 1999 -
OneWorld Systems Closes $10 Million in Financing.
-39-
<PAGE> 40
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- -------------------------------------------------------------------------------
<S> <C>
2.1xx Asset Purchase Agreement by and among Boca Global, Inc., Boca
Research, Inc. and the Company, dated as of March 31, 1998
3.1(a)xx Amended and Restated Certificate of Incorporation of OneWorld
Systems, Inc.
3.1(b) Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of OneWorld Systems, Inc., dated March
3, 1999
3.1(c) Certificate of Amendment to Amended and Restated Certificate of
Incorporation of OneWorld Systems, Inc., dated June 25, 1999
3.2* Form of Bylaws of Global Village Communication Delaware
4.1 Reference is made to Exhibits 3.1 through 3.2
4.2* Amended and Restated Investor Rights Agreements among the Company
and certain other person named therein, dated as of May 26, 1992
4.3* Employee Shareholder Agreement between the Company and certain
stockholders of the Company, as amended, and related schedule
4.4* Common Stock Purchase Agreement between the Company and other
parties named therein, dated as of October 2, 1989
4.5* Series A Junior Preferred Stock Exchange Agreement between the
Company and other parties named therein, dated as of May 14, 1991
4.6* Series B Preferred Stock Purchase Agreement between the Company and
other parties named therein, dated as of May 14, 1991
4.7* Warrant to Purchase 31,395 Shares of Series B Preferred granted by
the Company to Company to Dominion Ventures, dated as of November
27, 1991
4.8* Series C Preferred Stock Purchase Agreement between the Company and
other parties named therein, dated as of May 26, 1992
4.9x Warrant to Purchase 425,000 Shares of Common Stock granted by the
Company to Boca Research, Inc., dated as of June 18, 1998
4.10 Unit Purchase Agreement between the Company and other parties named
therein, Dated as of March 3, 1999
4.11 Investor Rights Agreement dated as of March 3, 1999 by and among the
parties to the Unit Purchase Agreement
10.1* Form of Indemnity Agreement entered into between the Company and its
directors and officers, with related schedule
10.2** 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, as amended
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, LLP
25.1 Power of Attorney (see page 42)
27.1 Financial Data Schedule
</TABLE>
-40-
<PAGE> 41
* Filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No 33-73878 as amended) and hereby
incorporated by reference herein.
** Filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q filed with the Commission on November 13, 1998, and
hereby incorporated by reference herein.
x Filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q filed with the Commission on August 12, 1998, and
hereby incorporated by reference herein.
xx Filed as an exhibit to the Registrant's Annual Report on Form
10-K/A filed with the Commission on July 2, 1998, and hereby
incorporated by reference herein.
+ 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> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Company has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized on
June 28, 1999.
OneWorld Systems, Inc.
By: /s/ Neil Selvin
-----------------------------------------
Neil Selvin, President, Chief Executive
Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Neil Selvin and Marc E. Linden jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to the Form 10-K Annual
Report, and to file the same, with exhibits thereto and other documents in
connections therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ LEONARD A. LEHMANN Chairman of the Board 6/28/99
- --------------------------
Leonard A. Lehmann
/s/ NEIL SELVIN President, Chief Executive Officer and Director 6/28/99
- --------------------------- (Principle Executive Officer)
Neil Selvin
/s/ MARC E. LINDEN Senior Vice President and Chief Financial Officer 6/28/99
- --------------------------- (Principle Financial and Accounting Officer)
Marc E. Linden
/s/ KEVIN R. COMPTON Director 6/28/99
- ---------------------------
Kevin R. Compton
/s/ KENNETH A. GOLDMAN Director 6/28/99
- ---------------------------
Kenneth A. Goldman
/s/ ROGER ROBERTS Director 6/28/99
- ---------------------------
Roger Roberts
</TABLE>
-42-
<PAGE> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1xx Asset Purchase Agreement by and among Boca Global, Inc., Boca
Research, Inc. and the Company, dated as of March 31, 1998
3.1(a)xx Amended and Restated Certificate of Incorporation of OneWorld
Systems, Inc.
3.1(b) Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of OneWorld Systems, Inc., dated March
3, 1999
3.1(c) Certificate of Amendment to Amended and Restated Certificate of
Incorporation of OneWorld Systems, Inc., dated June 25, 1999
3.2* Form of Bylaws of Global Village Communication Delaware
4.1 Reference is made to Exhibits 3.1 through 3.2
4.2* Amended and Restated Investor Rights Agreements among the Company
and certain other person named therein, dated as of May 26, 1992
4.3* Employee Shareholder Agreement between the Company and certain
stockholders of the Company, as amended, and related schedule
4.4* Common Stock Purchase Agreement between the Company and other
parties named therein, dated as of October 2, 1989
4.5* Series A Junior Preferred Stock Exchange Agreement between the
Company and other parties named therein, dated as of May 14, 1991
4.6* Series B Preferred Stock Purchase Agreement between the Company and
other parties named therein, dated as of May 14, 1991
4.7* Warrant to Purchase 31,395 Shares of Series B Preferred granted by
the Company to Company to Dominion Ventures, dated as of November
27, 1991
4.8* Series C Preferred Stock Purchase Agreement between the Company and
other parties named therein, dated as of May 26, 1992
4.9x Warrant to Purchase 425,000 Shares of Common Stock granted by the
Company to Boca Research, Inc., dated as of June 18, 1998
4.10 Unit Purchase Agreement between the Company and other parties named
therein, Dated as of March 3, 1999
4.11 Investor Rights Agreement dated as of March 3, 1999 by and among the
parties to the Unit Purchase Agreement
10.1* Form of Indemnity Agreement entered into between the Company and its
directors and officers, with related schedule
10.2** 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, as amended
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, LLP
25.1 Power of Attorney (see page 42)
27.1 Financial Data Schedule
</TABLE>
* Filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No 33-73878 as amended) and hereby
incorporated by reference herein.
** Filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q filed with the Commission on November 13, 1998, and
hereby incorporated by reference herein.
x Filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q filed with the Commission on August 12, 1998, and
hereby incorporated by reference herein.
xx Filed as an exhibit to the Registrant's Annual Report on Form
10-K/A filed with the Commission on July 2, 1998, and hereby
incorporated by reference herein.
+ 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.
<PAGE> 1
EXHIBIT 3.1(b)
EXHIBIT A
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
ONEWORLD SYSTEMS, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
INTRODUCTION
OneWorld Systems, Inc., a Delaware corporation (the "Corporation"),
certifies that pursuant to the authority contained in Article IV of its
Certificate of Incorporation, and in accordance with the provisions of Section
151 of the General Corporation law of the State of Delaware, its Board of
Directors (the "Board of Directors") has adopted the following resolutions
creating a series of its Preferred Stock, par value of $0.001 per share,
designated as the Series A Convertible Preferred Stock:
RESOLVED, that a series of the class of authorized Preferred Stock, par
value $0.001 per share, of the Corporation be, and it hereby is created, and
that the designation and amount thereof and the voting powers, preferences and
relative, participating, optional and other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof are as
follows:
1. TITLE OF SERIES. The series of the Preferred Stock shall be
designated as the Series A Convertible Preferred Stock (the "Series A Preferred
Stock").
2. NUMBER OF SHARES IN SERIES; PAR VALUE. The number of authorized
shares of Series A Preferred Stock shall be three million one hundred thousand
(3,100,000) shares, par value $0.001 per share.
3. DIVIDENDS.
3.1 The holders of the Series A Preferred Stock shall be entitled
to receive, when as and if declared by the Board of Directors, out of funds
legally available therefore prior and in preference to payment of any dividend
with respect to the Common Stock (other than dividends payable solely in Common
Stock of the Corporation), a dividend in an amount equal to $0.2679 per
-1-
<PAGE> 2
share of Series A Preferred Stock per annum, accruing from the date of issuance
of the Series A Preferred Stock. Such dividends shall be cumulative when as and
if declared by the Board of Directors.
3.2 No dividends or other distributions shall be made with
respect to the Common Stock during any fiscal year of the Corporation unless at
the same time a dividend or distribution is paid with respect to all outstanding
shares of Series A Preferred Stock in an amount equal to the amount paid with
respect to a share of Common Stock (with each share of Series A Preferred Stock
being treated for such purpose as if it had been converted into Common Stock at
the then effective Conversion Rate; for such purpose, all shares of Series A
Preferred Stock held by each holder of Series A Preferred Stock shall be
aggregated, and any resulting fractional share of Common Stock shall be
disregarded).
4. LIQUIDATION PREFERENCE. At any time, in the event of any of the
following occurrences (a "TRANSACTION"):
(1) any transaction or series of related transactions (including,
without limitation, any reorganization, merger or consolidation) that will
result in the Corporation's shareholders immediately prior to such transaction
not holding (by virtue of such shares or securities issued solely with respect
thereto) at least 50% of the voting power of the surviving or continuing entity;
(2) a sale of all or substantially all of the assets of the
Corporation, unless the Corporation's shareholders immediately prior to such
sale will, as a result of such sale, hold (by virtue of securities issued as
consideration for the Corporation's sale) at least 50% of the voting power of
the purchasing entity; or
(3) any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary;
then immediately after giving effect to the applicable provisions of Section 7.6
hereof, if any, the Corporation shall take appropriate steps in connection with
such Transaction to ensure that the assets of the Corporation available for
distribution or such other property issued in connection with such Transaction
shall be distributed at the closing of the Transaction in the order and priority
that follows:
4.1 The holders of the Series A Preferred Stock shall be entitled
to receive, before any amount shall be paid to holders of Common Stock, the
amount of $2.679 per share for each share of Series A Preferred Stock then held
by them (adjusted for any combinations, consolidations, or stock distributions
or dividends with respect to such shares) and, in addition, an amount equal to
all declared but unpaid dividends on the shares of Series A Preferred Stock then
held by them, if any.
-2-
<PAGE> 3
4.2 If the assets and funds legally available for distribution to
the holders of the Series A Preferred Stock shall be insufficient to permit the
payment to such holders of the preferential amounts to which each holder of
Series A Preferred Stock is entitled, then the entire assets and funds of the
Corporation legally available for distribution to such holders shall be
distributed among the holders of Series A Preferred Stock pro rata. Thereafter,
the remaining assets and funds of the Corporation equally available for
distribution, if any, shall be distributed ratably among the holders of the
Common Stock and Preferred Stock, with each share of the Series A Preferred
Stock being treated for such purpose as if it had been converted into Common
Stock at its then effective Conversion Rate.
4.3 Any securities to be delivered to the holders of the Series A
Preferred Stock pursuant to paragraphs 4.1 and 4.2 above shall be valued as
follows:
4.3.1 Securities not subject to investment letter or other
similar restrictions on free marketability:
4.3.1.1 If traded on a securities exchange or
through the Nasdaq National Market, the value shall be deemed to be the average
of the closing prices of the securities on such exchange over the 30-day period
ending three (3) days prior to the closing;
4.3.1.2 If actively traded over-the-counter, the
value shall be deemed to be the average of the closing bid prices over the
30-day period ending three (3) days prior to the closing; and
4.3.1.3 If there is no active public market, the
value shall be the fair market value thereof, as determined in good faith by the
Board of Directors.
4.3.2 The method of valuation of securities subject to
investment letter or other restrictions on free marketability shall be to make
an appropriate discount from the market value determined as above in 4.3.1.1,
4.3.1.2 or 4.3.1.3 to reflect the approximate fair market value thereof, as
determined in good faith by the Board of Directors.
5. VOTING RIGHTS. Except as otherwise required by law, the holder of
each share of Series A Preferred Stock shall be entitled to the number of votes
equal to the number of shares of Common Stock into which such share of Series A
Preferred Stock could be converted at the effective Conversion Rate at the
record date for determination of the stockholders entitled to vote on such
matters, or, if no such record date is established, at the date such vote is
taken or any written consent of stockholders is solicited. The holders of the
Series A Preferred Stock shall be entitled to vote, on an as-converted basis,
with the holders of Common Stock on all matters submitted to the holders of the
Common Stock, except as otherwise required by law.
-3-
<PAGE> 4
6. CERTAIN TAXES. The Corporation shall pay any and all issuance and
other taxes (excluding any federal or state income taxes) that may be payable in
respect of any issuance or delivery of shares of Common Stock on conversion of
Series A Preferred Stock. The Corporation shall not, however, be required to pay
any tax that may be payable in respect of any transfer involved in the issuance
and delivery of shares of Common Stock in a name other than that in which the
shares of Series A Preferred Stock to which such issuance relates were
registered, and no such issuance or delivery shall be made unless and until the
person requesting such issuance has paid to the Corporation the amount of any
such tax, or it is established to the satisfaction of the Corporation that such
tax has been paid.
7. CONVERSION. The holders of the Series A Preferred Stock have
conversion rights as follows (the "CONVERSION RIGHTS"):
7.1 Definitions. For purposes of this Section 7 the following
definitions shall apply:
7.1.1 "Issuance Date" shall mean, with respect to the
Series A Preferred Stock, the first date on which the Corporation issues any
shares of such Series A Preferred Stock.
7.1.2 "Conversion Price" shall mean, with respect to the
Series A Preferred Stock, the price, determined pursuant to this Section 7, at
which shares of Common Stock shall be deliverable upon conversion of shares of
such Series A Preferred Stock.
7.1.3 "Current Conversion Price" shall mean, with respect
to the Series A Preferred Stock, the Conversion Price immediately before the
occurrence of any event, that, pursuant to Section 7.2, causes an adjustment to
the Conversion Price.
7.1.4 "Series A Preferred Stock Purchase Price" shall mean
$2.679 per share.
7.2 Adjustments to Conversion Price. The Conversion Price in
effect from time to time for the Series A Preferred Stock shall be subject to
adjustment in certain cases as follows:
7.2.1 Stock Dividends. In the event the Corporation at any
time or from time to time after the original Issuance Date shall declare or pay
any dividend on the Common Stock or other class or series of Preferred Stock
payable in Common Stock, and no equivalent dividend is disclosed or made on the
Series A Preferred Stock, then and in any such event, the then applicable
Conversion Price of the Series A Preferred Stock shall be proportionately
decreased upon the close of business on the record date for the determination of
holders of any class of securities entitled to receive such dividend; provided,
however, that if such record date is fixed and such dividend is not fully paid
the only proportional decrease in the then applicable Conversion Price will be
with respect
-4-
<PAGE> 5
to the number of shares of Common Stock actually issued in such dividend, and
such shares will be deemed to have been issued as of the close of business on
such record date, and the Conversion Price shall be recomputed accordingly.
7.2.2 Adjustments for Subdivisions, Combinations or
Consolidation of Common Stock. In the event the outstanding shares of Common
Stock shall be subdivided (by stock split, or otherwise), into a greater number
of shares of Common Stock, the Conversion Price applicable to the Series A
Preferred Stock then in effect shall, concurrently with the effectiveness of
such subdivision, be proportionately decreased. In the event the outstanding
shares of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Conversion Price
applicable to the Series A Preferred Stock then in effect shall, concurrently
with the effectiveness of such combination or consolidation, be proportionately
increased.
7.2.3 Adjustments for Other Distributions. In the event
the Corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 7 or as
otherwise provided in Section 3, then and in each such event provision shall be
made so that the holders of Series A Preferred Stock shall receive upon
conversion thereof, in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities of the Corporation which they
would have received had their Series A Preferred Stock been converted into
Common Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the date of conversion,
retained such securities receivable by them as aforesaid during such period,
subject to all other adjustments called for during such period under this
Section 7 with respect to the rights of the holders of the Series A Preferred
Stock.
7.2.4 Adjustments for Reclassification, Exchange and
Substitution. If the Common Stock issuable upon conversion of the Series A
Preferred Stock shall be changed into the same or a different number of shares
of any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
provided for in Section 7.2.5 above), the Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or reclassification,
be proportionately adjusted such that the Series A Preferred Stock shall be
convertible into, in lieu of the number of shares of Common Stock which the
holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Series A Preferred Stock immediately before that change.
7.3 No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution,
-5-
<PAGE> 6
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation but will at all times in good faith
assist in the carrying out of all the provisions of this Section 7 and in the
taking of all such action as may be necessary or appropriate in order to protect
the Conversion Rights of the holders of the Series A Preferred Stock against
impairment.
7.4 Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 7,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series A Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of Series A Preferred Stock.
7.5 Right to Convert. Each share of Series A Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after the
date of issuance of such share at the office of the Corporation or any transfer
agent for the Series A Preferred Stock, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the Series A
Preferred Stock Purchase Price by the Conversion Price applicable to such Series
A Preferred Stock in effect at the time of the conversion. Upon conversion, all
declared and unpaid dividends on the Series A Preferred Stock shall be paid
either in cash or in shares of Common Stock of the Corporation, at the election
of the Corporation, wherein the shares of Common Stock shall be valued at the
fair market value at the time of such conversion, as determined by the Board of
Directors in their good faith discretion. For purposes of determining the number
of shares of Common Stock into which the Series A Preferred Stock is
convertible, the initial Conversion Price shall be $0.2679.
7.6 Automatic Conversion.
7.6.1 Fifty percent (50%) of the outstanding shares of
Series A Preferred Stock shall automatically be converted into Common Stock of
the Corporation at the then applicable Conversation Price at such time as the
stockholders of the Corporation validly authorize (i) an increase in the number
of authorized shares of Common Stock, or (ii) a reverse stock split with respect
to the Common Stock, and any requisite amendment to the Certificate of
Incorporation has been filed with the Delaware Secretary of State, provided
that, in either such case, the Corporation must then have sufficient shares of
Common Stock authorized and available for issuance to provide for the conversion
of all outstanding shares of Series A Preferred Stock. Such automatic conversion
shall be applied to all holders of Series A Preferred Stock proportionally on a
pro rata basis.
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7.6.2 Provided that the automatic conversion contemplated
in Section 7.6.1 hereof has taken place, and in each case, that sufficient
shares of Common Stock of the Corporation are authorized and available for
issuance to permit such conversion, the remaining issued and outstanding shares
of Series A Preferred Stock shall automatically convert to Common Stock at the
then applicable Conversion Price as follows:
7.6.2.1 Twenty-five percent (25%) of such remaining
shares of Series A Preferred Stock shall convert on the first date upon which
the closing price per share of the Common Stock (as reported on the NASDAQ
National Market, or on such other securities exchange or automated quotation
system as then reports the price of the Common Stock) reaches $0.77607;
7.6.2.2 Twenty-five percent (25%) of such remaining
shares of Series A Preferred Stock shall convert on the first date upon which
the closing price per share of the Common Stock (as reported on the NASDAQ
National Market, or on such other securities exchange or automated quotation
system as then reports the price of the Common Stock) reaches $1.03476;
7.6.2.3 Twenty-five percent (25%) of such remaining
shares of Series A Preferred Stock shall convert on the first date upon which
the closing price per share of the Common Stock (as reported on the NASDAQ
National Market, or on such other securities exchange or automated quotation
system as then reports the price of the Common Stock) reaches $1.29345; and
7.6.2.4 Twenty-five percent (25%) of such remaining
shares of Series A Preferred Stock shall convert on the first date upon which
the closing price per share of the Common Stock (as reported on the NASDAQ
National Market, or on such other securities exchange or automated quotation
system as then reports the price of the Common Stock) reaches $1.55214.
7.6.3 So long as sufficient shares of Common Stock are
authorized and available for issuance to permit such conversion, all shares of
Series A Preferred Stock which remain issued and outstanding as of March 12,
2001 shall automatically be converted into shares of Common Stock at the then
applicable Conversion Price, unless the right of redemption provided to the
holders of the Series A Preferred Stock by Section 7.8 hereof has already been
exercised.
7.6.4 Each share of Series A Preferred Stock shall
automatically be converted into shares of Common Stock at the then effective
Conversion Price (pursuant to the methodology of Section 7.5 above) at any time
upon the election of a majority of the Series A Preferred Stock, voting together
as a single class, provided that sufficient shares of Common Stock are
authorized and available for issuance by the Company at the time of such
election.
Notice of any such automatic conversion pursuant to
this Section 7.6 shall be given by the Corporation by mail, postage prepaid, to
the holders of the Series A Preferred
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Stock at their addresses shown in the Corporation's records and, upon surrender
by the holder of Series A Preferred Stock of the certificate or certificates
representing such Series A Preferred Stock, the Corporation shall deliver to
such holder those items described in the last sentence of Section 7.7.1.
7.7 Mechanics of Conversion.
7.7.1 In order for a holder of Series A Preferred Stock to
convert shares of Series A Preferred Stock into shares of Common Stock, such
holder shall surrender the certificate or certificates for such shares of Series
A Preferred Stock at the office of the transfer agent for the Series A Preferred
Stock (or at the principal office of the Corporation if the Corporation serves
as its own transfer agent), together with written notice that such holder elects
to convert all or any number of the shares of the Series A Preferred Stock
represented by such certificate or certificates. Such notice shall state such
holder's name or the names of the nominees in which such holder wishes the
certificate or certificates for shares of Common Stock to be issued. The
transfer of certificates to any person other than the holder is subject to
applicable federal and state securities laws. If required by the Corporation,
certificates surrendered for conversion shall be endorsed or accompanied by a
written instrument or instruments of transfer, in form satisfactory to the
Corporation, duly executed by the registered holder or his or its attorney duly
authorized in writing. The date of receipt of such certificate or certificates
and notice by the transfer agent (or by the Corporation if the Corporation
serves as its own transfer agent) shall be the conversion date (the "Conversion
Date"). The Corporation shall, as soon as practicable after the Conversion Date,
issue and deliver at such office to such holder of Series A Preferred Stock, or
to his or its nominees, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled, together with cash in
lieu of any fraction of a share, payment in cash or Common Stock (as determined
under Section 7.5) representing any declared and unpaid dividends on the
converted Series A Preferred Stock and, if less than all of the shares of the
Series A Preferred Stock represented by the surrendered certificate or
certificates are converted into Common Stock, a certificate representing the
shares of Series A Preferred Stock not converted into Common Stock.
7.7.2 Before taking any action that would cause an
adjustment reducing the Conversion Price below the then par value of the shares
of Common Stock issuable upon conversion of the Series A Preferred Stock, the
Corporation will take any corporate action that may, in the opinion of its
counsel, be necessary in order that the Corporation may validly and legally
issue fully paid and nonassessable shares of Common Stock at such adjusted
Conversion Price.
7.7.3 All shares of Series A Preferred Stock that shall
have been surrendered for conversion as herein provided shall no longer be
deemed to be outstanding and all rights with respect to such shares, including
the rights, if any, to receive notices and to vote, shall immediately cease and
terminate on the Conversion Date, except only the right of the holders thereof
to receive shares of Common Stock in exchange therefor and payment of any
accrued and unpaid dividends
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thereon. Any shares of Series A Preferred Stock so converted shall be retired
and canceled and returned to the authorized but unissued category.
7.8 Redemption. On or at any time after October 1, 2000 upon the
vote of the holders of a majority of the outstanding shares of the Series A
Preferred Stock, the Corporation shall redeem all outstanding shares of Series A
Preferred Stock at a redemption price per share equal to $2.679 plus all
declared, accrued and unpaid dividends thereon as of the redemption date.
7.9 Series A Protective Provisions. The Corporation shall not,
without the vote or written consent of a majority of the outstanding Series A
Preferred Stock, voting as a single class:
(a) amend or repeal any provision of the Certificate of
Incorporation if such action would alter or change the rights, preferences or
privileges of the Series A Preferred Stock;
(b) authorize or issue shares of any class of stock having
any preference or priority as to dividends or assets superior to or on a parity
with Series A Preferred Stock;
(c) pay or declare any dividend (other than a dividend of
securities) on any security;
(d) authorize a merger, sale of all or substantially all
the assets of the Corporation, recapitalization or reorganization of the
Corporation; or
(e) take any other action required by law to be approved
by the holders of the Series A Preferred Stock, voting as a separate class.
7.10 Information Rights. So long as at least fifty percent (50%)
of the Series A Preferred Stock originally issued remains outstanding, the
Corporation will provide the holders of the Series A Preferred Stock with copies
of periodic reports, including audited financial statements and unaudited
quarterly financial information, promptly following the Corporation's filing of
such reports with the Securities and Exchange Commission.
7.11 Registration of Transfer. The Corporation shall keep at its
principal office a register for the registration of Series A Preferred Stock.
Upon the surrender of any certificate representing Series A Preferred Stock at
such place, the Corporation shall, at the request of the record holder of the
certificate, execute and deliver (at the Corporation's expense) a new
certificate or certificates in exchange therefor representing in the aggregate
the number of shares of Series A Preferred Stock as is requested by the holder
of the surrendered certificate and shall be substantially identical in form to
the surrendered certificate, and dividends shall accrue on the Series A
Preferred
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Stock represented by the new certificate from the date to which dividends have
been fully paid on the Series A Preferred Stock represented by the surrendered
certificate.
7.12 Replacement. Upon receipt of evidence reasonably
satisfactory to the Corporation (an affidavit of the registered holder will be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing shares of Series A Preferred Stock, and in the case
of any such loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Corporation, or, in the case of any such mutilation upon
surrender of the certificate, the Corporation shall (at the holder's expense)
execute and deliver in lieu of the certificate a new certificate of like kind
representing the number of shares of Series A Preferred Stock represented by the
lost, stolen, destroyed or mutilated certificate and dated the date of the lost,
stolen, destroyed or mutilated certificate.
7.13 Amendment and Waiver. No amendment, modification or waiver
shall be binding or effective with respect to any provision of this Certificate
without the affirmative vote of the holders of a majority of the then
outstanding shares of Series A Preferred Stock or the prior written consent of
the holders of a majority of the then outstanding shares of Series A Preferred
Stock at the time such action is taken; provided, that no change in the terms
hereof may be accomplished by merger or consolidation of the Corporation with
another corporation unless first approved by an affirmative vote of the holders
of a majority of the then outstanding shares of Series A Preferred Stock or
unless the Corporation has obtained the prior written consent of the holders of
a majority of the then outstanding shares of Series A Preferred Stock.
7.14 Notice. All notices shall be in writing and shall be deemed
to have been duly given on the date of delivery if delivered personally or sent
by overnight courier, with acknowledgment of receipt, to the party to whom
notice is to be given, or on the fifth day after mailing if mailed to the party
to whom notice is to be given, by registered or certified mail, return receipt
requested, postage prepaid, and properly addressed as follows: (a) if to the
Corporation, at its principal executive offices or (b) if to any stockholder, at
that holders' address, as it appears in the stock records of the Corporation.
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IN WITNESS WHEREOF, OneWorld Systems, Inc. has caused this Certificate
of Designations, Preferences and Rights of Series A Convertible Preferred Stock
to be signed by its Chief Executive Officer this 3rd day of March, 1999.
ONEWORLD SYSTEMS, INC.
/S/ Neil Selvin
-----------------------------------------
By: Neil Selvin
Chief Executive Officer
[SIGNATURE PAGE TO CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF SERIES A CONVERTIBLE PREFERRED STOCK
OF ONEWORLD SYSTEMS, INC.]
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<PAGE> 1
EXHIBIT 3.1(c)
CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ONEWORLD SYSTEMS, INC.
Neil Selvin certifies that:
1. He is the duly elected and acting President of OneWorld Systems,
Inc., a corporation organized and existing under the laws of the State of
Delaware (the "Corporation").
2. The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on December 31, 1993.
The Amended and Restated Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on June 18, 1998 (the
"Restated Certificate"). A Certificate of Designations, Preferences and Rights
of Series A Convertible Preferred Stock of the Corporation was filed with the
Secretary of State of the State of Delaware on March 3, 1999.
3. Pursuant to Section 242 of the General Corporation Law of the State
of Delaware, this Certificate of Amendment of the Amended and Restated
Certificate of Incorporation amends the provisions of the Restated Certificate.
4. In accordance with Section 242 of the General Corporation Law of the
State of Delaware, the terms and provisions of this Certificate of Amendment of
the Amended and Restated Certificate of Incorporation have been duly adopted by
the Board of Directors of this Corporation and duly approved by the holders of a
majority of the outstanding stock of each class of this Corporation's stock
entitled to vote thereon at a Special Meeting of the stockholders of the
Corporation called and held upon notice in accordance with Section 222 of the
General Corporation Law of the State of Delaware.
5. Article IV of the Restated Certificate is hereby amended by the
addition of a new Section C, which shall be inserted immediately following
existing Section B thereof, and shall read in its entirety as follows:
"C. Effective as of 12:01 a.m. on July 6, 1999, all outstanding
shares of Common Stock of this corporation will be divided by ten (10),
and any fractional shares resulting from
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such division will be canceled, for which each stockholder will receive
an amount of cash equal to the fair value of such stockholder's Common
Stock canceled on the effective date of the reverse split. The fair
market value of a share of Common Stock shall be a number reasonably
determined by the Board of Directors."
IN WITNESS WHEREOF, this Certificate of Amendment of the Amended and
Restated Certificate of Incorporation, which amends Article IV of the Restated
Certificate, having been duly adopted in accordance with Section 242 of the
General Corporation Law of the State of Delaware, has been duly executed by its
President, this 25th day of June, 1999.
/S/ Neil Selvin
------------------------------------
Neil Selvin
President
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<PAGE> 1
EXHIBIT 4.10
ONEWORLD SYSTEMS, INC.
UNIT PURCHASE AGREEMENT
This Unit Purchase Agreement (this "AGREEMENT") is made as of March 3,
1999 by and between OneWorld Systems, Inc., a Delaware corporation (the
"COMPANY"), and the investors listed on Schedule 1.2 attached hereto (the
"INVESTORS").
SECTION 1.
AUTHORIZATION AND SALE OF COMMON STOCK AND SERIES A PREFERRED STOCK
1.1 AUTHORIZATION OF SERIES A PREFERRED AND COMMON STOCK. The Company
has authorized the sale and issuance of up to 3,100,000 shares of its Series A
Preferred Stock (the "SERIES A PREFERRED") and up to 8,060,000 shares of its
Common Stock (the "Common Stock"). The Series A Preferred has the rights,
preferences and privileges provided for in the Certificate of Designation, in
the form attached hereto as Exhibit A (the "CERTIFICATE").
1.2 SALE OF THE COMMON STOCK AND SERIES A PREFERRED. Subject to the
terms and conditions set forth herein, the Company will issue and sell to the
Investors, and each of the Investors will purchase from the Company the shares
(the "SHARES") of Common Stock and Series A Preferred set forth opposite their
respective names on Schedule 1.2. Payment for such shares shall be delivered to
the Company at the Closing (as defined below) by certified check or wire
transfer in the amount set forth beside each Investor's name on Schedule 1.2
hereto.
SECTION 2.
CLOSING DATES; DELIVERY
2.1 CLOSING DATES. The closing of the purchase and sale of the Shares
hereunder (the "CLOSING") shall be held at the offices of Wilson Sonsini
Goodrich & Rosati, counsel to the Company, at 9:00 a.m. on March 3, 1999 or at
such other time and location selected by the parties hereto (such date shall
hereinafter be referred to as the "CLOSING DATE").
2.2 DELIVERY. At the Closing, the Company will deliver to each Investor
certificates, registered in such Investor's name (or the name of its nominee),
representing the Shares to be purchased by such Investor in accordance with the
terms hereof.
<PAGE> 2
SECTION 3.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the Schedule of Exceptions to the Company's
representations and warranties attached hereto as Schedule 3, the Company
represents and warrants to the Investors as follows:
3.1 ORGANIZATION. Each of the Company and its subsidiaries (as defined
in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"),
the "Subsidiaries"), is a corporation duly organized and validly existing in
good standing under the laws of the jurisdiction of its organization. Each of
the Company and its Subsidiaries has full power and authority to own, operate
and occupy its properties and to conduct its business as presently conducted and
is registered or qualified to do business and in good standing in each
jurisdiction in which it owns or leases property or transacts business and where
the failure to be so qualified would have a material adverse effect upon the
business, financial condition, prospects, properties or operations of the
Company and its Subsidiaries, considered as one enterprise (a "Material Adverse
Effect"), and no proceeding has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification. The Company does not have any Subsidiaries
nor does it control, directly or indirectly, or own, directly or indirectly, any
shares of stock or any other equity interest of any corporation, partnership or
limited liability company, other than as disclosed in the Company's Annual
Report on Form 10-K ("Annual Report") or the Company's Quarterly Reports on Form
10-Q ("Quarterly Reports," and together with the Annual Report, the "Exchange
Act Reports") filed from time to time with the Securities and Exchange
Commission (the "SEC") pursuant to the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") or identified on Schedule 3.1.
3.2 DUE AUTHORIZATION. The Company has all requisite power and authority
to execute, deliver and perform its obligations under this Agreement and the
Investor Rights Agreement and such agreements have been duly authorized and
validly executed and delivered by the Company and constitute legal, valid and
binding agreements of the Company enforceable against the Company in accordance
with their terms, except as rights to indemnity and contribution may be limited
by state or federal securities laws or the public policy underlying such laws,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' and contracting
parties' rights generally and except as enforceability may be subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
3.3 NON-CONTRAVENTION. Except as set forth on Schedule 3.3, the
execution and delivery of the Agreement and the Investor Rights Agreement, the
issuance and sale of the Shares to be sold by the Company under the Agreement,
the fulfillment of the terms of the Agreement and the Investor Rights Agreement
and the consummation of the transactions contemplated hereby and thereby will
not (A) conflict with or constitute a violation of, or default (with the passage
of time or otherwise)
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<PAGE> 3
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, (i) any material bond, debenture, note or other evidence of
indebtedness, or under any material lease, contract, indenture, mortgage, deed
of trust, loan agreement, joint venture or other agreement or instrument to
which the Company or any Subsidiary is a party or by which it or any of its
Subsidiaries or their respective properties are bound, (ii) the charter, by-laws
or other organizational documents of the Company or any Subsidiary, or (iii) any
law, administrative regulation, ordinance, judgement, injunction, or order of
any court or governmental agency, arbitration panel or authority applicable to
the Company or any Subsidiary or their respective properties, or (B) result in
the creation or imposition of any lien, encumbrance, claim, security interest or
restriction whatsoever upon any of the material properties or assets of the
Company or any Subsidiary or an acceleration of indebtedness pursuant to any
obligation, agreement or condition contained in any material bond, debenture,
note or any other evidence of indebtedness or any material indenture, mortgage,
deed of trust or any other agreement or instrument to which the Company or any
Subsidiary is a party or by which any of them is bound or to which any of the
property or assets of the Company or any Subsidiary is subject. No consent,
waiver, approval, authorization or other order of, or registration,
qualification or filing with, any regulatory body, administrative agency, or
other governmental body in the United States is required for the execution and
delivery of the Agreements and the valid issuance and sale of the Shares to be
sold pursuant to the Agreements, other than such as have been made or obtained,
and except for any securities filings required to be made under federal or state
securities laws.
3.4 CAPITALIZATION. The capitalization of the Company as of December 31,
1998 is as set forth in Schedule 3.4. The Company has not issued any capital
stock since that date other than pursuant to the Company's employee benefit
plans. The Shares to be sold pursuant to this Agreement have been duly
authorized, and when issued and paid for in accordance with the terms of the
Agreement will be duly and validly issued, fully paid and nonassessable. The
outstanding shares of capital stock of the Company have been duly and validly
issued and are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, and were not issued in violation of any
preemptive rights or similar rights to subscribe for or purchase securities.
Except as set forth in Schedule 3.4, there are no outstanding rights (including,
without limitation, preemptive rights), warrants or options to acquire, or
instruments convertible into or exchangeable for, any unissued shares of capital
stock or other equity interest in the Company or any Subsidiary, or any
contract, commitment, agreement, understanding or arrangement of any kind to
which the Company is a party or of which the Company has knowledge and relating
to the issuance or sale of any capital stock of the Company or any Subsidiary,
any such convertible or exchangeable securities or any such rights, warrants or
options. Without limiting the foregoing, no preemptive right, co-sale right,
registration right, right of first refusal or other similar right exists with
respect to the Shares or the issuance and sale thereof. No further approval or
authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale of the Shares. Except as set forth
on Schedule 3.1, the Company owns the entire equity interest in each of its
Subsidiaries, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, other than as described in the Company
audited financial statements contained in the Company's Annual Report. Except as
contemplated hereby, there are no stockholders agreements,
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<PAGE> 4
voting agreements or other similar agreements with respect to the Common Stock
to which the Company is a party or, to the knowledge of the Company, between or
among any of the Company's stockholders.
3.5 LEGAL PROCEEDINGS. There is no action, suit, notice of violation,
proceeding or investigation pending or, to the best actual knowledge of the
Company, threatened against or affecting the Company or any of its Subsidiaries
or any of their respective properties before or by any court, governmental or
administrative agency or regulatory authority (Federal, state, county, local or
foreign) which (i) relates to or challenges the legality, validity or
enforceability of the Agreement or the Investor Rights Agreement or the Shares,
(ii) could, individually or in the aggregate, have a Material Adverse Effect or
(iii) could, individually or in the aggregate, adversely impair the ability of
the Company to perform fully on a timely basis its obligations under the
Agreement or the Investor Rights Agreement.
3.6 NO VIOLATIONS. Neither the Company nor any Subsidiary, except as
listed on Schedule 3.6, is in violation of its charter, bylaws, or other
organizational document, or in violation of any law, administrative regulation,
ordinance or order of any court or governmental agency, arbitration panel or
authority applicable to the Company or any Subsidiary, which violation,
individually or in the aggregate, would be reasonably likely to have a Material
Adverse Effect, or is in default in any material respect in the performance of
any obligation, agreement or condition contained in any bond, debenture, note or
any other evidence of indebtedness in any indenture, mortgage, deed of trust or
any other agreement or instrument to which the Company or any Subsidiary is a
party or by which the Company or any Subsidiary is bound or by which the
properties of the Company or any Subsidiary are bound or affected, and there
exists no condition which, with the passage of time or otherwise, would
constitute a material default under any such document or instrument or result in
the imposition of any material penalty or the acceleration of any material
indebtedness.
3.7 GOVERNMENTAL PERMITS, ETC. Each of the Company and its Subsidiaries
has all necessary franchises, licenses, certificates and other authorizations
from any foreign, federal, state or local government or governmental agency,
department, or body that are currently necessary for the operation of the
business of the Company and its Subsidiaries as currently conducted, except
where the failure to currently possess could not reasonably be expected to have
a Material Adverse Effect on the Company.
3.8 INTELLECTUAL PROPERTY. Subject to the matters discussed under "Risk
Factors" in the Company's Exchange Act Reports, (i) each of the Company and its
Subsidiaries owns or possesses sufficient rights to use all material patents,
patent rights, trademarks, copyrights, licenses, inventions, trade secrets,
trade names and know-how (collectively, "Intellectual Property") that are
necessary for the conduct of its business as now conducted, except where the
failure to currently own or possess would not have a Material Adverse Effect on
the Company, (ii) neither the Company nor any of its Subsidiaries has received
any notice of, or has any knowledge of, any infringement of or conflict with
asserted rights of the Company or any of its Subsidiaries by others with respect
to any
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<PAGE> 5
Intellectual Property, except as would not have a Material Adverse Effect on the
Company, (iii) neither the Company nor any of its Subsidiaries has received any
notice of, or has any knowledge of, any infringement of or conflict with
asserted rights of a third party with respect to any Intellectual Property that,
individually or in the aggregate, would have a Material Adverse Effect on the
Company. None of the Company's trademarks, trade names, service marks, service
mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, government authorizations, trade secrets or
other intellectual property rights have expired or terminated, or are expected
to expire or terminate within two years from the date of this Agreement.
3.9 FINANCIAL STATEMENTS. The financial statements of the Company and
the related notes contained in the Company's Exchange Act Reports comply as to
form in all material respects with all applicable accounting requirements and
the published rules and regulations of the Commission with respect thereto, and
present fairly, in accordance with generally accepted accounting principles, the
financial position of the Company and its Subsidiaries as of the dates
indicated, and the results of its operations and cash flows for the periods
therein specified. Such financial statements (including the related notes) have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods therein specified, except
that the unaudited financial statements contained in the Company's Quarterly
Reports do not contain all of the notes required pursuant to generally accepted
accounting principals.
3.10 NO MATERIAL ADVERSE EFFECT. Except as disclosed in Schedule 3.10 or
otherwise disclosed, since December 31, 1998, there has not been any event or
occurrence which has caused or resulted in a Material Adverse Effect, including,
without limitation, (i) the incurrence of any obligation, direct or contingent,
that is material to the Company and its Subsidiaries considered as one
enterprise, except obligations incurred in the ordinary course of business, (ii)
any dividend or distribution of any kind declared, paid or made on the capital
stock of the Company or any of its Subsidiaries, (iii) any loss or damage
(whether or not insured) to the physical property of the Company or any of its
Subsidiaries, (iv) any amendment to the Company's charter or by-laws, (v) any
sale of a material asset of the Company or any of its Subsidiaries, (vi) any
capital expenditure of the Company or any of its Subsidiaries in excess of
$50,000, or (vii) any agreement, approval, commitment or authorization to do any
of the foregoing, except as contemplated herein.
3.11 DISCLOSURE. The Company has fully provided each Investor with all
information requested by such Investor in deciding whether to purchase the
Shares. Such information provided, as of the date of such information and on the
date hereof, did not and does not contain an untrue statement of a material
fact, or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the Company makes
no representation or warranty with respect to any forward-looking statements
made within such information provided.
3.12 FOREIGN CORRUPT PRACTICES. Neither the Company nor any of its
Subsidiaries, nor, to the knowledge of the Company or any Subsidiary, any agent
or other person acting on behalf of the Company or any of its Subsidiaries, have
(i) directly or indirectly, used any corporate funds for
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unlawful contributions, gifts, entertainment or other unlawful expenses related
to foreign or domestic political activity; (ii) made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds; (iii) failed to disclose
fully any contribution made by the Company or made by any person acting on its
behalf and of which the Company is aware in violation of law; (iv) violated in
any material respect any provision of the Foreign Corrupt Practices Act of 1977,
as amended; or (v) made any unlawful bribe, rebate, payoff, influence, kick-back
or other unlawful payment.
3.13 NO MANIPULATION OF STOCK. The Company has not taken and will not
take, any action designed to or that might reasonably be expected to cause or
result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
3.14 ACCOUNTING CONTROLS. The Company and each of its Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets, (iii) access to assets is permitted only in accordance with management's
general or specific authorization, and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
3.15 COMPLIANCE WITH FLORIDA STATUTES. The Company has complied with all
provisions of Florida Statutes Section 517.075, and the regulations thereunder,
relating to doing business with the Government of Cuba or with any person or
affiliate located in Cuba.
3.16 REPORTING STATUS. The Company has filed in a timely manner all
documents that the Company was required to file under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including documents filed pursuant
to Section 13(a) or 15(d) thereof, during the 12 months preceding the date of
this Agreement (the foregoing materials being collectively referred to herein as
the "SEC Documents"). The SEC Documents complied in all material respects with
the SEC's requirements as of their respective filing dates, and the information
contained therein as of the date thereof did not contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein in light of the circumstances under
where they were made not misleading:
3.17 LISTING. The Company shall comply with all requirements of the
National Association of Securities Dealers, Inc. with respect to the issuance of
the Shares and the listing thereof.
3.18 YEAR 2000 COMPLIANCE. The information set forth in the Company's
Exchange Act Reports with respect to the Company's efforts regarding Year 2000
matters (i) conforms in all material respects to the guidelines set forth in SEC
Release No. 33-7558 and (ii) accurately describes the status of the Company's
efforts regarding Year 2000 matters. To the Company's knowledge, the
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costs associated with ensuring that the Company is Year 2000 compliant will not
have a Material Adverse Effect on the Company.
3.19 CERTAIN FEES. No fees or commissions will be payable by the Company
to any broker, finder, investment banker or bank with respect to the
consummation of the transactions contemplated hereby. The Company has taken no
action that would require any Investor to pay any such fee or commission.
3.20 PRIVATE OFFERING. Neither the Company nor any person acting on its
behalf has taken or will take any action (including, without limitation, any
offering of any securities of the Company under circumstances which would
require the integration of such offering with the offering of the Shares or the
shares of Common Stock issuable upon conversion of the Series A Preferred (the
"Underlying Shares") under the Securities Act) which might subject the offering,
issuance or sale of the Shares or the Underlying Shares to the registration
requirements of Section 5 of the Securities Act.
3.21 SENIORITY. No class of equity securities of the Company is senior
to the Series A Preferred in right of payment, whether upon liquidation,
dissolution or otherwise.
3.22 REAL PROPERTY HOLDING COMPANY. The Company is not a real property
holding company within the meaning of Section 897 of the Internal Revenue code
of 1986, as amended.
3.23 TITLE. The Company and its Subsidiaries have good and marketable
title in fee simple to all real property owned by them and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as do not materially affect the value of
such property and do not interfere with the use made and proposed to be made of
such property by the Company or any of its Subsidiaries. Any real property and
facilities held under lease by the Company or any of its Subsidiaries are held
by them under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its Subsidiaries.
SECTION 4.
REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
Each Investor hereby severally represents and warrants to the Company
with respect to the purchase of the Shares as follows:
4.1 EXPERIENCE. It has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar
to the Company so that it is capable of evaluating the merits and risks of its
investment in the Company and has the capacity to protect its own interests.
Investor is an "accredited investor" as defined in Regulation 501(a) of
Regulation D promulgated under the Securities Act of 1933, as amended (the
"Securities Act").
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4.2 INVESTMENT. It is acquiring the Shares for investment for its own
account, not as a nominee or agent, and not with the view to, or for resale in
connection with, any distribution thereof. It understands that the Shares have
not been, and will not be when issued, registered under the Securities Act by
reason of a specific exemption from the registration provisions of the
Securities Act, the availability of which depends upon, among other things, the
bona fide nature of the investment intent and the accuracy of the
representations as expressed herein.
4.3 RULE 144. It acknowledges that the Shares must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from such registration is available. It is aware of the provisions of Rule 144
promulgated under the Securities Act which permit limited resale of shares
purchased in a private placement subject to the satisfaction of certain
conditions, which may include, among other things, the existence of a public
market for the shares, the availability of certain current public information
about the Company, the resale occurring not less than one year after a party has
purchased and paid for the security to be sold, the sale being effected through
a "broker's transaction" or in transactions directly with a "market maker" and
the number of shares being sold during any three-month period not exceeding
specified limitations.
4.4 NO PUBLIC MARKET. It understands that no public market now exists
for the Shares, and that a market may never exist for the Shares.
4.5 ACCESS TO DATA. Its officers and agents, to the extent that they
desired, have had an opportunity to discuss the Company's management, business
plan and financial condition with the Company's management. It understands that
a purchase of the Shares involves a high degree of risk, and there can be no
assurance the Company's business objectives will be obtained.
4.6 AUTHORIZATION. This Agreement and the Investors' Rights Agreement,
when executed and delivered by the Investors, will constitute a valid and
legally binding obligation of each such Investor, enforceable in accordance with
its terms, except as rights to indemnity and contribution may be limited by
state or federal securities laws or the public policy underlying such laws,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' and contracting
parties' rights generally and except as enforceability may be subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
4.7 AUTHORITY. It has all requisite legal power and authority to enter
into this Agreement and the Investors' Rights Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Investors' Rights Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of it. The execution and delivery of this Agreement
and the Investors Rights Agreement do not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both),
under any provision of the organization documents of such Investor.
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<PAGE> 9
4.8 NO CONFLICTS. The execution, delivery and performance of this
Agreement by such Investor will not breach, cause a default under or otherwise
conflict with or give rise to any acceleration or termination of the charter
documents of such Investor or any material contract or agreement to which such
Investor is a party.
4.9 BROKER'S AND FINDERS' FEES. It has not incurred, and will not incur,
directly or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby.
4.10 NOT ACTING IN CONCERT. Notwithstanding the fact that immediately
after the Closing, the Investors will hold an aggregate of 64% of the voting
power of the Company on a fully-diluted basis, and the fact that certain of the
Investors are affiliated entities as indicated by the three numbered groupings
of Investors contained in Schedule 1.2 hereto, such Investor is not acting in
concert with any other Investor, or group of Investors, whether affiliated or
otherwise, for the purpose of gaining control over the direction of the Company.
SECTION 5.
CONDITIONS TO CLOSING OF THE INVESTORS
The Investors' obligations to purchase the Shares at the Closing are, at
the option of the Investors, subject to the fulfillment of the following
conditions:
5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties made by the Company in Section 3 hereof shall be true and correct in
all material respects as of the Closing Date and the Company shall have
performed all obligations and conditions required to be performed or observed by
it on or prior to the Closing Date and all documents incident thereto shall be
satisfactory in form and content to the Investors and special counsel to the
Investors.
5.2 OFFICER'S CERTIFICATE. The Company shall have delivered to each
Investor a certificate or certificates, executed by an authorized officer of the
Company, dated the Closing Date, certifying to the fulfillment of the conditions
specified in Section 5.1.
5.3 INVESTOR RIGHTS AGREEMENT. The Company and the Investors shall have
executed and delivered the Investor Rights Agreement substantially in the form
attached hereto as Exhibit B.
5.4 FEES AND EXPENSES. The Company shall pay the fees and expenses of
one counsel to Investors reasonably incurred; provided, however, that under no
circumstances shall such amount exceed $10,000 in the aggregate.
5.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in
connection with the transactions contemplated at the Closing and all documents
and instruments incident to such transactions shall have been reasonably
approved by special counsel to the Investors, and the
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Investors and its special counsel shall have received all such counterpart
originals or certified or other copies of such documents as they may reasonably
request.
5.6 COMPLIANCE WITH LAWS. The offer and purchase and sale of Shares to
the Investors hereunder shall be legally permitted by all laws and regulations
to which the Company or the Investors are subject.
5.7 LEGAL OPINION. Each Investor shall have received from Wilson Sonsini
Goodrich & Rosati, P.C., counsel to the Company, an opinion, dated as of the
Closing, in the form attached hereto as Exhibit A.
SECTION 6.
CONDITIONS TO CLOSING OF COMPANY
The Company's obligation to sell and issue the Shares at the Closing
Date is, at the option of the Company, subject to the fulfillment as of the
Closing Date of the following conditions:
6.1 REPRESENTATIONS AND COVENANTS. The representations made by the
Investors in Section 4 hereof shall be true and correct when made, and shall be
true and correct on the Closing Date and the Investors shall have performed all
obligations and conditions required to be performed or observed by it on or
prior to the Closing Date and all documents incident thereto shall be
satisfactory in form and content to the Company.
SECTION 7.
COVENANTS
7. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT; SHAREHOLDER
APPROVAL; LISTING.
7.1 REGISTRATION PROCEDURES AND EXPENSES. The Company shall:
(a) subject to receipt of necessary information from the
Investors, prepare and file with the SEC, within sixty (60) days after the
Closing Date, a registration statement (the "Registration Statement") to enable
the resale of the Common Stock purchased hereby by the Investors from time to
time through the automated quotation system of the Nasdaq National Market or
NASD Over the Counter (OTC) Bulletin Board system as applicable, or in
privately-negotiated transactions;
(b) use its reasonable efforts, subject to receipt of
necessary information from the Investors, to cause the Registration Statement to
become effective within 90 days after the Registration Statement is filed by the
Company;
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(c) in each case upon providing written notice thereof to
each Investor at least five (5) days prior thereto, prepare and file with the
SEC such amendments and supplements to the Registration Statement and the
prospectus used in connection therewith (the "Prospectus") as may be necessary
to keep the Registration Statement current and effective for a period not
exceeding, with respect to each Investor's Shares purchased hereunder, the
earlier of (i) the date on which the Investor may sell all Shares then held by
the Investor in accordance with the provisions of Rule 144 of the Securities Act
during any three (3)-month period, or (ii) such time as all Shares purchased by
such Investor in this offering have been sold;
(d) furnish to the Investor with respect to the Shares
registered under the Registration Statement such number of copies of the
Registration Statement, Prospectuses and Preliminary Prospectuses in conformity
with the requirements of the Securities Act and such other documents as the
Investor may reasonably request, in order to facilitate the public sale or other
disposition of all or any of the Shares by the Investor; provided, however, that
the obligation of the Company to deliver copies of Prospectuses or Preliminary
Prospectuses to the Investor shall be subject to the receipt by the Company of
reasonable assurances from the Investor that the Investor will comply with the
applicable provisions of the Securities Act and of such other securities or blue
sky laws as may be applicable in connection with any use of such Prospectuses or
Preliminary Prospectuses;
(e) file documents required of the Company for normal blue
sky clearance in states specified in writing by the Investor, provided, however,
that the Company shall not be required to qualify to do business or consent to
service of process in any jurisdiction in which it is not now so qualified or
has not so consented;
(f) bear all expenses in connection with the procedures in
paragraph (a) through (e) of this Section 7.1 and the registration of the Shares
pursuant to the Registration Statement; and
(g) advise the Investors, promptly after it shall receive
notice or obtain knowledge of the issuance of any stop order by the SEC delaying
or suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose; and it will promptly
use its reasonable efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order should
be issued.
7.2 TRANSFER OF SHARES AFTER REGISTRATION; SUSPENSION.
(a) The Investor agrees that it will not effect any
disposition of the Shares or its right to purchase the Shares that would
constitute a sale within the meaning of the Securities Act except as
contemplated in the Registration Statement referred to in Section 7.1 and as
described below, and that it will promptly notify the Company of any changes in
the information set forth in the Registration Statement regarding the Investor
or its plan of distribution.
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<PAGE> 12
(b) If any Investor (or any permitted transferee) shall
propose to sell any Shares pursuant to the Registration Statement, it shall
notify Company of its intent to do so at least three (3) full business days
prior to such sale. Such notice shall be deemed to constitute a representation
that any information previously supplied by such Investor or transferee is
accurate as of the date of such notice. At any time within such three (3)
business-day period, the Company may refuse to permit the Investor or transferee
to resell any Shares pursuant to the Registration Statement; provided, however,
that the Company in each case shall use its best reasonable efforts to respond
as rapidly as possible; and provided, however, that in order to exercise this
right, the Company must deliver a certificate in writing to the requesting party
to the effect that a delay in such sale is necessary because a sale pursuant to
such Registration Statement in its then-current form would not be, in the
reasonable judgment of the Company, in the best interests of the Company and its
stockholders. In no event shall such delay exceed thirty (30) calendar days with
respect to any single exercise of the Company's rights hereunder, and provided
further, however, that in no event shall the Company be permitted to exercise
this right more than three times or for more than an aggregate of sixty (60)
calendar days in any single calendar year. In addition, the Company agrees to
use its reasonable best efforts to resolve whatever condition or conditions have
occasioned any such delay on its part, and will promptly end such delay upon
resolution of such condition or conditions.
(c) Provided that a suspension is not then in effect the
Investor may sell Shares under the Registration Statement, provided that it
arranges for delivery of a current Prospectus to the transferee of such Shares.
Upon receipt of a request therefor, the Company has agreed to provide an
adequate number of current Prospectuses to the Investor and to supply copies to
any other parties requiring such Prospectuses.
7.3 INDEMNIFICATION. For the purpose of this Section 7.3:
(i) the term "Selling Stockholder" shall include the
Investor and any affiliate of such Investor;
(ii) the term "Registration Statement" shall include
any final Prospectus, exhibit, supplement or amendment included in or relating
to the Registration Statement (or any of the securities offered thereunder)
referred to in Section 7.1; and
(iii) the term "untrue statement" shall include any
untrue statement or alleged untrue statement, or any omission or alleged
omission to state in the Registration Statement a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(a) The Company agrees to indemnify and hold harmless each
Selling Stockholder from and against any losses, claims, damages or liabilities
to which such Selling Stockholder may become subject (under the Securities Act
or otherwise) insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of, or are based upon (i) any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, or (ii) any omission or alleged omission to state
therein a material fact
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required to be stated therein, or necessary to make the statements therein not
misleading, or (iii) any violation or alleged violation by the company of the
Securities Act, the Exchange Act, any state securities laws or any rule or
regulation promulgated under the Securities Act, the Exchange Act or any state
securities laws, (iv) any failure by the Company to fulfill any undertaking
included in the Registration Statement, and the Company will reimburse such
Selling Stockholder for any reasonable legal or other expenses reasonably
incurred in connection with investigating, defending or preparing to defend any
such action, proceeding or claim, provided, however, that the Company shall not
be liable in any such case to the extent that such loss, claim, damage or
liability arises out of, or is based upon, an untrue statement made in such
Registration Statement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Selling Stockholder
specifically for use in preparation of the Registration Statement or the failure
of such Selling Stockholder to comply with its covenants and agreements
contained in 7.2 hereof respecting sale of the Shares or any statement or
omission in any Prospectus that is corrected in any subsequent Prospectus that
was delivered to the Investor prior to the pertinent sale or sales by the
Investor.
(b) The Investor agrees to indemnify and hold harmless the
Company (and each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act, each officer of the Company who signs the
Registration Statement and each director of the Company) from and against any
losses, claims, damages or liabilities, joint or several, to which the Company
(or any such officer, director or controlling person) may become subject (under
the Securities Act or otherwise), insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of, or are
based upon, (i) any failure to comply with the covenants and agreements
contained in Section 7.2 hereof respecting sale of the Shares, or (ii) any
untrue statement of a material fact contained in the Registration Statement if
such untrue statement was made in reliance upon and in conformity with written
information furnished by or on behalf of the Investor specifically for use in
preparation of the Registration Statement, and the Investor will reimburse the
Company (or such officer, director or controlling person), as the case may be,
for any legal or other expenses reasonably incurred in investigating, defending
or preparing to defend any such action, proceeding or claim; provided that in no
event shall any indemnity under this Subsection 7.3(b) exceed the net proceeds
from the offering received by the Selling Stockholder.
(c) Promptly after receipt by any indemnified person of a
notice of a claim or the beginning of any action in respect of which indemnity
is to be sought against an indemnifying person pursuant to this Section 7.3,
such indemnified person shall notify the indemnifying person in writing of such
claim or of the commencement of such action, but the omission to so notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party under this Section 7.3 (except to the extent that such
omission materially and adversely affects the indemnifying party's ability to
defend such action) or from any liability otherwise than under this Section 7.3.
Subject to the provisions hereinafter stated, in case any such action shall be
brought against an indemnified person, the indemnifying person shall be entitled
to participate therein, and, to the extent that it shall elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid notice
from such indemnified party, shall be entitled to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified person. After notice
from the
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indemnifying person to such indemnified person of its election to assume the
defense thereof, such indemnifying person shall not be liable to such
indemnified person for any legal expenses subsequently incurred by such
indemnified person in connection with the defense thereof, provided, however,
that if there exists or shall exist a conflict of interest that would make it
inappropriate, in the opinion of counsel to the indemnified person, for the same
counsel to represent both the indemnified person and such indemnifying person or
any affiliate or associate thereof, the indemnified person shall be entitled to
retain its own counsel at the expense of such indemnifying person; provided,
however, that unless another such specific conflict of interest between
indemnified parties requires otherwise, no indemnifying person shall be
responsible for the fees and expenses of more than one separate counsel
(together with appropriate local counsel) for all indemnified parties. In no
event shall any indemnifying person be liable in respect of any amounts paid in
settlement of any action unless the indemnifying person shall have approved the
terms of such settlement; provided that such consent shall not be unreasonably
withheld. No indemnifying person shall, without the prior written consent of the
indemnified person, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified person is or could have been a
party and indemnification could have been sought hereunder by such indemnified
person, unless such settlement includes an unconditional release of such
indemnified person from all liability on claims that are the subject matter of
such proceeding.
(d) If the indemnification provided for in this Section
7.3 is unavailable to or insufficient to hold harmless an indemnified party
under subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative fault of the Company on the one hand and the Investors
on the other in connection with the statements or omissions or other matters
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things, in the
case of an untrue statement, whether the untrue statement relates to information
supplied by the Company on the one hand or an Investor on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement. The Company and the Investors agree
that it would not be just and equitable if contribution pursuant to this
subsection (d) were determined by pro rata allocation (even if the Investors
were treated as one entity for such purpose) or by any other method of
allocation which does not take into account the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (d), no Investor
shall be required to contribute any amount in excess of the amount by which the
net amount received by the Investor from the sale of the Shares to which such
loss relates exceeds the amount of any damages which such Investor has otherwise
been required to pay by reason of such untrue statement. No person guilty of
fraudulent misrepresentation (within the
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meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Investors' obligations in this subsection to contribute
are several in proportion to their sales of Shares to which such loss relates
and not joint.
(e) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof including, without limitation,
the provisions of this Section 7.3, and are fully informed regarding said
provisions. They further acknowledge that the provisions of this Section 7.3
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is made
in the Registration Statement as required by the Securities Act and the Exchange
Act. The parties are advised that federal or state public policy as interpreted
by the courts in certain jurisdictions may be contrary to certain of the
provisions of this Section 7.3, and the parties hereto hereby expressly waive
and relinquish any right or ability to assert such public policy as a defense to
a claim under this Section 7.3 and further agree not to attempt to assert any
such defense.
7.4 TERMINATION OF CONDITIONS AND OBLIGATIONS. The conditions precedent
imposed by this Section 7 upon the transferability of the Shares shall cease and
terminate as to any particular number of the Shares when such Shares shall have
been effectively registered under the Securities Act and sold or otherwise
disposed of in accordance with the intended method of disposition set forth in
the Registration Statement covering such Shares or at such time as an opinion of
counsel satisfactory to the Company shall have been rendered to the effect that
such conditions are not necessary in order to comply with the Securities Act.
7.5 SHAREHOLDER APPROVAl. The Company shall use its reasonable best
efforts to seek shareholder approval for an increase in the authorized number of
shares of Common Stock or a reverse stock split, and to reserve sufficient
shares of Common Stock, to enable the Company to perform it conversion
obligations with respect to the Shares. Upon such action, the Company shall use
its reasonable best efforts to ensure that the Underlying Shares when issued in
accordance with the Certificate of Incorporation shall be duly authorized,
validly issued, fully paid and nonassessable and free and clear of all liens.
7.6 LISTING. Promptly following the Closing, the Company shall use its
best reasonable efforts to cause all of the outstanding shares of the Common
Stock of the Company and the Underlying Shares to be approved for listing in the
Nasdaq National Market or SmallCap Market, as the case may be, and shall provide
to the Investors evidence of such listing when approved and shall use its best
reasonable efforts to maintain the listing of its Common Stock on such exchange.
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SECTION 8.
MISCELLANEOUS
8.1 FURTHER ASSURANCES. The parties hereto shall take all such actions,
and shall execute and deliver all such documents and instruments, as may be
reasonably requested by the other to carry out the purposes and intent of the
provisions of this Agreement.
8.2 GOVERNING LAW. Except as set forth below, this Agreement shall be
governed by and construed in accordance with the laws of the State of
California.
8.3 ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement shall be settled by binding arbitration to be held in San Jose,
California. Such arbitration shall be in accordance with the rules of the
American Arbitration Association, and judgment upon the award may be entered in
any court of competent jurisdiction. The prevailing party or parties in such
arbitration and any ensuing legal action shall be reimbursed by the party or
parties who do not prevail for their reasonable attorneys', accountants' and
experts' fees and the costs of such actions.
8.4 AMENDMENT. Neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by each of the parties hereto.
8.5 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be effective upon receipt and
may be delivered in person, by telecopy, express delivery service or U.S. mail,
in which event it may be mailed by first-class, registered or certified mail,
postage prepaid, addressed to:
if to the Company to:
OneWorld Systems, Inc.
1144 E. Arques Avenue
Sunnyvale, California 94086
Attn: Neil Selvin
Fax: (408)523-2019
with a copy to:
Alan K. Austin
Wilson Sonsini Goodrich & Rosati,
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Fax: (650) 493-6811
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if to the Investors:
to the address listed on Schedule 8.5 attached hereto
with a copy to:
Patrick Pohlen
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306-2155
Fax: (650) 857-0663
8.6 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to either party upon any breach or default of such
other party under this Agreement, shall impair any such right, power or remedy
of such party nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of either party or any waiver on the part of either party of any
provisions or conditions of this Agreement, must be in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement, or by law or otherwise afforded to either
party, shall be cumulative and not alternative.
8.7 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue full force and effect
without said provision.
8.8 TITLES AND SUBTITLES. The titles of the paragraphs and subparagraphs
of this Agreement are used for convenience only and are not considered in
construing or interpreting this Agreement.
8.9 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
8.10 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be enforceable against the party actually
executing such counterpart, and all of which together shall constitute one
instrument.
8.11 SURVIVAL OF WARRANTIES. The warranties, representations and
covenants of the Company and the Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing.
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<PAGE> 18
8.12 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto pertaining to the subject matter hereof, and any and
all other written or oral agreements existing between the parties hereto are
expressly canceled.
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<PAGE> 19
The foregoing Unit Stock Purchase Agreement is hereby executed as of the
date set forth above.
ONEWORLD SYSTEMS, INC.
By: /S/ Neil Selvin
-------------------------------------
Title: President and CEO
INVESTORS:
ACCESS TECHNOLOGY PARTNERS
BROKERS FUND, L.P.
By: H&Q VENTURE MANAGEMENT, L.L.C.
Its: General Partner
By: /S/ Robert N. Savoie
-------------------------------------------------
Its: Robert N. Savoie Tax Director, Attorney-in-Fact
-----------------------------------------------
ACCESS TECHNOLOGY PARTNERS, L.P.
By: ACCESS TECHNOLOGY MANAGEMENT, L.L.C.
Its: General Partner
By: H&Q VENTURE MANAGEMENT, L.L.C.
Its: Managing Member
By: /S/ Robert N. Savoie
--------------------------------------------------
Its: Robert N. Savoie Tax Director, Attorney-in-Fact
-----------------------------------------------
[SIGNATURE PAGE TO THE UNIT PURCHASE AGREEMENT]
<PAGE> 20
HAMBRECHT & QUIST CALIFORNIA
By: /S/ Robert N. Savoie
------------------------------------------------
Its: Robert N. Savoie Tax Director, Attorney-in-Fact
------------------------------------------------
HAMBRECHT & QUIST EMPLOYEE VENTURE FUND, L.P. II
By: H&Q VENTURE MANAGEMENT, L.L.C
Its: General Partner
By: /S/ Robert N. Savoie
------------------------------------------------
Its: Robert N. Savoie Tax Director, Attorney-in-Fact
------------------------------------------------
DANIEL H. CASE III
By: /S/ Daniel H. Case III
------------------------
DELAWARE CHARTER GUARANTEE & TRUST
COMPANY, CUSTODIAN FOR DANIEL H. CASE
By: /S/ Daniel H. Case
-----------------------
Name: Daniel H. Case
-----------------------
STEPHEN M. CASE
By: /S/ Stephen M. Case
-------------------------
[SIGNATURE PAGE TO THE UNIT PURCHASE AGREEMENT]
<PAGE> 21
DAVID GOLDEN
By: /S/ David Golden
--------------------------
MARK ZANOLI
By: /S/ David Yao, Attorney-in-Fact
--------------------------------
[SIGNATURE PAGE TO THE UNIT PURCHASE AGREEMENT]
<PAGE> 22
INTEGRAL CAPITAL PARTNERS IV, L.P.
By: INTEGRAL CAPITAL MANAGEMENT IV, LLC
Its: General Partner
By: /S/ Pamela K. Hagenah
----------------------------------------
Pamela K. Hagenah
A Manager
INTEGRAL CAPITAL PARTNERS IV MS SIDE FUND, L.P.
By: ICP MS MANAGEMENT, LLC
Its: General Partner
By: Pamela K. Hagenah
---------------------------------------
Pamela K. Hagenah
A Manager
[SIGNATURE PAGE TO THE UNIT PURCHASE AGREEMENT]
<PAGE> 23
COMPTON FAMILY TRUST, APRIL 19, 1996
By: Kevin Compton
----------------------------
Its: Trustee
----------------------------
[SIGNATURE PAGE TO THE UNIT PURCHASE AGREEMENT]
<PAGE> 1
EXHIBIT 4.11
ONEWORLD SYSTEMS, INC.
INVESTOR RIGHTS AGREEMENT
This Investor Rights Agreement (the "AGREEMENT") is made and entered
into as of March 3, 1999 by and among OneWorld Systems, Inc., a Delaware
corporation (the "COMPANY"), and the persons listed on Schedule A attached
hereto (the "INVESTORS").
RECITALS
WHEREAS, the Company desires for the Investors to purchase shares of the
Company's Common Stock and Series A Preferred Stock pursuant to a Unit Purchase
Agreement of even date herewith (the "PURCHASE AGREEMENT"); and
WHEREAS, as an inducement for the Investors to enter into the Purchase
Agreement, the Company and the Investors desire to enter into this Agreement.
1. RIGHTS OF INVESTORS.
The Company hereby grants to the Investors the registration rights
(collectively the "INVESTOR RIGHTS") contained herein. The Investors accept the
Investor Rights, as applicable, and agree to be bound by the obligations
contained herein.
2. REGISTRATION RIGHTS.
2.1 DEFINITIONS.
(a) Exchange Act. The term "EXCHANGE ACT" means the
Securities Exchange Act of 1934, as amended.
(b) Form S-1. The term "FORM S-1" means such form
under the Securities Act as is in effect on the date hereof or any successor
registration form under the Securities Act subsequently adopted by the SEC.
(c) Form S-3. The term "FORM S-3" means such form
under the Securities Act as is in effect on the date hereof or any successor
registration form under the Securities Act subsequently adopted by the SEC which
permits inclusion or incorporation of substantial information by reference to
other documents filed by the Company with the SEC.
(d) Holder. For purposes of this Section 2, the term
"HOLDER" means any person owning of record Registrable Securities that have not
been sold to the public or pursuant to
<PAGE> 2
Rule 144 promulgated under the Securities Act or any assignee of record of such
Registrable Securities to whom rights under this Section 2 have been duly
assigned in accordance with this Agreement (including Section 2.10 hereof).
(e) Initiating Holder. The term "INITIATING HOLDER"
shall mean any Holder or Holders who in the aggregate are Holders of not less
than a majority of the then outstanding Registrable Securities which have not
been sold to the public.
(f) Preferred Stock. The term "PREFERRED STOCK" shall mean
the Series A Preferred Stock of the Company.
(g) Registrable Securities. The term "REGISTRABLE
SECURITIES" means: (1) all shares of Series A Preferred Stock and Common Stock
issued and outstanding as of March 12, 2001, (2) all shares of Common Stock
issued or issuable pursuant to the conversion of Series A Preferred Stock, and
(3) any shares of the Common Stock of the Company or other securities issued in
connection with any stock split, stock dividend, recapitalization or similar
event relating to the foregoing; excluding in all cases, however, any
Registrable Securities sold by a person in a transaction in which rights under
this Section 2 are not assigned in accordance with this Agreement or any
Registrable Securities sold to the public or sold pursuant to Rule 144
promulgated under the Securities Act.
(h) Registration. The terms "REGISTER," "REGISTERED," and
"REGISTRATION" refer to a registration effected by preparing and filing a
registration statement on Form S-1 or Form S-3 in compliance with the Securities
Act, and the declaration or ordering of effectiveness of such registration
statement.
(i) Registration Expenses. "REGISTRATION EXPENSES" shall
mean all expenses incurred by the Company in complying with Section 2.2 hereof,
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel and accountants for the Company,
fees and expenses of one counsel for all the Holders, blue sky fees and expenses
and the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company, which shall be paid in any event by the Company).
(j) SEC. The term "SEC" or "COMMISSION" means the
U.S. Securities and Exchange Commission.
(k) Selling Expenses. "SELLING EXPENSES" shall mean all
underwriting discounts and selling commissions applicable to the sale of
Registrable Securities.
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<PAGE> 3
2.2 REQUESTED REGISTRATION.
(k) Request for Registration by Initiating Holders. If the
Company shall receive from Initiating Holders, at any time after the date sixty
(60) calendar days from the date hereof, a written request that the Company
effect any registration with respect to all or a part of that portion of the
Registrable Securities which consists of Common Stock, or alternately, at any
time after the date two (2) calendar years from the date hereof, a written
request that the Company effect any registration with respect to all or part of
that portion of the Registrable Securities which consists of Series A Preferred
Stock and/or Common Stock, the Company will:
(i) promptly give written notice of the
proposed registration, qualification or compliance to all other Holders of
Registrable Securities; and
(ii) as soon as practicable, use its best
efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act) as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any Holder or Holders joining in such request as are of the same
class as those which are the subject of the request and are specified in a
written request received by the Company within 15 days after written notice from
the Company is given under Section 2.2(a)(i) above; provided, however, that the
Company shall not be obligated to effect, or take any action to effect, any such
registration pursuant to this Section 2.2(a):
(A) In any particular jurisdiction in which
the Company would be required to execute a general consent to service of process
in effecting such registration, qualification or compliance unless the Company
is already subject to service in such jurisdiction and except as may be required
by the Securities Act or applicable rules or regulations thereunder; or
(B) With respect to that portion of the
Registrable Securities which consists of shares of Common Stock, after the
Company has effected one such registration of shares of Common Stock pursuant to
Section 2.2 and such registration has been declared or ordered effective and the
sale of such Registrable Securities shall have closed; and with respect to that
portion of the Registrable Securities which consists of shares of Series A
Preferred Stock, after the Company has effected one such registration of shares
of Series A Preferred Stock pursuant to Section 2.2 and such registration has
been declared or ordered effective and the sale of such Registrable Securities
shall have closed.
The registration statement filed pursuant to the request of the
Initiating Holders may, subject to the provisions of Section 2.2(b) below,
include other securities of the Company which are held by officers or directors
of the Company, or which are held by persons who, by virtue of agreements with
the Company, are entitled to include their securities in any such registration,
but the Company and
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<PAGE> 4
such other holders shall have no absolute right to include any of its securities
in any such registration.
(b) Underwriting; Request by Initiating Holders. If
the Initiating Holders intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to Section 2.2(a) and the Company shall
include such information in the written notice referred to in Section 2.2(a). In
such event, the right of any Holder to include such Holder's Registrable
Securities in such registration shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the Company as provided in Section
2.4(e)) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Holders and reasonably acceptable to the Company.
Notwithstanding any other provision of Section 2.2, if the underwriter advises
the Company and the Initiating Holders in writing that marketing factors require
a limitation of the number of shares to be underwritten, then the Company shall
so advise all Holders of Registrable Securities which would otherwise be
underwritten pursuant hereto, and the number of shares of Registrable Securities
that may be included in the underwriting shall be allocated among all Holders
thereof, including the Initiating Holders, in such proportion (as nearly as
practicable) among the Holders pro rata based on the amount of Registrable
Securities owned by each Holder.
(c) Notwithstanding the foregoing, if the Company
shall furnish to the Holders requesting the filing of a registration statement
pursuant to Section 2.2(a), a certificate signed by the President or Chief
Executive Officer of the Company stating that a delay in the filing of the
registration statement is necessary because in the reasonable judgment of the
Company, it would not be in the best interest of the Company and its
stockholders for such registration statement to be filed. In no event shall such
delay exceed thirty (30) calendar days with respect to any single exercise of
the Company's rights hereunder, and provided further, however, that in no event
shall Company be permitted to exercise this right more than three times or for
more than an aggregate of sixty (60) calendar days in any single calendar year.
In addition, the Company agrees to use its reasonable best efforts to resolve
whatever condition or conditions have occasioned any such delay on its part, and
will promptly end such delay upon resolution of such condition or conditions.
(d) Notwithstanding the foregoing, in the event that
the Company shall prepare and file with the SEC a registration statement
covering securities to be distributed on its own behalf (including, but not
limited to, registration statements relating to secondary offerings of
securities of the Company, but excluding any registration statement relating to
any employee benefit plan or a corporate reorganization, a "Company
Registration"), and such registration statement shall become effective, then
during the period of effectiveness of such Company Registration, the Company
shall have no obligation to prepare, file, or keep effective any registration
statement with respect to Registrable Securities of the Holders; however, such
obligations of the Company with
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<PAGE> 5
respect to the Holders as are contained elsewhere in this Section 2 shall arise
again immediately upon the end of the effectiveness of any Company Registration,
and if necessary, at such time the Company shall prepare, file and keep
effective a registration statement with respect to any Registrable Securities of
the Holders for which a previously effective registration statement was
preempted by a Company Registration.
(e) In the event that because of a planned Company
Registration, pursuant to Section 2.2(d) the Company will fail to maintain the
effectiveness of an effective registration statement previously filed with the
SEC to register Registrable Securities of the Holders pursuant to a request by
the Initiating Holders under this Section 2.2, the Company shall notify all
Holders in writing at least 30 days prior to such Company Registration, and will
afford each such Holder an opportunity to include in such Company Registration
all or any part of the Registrable Securities then held by such Holder. Each
Holder desiring to include in any such Company Registration all or any part of
the Registrable Securities held by such Holder shall, within 15 days after
receipt of the above-described notice from the Company, so notify the Company in
writing, and in such notice shall inform the Company of the number of
Registrable Securities such Holder wishes to include in such Company
Registration. If a Company Registration as which the Company gives notice under
this Section 2.2(e) is for an underwritten offering, then the Company shall so
advise the Holders. In such event, the right of any such Holder's Registrable
Securities to be included in the Company Registration shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their Registrable Securities through
such underwriting shall enter into an underwriting agreement in customary form
with the managing underwriter or underwriter(s) selected for such underwriting.
Notwithstanding any other provision of this Agreement, if the managing
underwriter(s) determine(s) in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the managing
underwriter(s) may exclude shares (including Registrable Securities) from the
registration and the underwriting, and the number of shares that may be included
in the registration and the underwriting shall be allocated, first, to the
Company, and second, to each of the Holders of Registrable Securities requesting
inclusion of their Registrable Securities in such registration statement, to be
allocated among all Holders thereof pro rata based on the amount of Registrable
Securities of the Company owned by each Holder. Any Registrable Securities
excluded or withdrawn from such underwriting shall be excluded and withdrawn
from the Company Registration.
2.3 EXPENSES OF REGISTRATION. All Registration Expenses incurred
in connection with one demand registration (pursuant to Section 2.2) shall be
borne by the Company, and all Selling Expenses shall be borne by the Holders of
the securities so registered pro rata on the basis of the number of their shares
so registered.
2.4 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities under this Agreement, the Company
shall, as expeditiously as reasonably possible:
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<PAGE> 6
(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective, and keep such
registration statement effective until the distribution is completed, subject to
any termination or suspension of the Holders' registration rights as provided
elsewhere herein.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and all amendments and supplements thereto,
and such other documents as they may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by them that are included in
such registration.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions,
unless the Company is already subject to service in such jurisdiction and except
as may be required by the Securities Act or applicable rules or regulations
thereunder.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter(s) of such offering. Each
Holder participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing and, following such notification, promptly deliver to each Holder
copies of all amendments or supplements referred to in paragraphs (b) and (c) of
this Section 2.4.
(g) Furnish, at the request of any Holder registering
Registrable Securities, on the date that such Registrable Securities are
delivered to the underwriters for sale, if such securities are being sold
through underwriters, (i) an opinion, dated as of such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering addressed to the underwriters, if
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<PAGE> 7
any, and if there are no underwriters, to the Holders requesting registration of
Registrable Securities; provided, however that the requesting Holder and the
Company shall each bear one half of the reasonable fees and expenses of counsel
in generating such opinion, and (ii) a "comfort" letter dated as of such date,
from the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering and reasonably satisfactory to a
majority in interest of the Holders requesting registration, addressed to the
underwriters; provided, however that the requesting Holder and the Company shall
each bear one half of the reasonable fees and expenses of the Company's
independent certified public accountants in generating such letter.
2.5 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Sections 2.2 that the
selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be required to timely effect the
registration of Registrable Securities.
2.6 DELAY OF REGISTRATION. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 2.
2.7 INDEMNIFICATION.
(a) For the purpose of this Section 2.7:
(i) the term "registration statement" shall
include any final prospectus, exhibit, supplement or amendment included in or
relating to the registration statement (or any of the securities offered
thereunder) referred to in Section 2.2 and
(ii) the term "untrue statement" shall include
any untrue statement or alleged untrue statement, or any omission or alleged
omission to state in the registration statement a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) The Company agrees to indemnify and hold harmless
each Holder (or any partner, officer or director of such Holder, and any person
who controls such Holder within the meaning of the Securities Act or the
Exchange Act) from and against any losses, claims, damages or liabilities, joint
or several, to which such person may become subject (under the Securities Act or
otherwise) insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of, or are based upon (i) any untrue
statement or alleged untrue statement of a material fact, or any omission to
state or alleged omission to state a material fact contained in the registration
statement, (ii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation promulgated thereunder in connection with the offering covered by the
registration statement, or (iii) any failure by the
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<PAGE> 8
Company to fulfill any undertaking included in the registration statement, and
the Company will reimburse such person for any reasonable legal or other
expenses reasonably incurred in investigating, defending or preparing to defend
any such action, proceeding or claim, or preparing to defend any such action,
proceeding or claim, provided, however, that the Company shall not be liable in
any such case to the extent that such loss, claim, damage or liability arises
out of, or is based upon, an untrue statement or alleged untrue statement, or
any omission to state or alleged omission to state a material fact made in such
registration statement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Holder specifically
for use in preparation of the registration statement or the failure of such
Holder to comply with its covenants and agreements contained in 2.8 hereof
respecting sale of the Registrable Securities or any statement or omission in
any Prospectus that is corrected in any subsequent Prospectus that was delivered
to the Holder prior to the pertinent sale or sales by the Holder.
(c) Each Holder agrees to indemnify and hold harmless
the Company (and each person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act, each officer of the Company who
signs the registration statement and each director of the Company) from and
against any losses, claims, damages or liabilities to which the Company (or any
such officer, director or controlling person) may become subject (under the
Securities Act or otherwise), insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of, or are
based upon, (i) any failure to comply with the covenants and agreements
contained in Section 2.8 hereof respecting sale of the Registrable Securities,
or (ii) any untrue statement or alleged untrue statement of a material fact, or
any omission to state or alleged omission to state a material fact contained in
the registration statement if such untrue statement or alleged untrue statement,
or any omission to state or alleged omission to state a material fact was made
in reliance upon and in conformity with written information furnished by or on
behalf of such Holder the Investor specifically for use in preparation of the
registration statement, and such Holder will reimburse the Company (or such
officer, director or controlling person), as the case may be, for any legal or
other expenses reasonably incurred in connection with investigating, defending
or preparing to defend any such action, proceeding or claim; provided, however,
that the indemnity agreement contained in this Section 2.7(c) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of such Holder, which consent
shall not be unreasonably withheld; provided, further, that in no event shall
the liability of any Holder under this Section 2.7 exceed the proceeds from the
offering actually received by such Holder.
(d) Promptly after receipt by any indemnified person
of a notice of a claim or the beginning of any action in respect of which
indemnity is to be sought against an indemnifying person pursuant to this
Section 2.7, such indemnified person shall notify the indemnifying person in
writing of such claim or of the commencement of such action, but the omission to
so notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party under this Section 2.7 (except to the extent
that such omission materially and adversely affects the indemnifying party's
ability to defend such action) or from any liability otherwise than under this
Section 7.3. Subject to the provisions hereinafter stated, in case any such
action shall be brought
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<PAGE> 9
against an indemnified person, the indemnifying person shall be entitled to
participate therein, and, to the extent that it shall elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid notice
from such indemnified party, shall be entitled to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified person. After notice
from the indemnifying person to such indemnified person of its election to
assume the defense thereof, such indemnifying person shall not be liable to such
indemnified person for any legal expenses subsequently incurred by such
indemnified person in connection with the defense thereof, provided, however,
that if there exists or shall exist a conflict of interest that would make it
inappropriate, in the opinion of counsel to the indemnified person, for the same
counsel to represent both the indemnified person and such indemnifying person or
any affiliate or associate thereof, the indemnified person shall be entitled to
retain its own counsel at the expense of such indemnifying person; provided,
however, that unless an additional specific conflict of interest between two
indemnified parties otherwise requires, no indemnifying person shall be
responsible for the fees and expenses of more than one separate counsel
(together with appropriate local counsel) for all indemnified parties. In no
event shall any indemnifying person be liable in respect of any amounts paid in
settlement of any action unless the indemnifying person shall have approved the
terms of such settlement; provided that such consent shall not be unreasonably
withheld. No indemnifying person shall, without the prior written consent of the
indemnified person, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified person is or could have been a
party and indemnification could have been sought hereunder by such indemnified
person, unless such settlement includes an unconditional release of such
indemnified person from all liability on claims that are the subject matter of
such proceeding.
(e) If the indemnification provided for in this Section
2.7 is unavailable to or insufficient to hold harmless an indemnified party
under subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions in respect thereof) in such proportion as is appropriate
to reflect the relative fault of the Company on the one hand and the Holders on
the other in connection with the statements or omissions or other matters which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
fault shall be determined by reference to, among other things, in the case of an
untrue statement, whether the untrue statement relates to information supplied
by the Company on the one hand or Holder on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement. The Company and the Holders agree that it would not be
just and equitable if contribution pursuant to this subsection (d) were
determined by pro rata allocation (even if the Holders were treated as one
entity for such purpose) or by any other method of allocation which does not
take into account the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Holder
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<PAGE> 10
shall be required to contribute any amount in excess of the amount by which the
net amount received by such Holder from the sale of the Registrable Securities
to which such loss relates exceeds the amount of any damages which such Holder
has otherwise been required to pay by reason of such untrue statement. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Holders' obligations in
this subsection to contribute are several in proportion to their sales of
Registrable Securities to which such loss relates and not joint.
(f) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof including, without limitation,
the provisions of this Section 2.7, and are fully informed regarding said
provisions. They further acknowledge that the provisions of this Section 2.7
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is made
in the registration statement as required by the Securities Act and the Exchange
Act. The parties are advised that federal or state public policy as interpreted
by the courts in certain jurisdictions may be contrary to certain of the
provisions of this Section 2.7, and the parties hereto hereby expressly waive
and relinquish any right or ability to assert such public policy as a defense to
a claim under this Section 2.7 and further agree not to attempt to assert any
such defense.
2.8 TRANSFER OF SHARES AFTER REGISTRATION.
(a) RESTRICTIONS ON TRANSFER. No Holder may make any sale
of any Restricted Shares except either (i) in accordance with the Registration
Statement, in which case Holder must comply with the requirement of delivering a
current prospectus, or (ii) in accordance with Rule 144. Such Restricted Shares
are not transferable on the books of the Company unless the certificate
submitted to the Company's transfer agent evidencing such Shares is accompanied
by a separate certificate executed by an officer of, or other person duly
authorized by, the Holder for purposes of establishing compliance with this
Agreement. Such certificate shall be in such form as shall be supplied by the
Company.
(b) NOTICE OF PROPOSED SALE; RIGHT OF COMPANY TO SUSPEND
USE OF REGISTRATION STATEMENT. If any Holder shall propose to sell any
Registrable Securities pursuant to the Registration Statement, it shall notify
Company of its intent to do so at least three (3) full business days prior to
such sale. Such notice shall be deemed to constitute a representation that any
information previously supplied by such Holder is accurate as of the date of
such notice. At any time within such three (3) business-day period, Company may
refuse to permit the Holder to resell any Registrable Securities pursuant to the
Registration Statement; provided, however, that the Company in each case shall
use its best reasonable efforts to respond as rapidly as possible; and provided,
however, that in order to exercise this right, Company must deliver a
certificate in writing to the Holder to the effect that a delay in such sale is
necessary because a sale pursuant to such Registration Statement in its
then-current form would not be in the best interests of Company and its
-10-
<PAGE> 11
shareholders. In no event shall such delay exceed thirty (30) calendar days with
respect to any single exercise of the Company's rights hereunder, and provided
further, however, that in no event shall Company be permitted to exercise this
right more than three times or for more than an aggregate of sixty (60) calendar
days in any single calendar year. In addition, the Company agrees to use its
reasonable best efforts to resolve whatever condition or conditions have
occasioned any such delay on its part, and will promptly end such delay upon
resolution of such condition or conditions.
2.9 RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Registrable Securities to the public without
registration, after such time as a public market exists for the Common Stock of
the Company, the Company agrees to:
(a) Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times after the effective date of the first registration under the Securities
Act filed by the Company for an offering of its securities to the general
public;
(b) Use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(c) So long as a Holder owns any Registrable Securities,
to furnish to the Holder forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of Rule 144 and of
the Securities Act and the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration.
2.10 ASSIGNMENT OF REGISTRATION RIGHTS. The rights of a Holder
under this Section 2 may be assigned by any Holder in connection with any
transfer or assignment by a Holder of Registrable Securities provided that: (i)
such transfer may otherwise be effected in accordance with applicable securities
laws, (ii) such transfer is effected in compliance with the restrictions on
transfer contained in the Agreement and in any other agreement between the
Company and the Holder, (iii) such assignee or transferee either holds
subsequent to such transfer not less than one hundred thousand (100,000) shares
of Registrable Securities (treating the outstanding Series A Preferred Stock on
an as-converted basis) or is a subsidiary, wholly-owned entity, successor
entity, parent, member or stockholder of a Holder, and (iv) such other party
agrees in writing with the Company to be bound by all of the provisions of this
Section 2.
2.11 TERMINATION OF REGISTRATION RIGHTS. The registration rights
granted pursuant to Section 2 will terminate as to any Holder upon the earlier
to occur of (a) such time as a Holder can sell all of its remaining Registrable
Securities under Rule 144 of the Securities Act
-11-
<PAGE> 12
during any three (3)-month period, or (b) such time as all Registrable
Securities purchased by such Holder pursuant to the Purchase Agreement have been
sold.
3. LEGENDS.
Each Investor understands that the share certificates evidencing
any Registrable Securities shall be endorsed with the following legends (in
addition to any legends required under applicable state securities laws):
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) Any legend required to be place thereon by any other
applicable state securities laws.
4. MISCELLANEOUS.
4.1 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, the terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the respective successors and permitted
transferees and permitted assigns of the parties.
4.2 GOVERNING LAW. This Agreement shall be governed in all
respects by the laws of the State of California as applied to contracts made and
to be performed entirely within that state between residents of that state.
4.3 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one instrument.
4.4 TITLES AND SUBTITLES. The titles of the paragraphs and
subparagraphs of this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement.
4.5 STOCK SPLITS, ETC. All share numbers used in this Agreement
are subject to adjustment in the case of any stock split, reverse stock split,
combination or similar events.
4.6 NOTICES. Any notice required or permitted to be given to a
party pursuant to the provisions of this Agreement will be in writing and will
be effective and or (i) the date of delivery by facsimile, or (ii) the business
day after deposit with a nationally-recognized courier or overnight service,
including Express Mail, for United States deliveries or (iii) five (5) business
days
-12-
<PAGE> 13
after deposit in the United States mail by registered or certified mail for
United States deliveries. All notices not delivered personally or by facsimile
will be sent with postage and other charges prepaid and properly addressed to
the party to be notified at the address set forth below such party's signature
on this Agreement or at such other address as such party may designate by ten
(10) days advance written notice to the other parties hereto. All notices for
delivery outside the United States will be sent by facsimile, or by nationally
recognized courier or overnight service. Any notice given hereunder to more than
one person will be deemed to have been given, for purposes of counting time
periods hereunder, on the date given to the last party required to be given such
notice. Notices to the Company will be marked to the attention of the Chief
Financial Officer.
4.7 ATTORNEYS' FEES. If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
4.8 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the party against whom
enforcement of such amendment or waiver is sought; provided, however that with
respect to any Investor, the consent of the holders of more than 50% of the
Registrable Securities shall be sufficient to bind any and all Investors; and
provided, further, that where the amendment or waiver affects a right or creates
an obligation that is specific to a party named herein (whether an individual,
trust, partnership or corporation), the amendment or waiver of such right or
creation of such obligation shall require the consent of such party.
4.9 SEVERABILITY. If any provision of this Agreement is held to
be unenforceable under applicable law, then such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision was so excluded and shall be enforceable in accordance with its
terms.
4.10 ENTIRE AGREEMENT. This Agreement, together with all Exhibits
hereto, constitute the full and entire understanding and agreement between the
parties with respect to the subject matter hereof and supersedes all prior
negotiations, correspondence, agreements, understandings, duties or obligations
among the parties with respect to the subject matter hereof.
4.11 FURTHER ASSURANCES. From and after the date of this
Agreement, upon the request of a party, the other parties shall execute and
deliver such instruments, documents or other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement.
[Remainder of Page Intentionally Left Blank]
-13-
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed this Investor
Rights Agreement as of the date first above written.
ONEWORLD SYSTEMS, INC.
By: /S/ Neil Selvin
-------------------------------------
Title: President and CEO
----------------------------------
INVESTORS:
ACCESS TECHNOLOGY PARTNERS
BROKERS FUND, L.P.
By: H&Q VENTURE MANAGEMENT, L.L.C.
Its: General Partner
By: /S/ Robert N. Savoie
-----------------------------------------------
Its: Robert N. Savoie Tax Director, Attorney-in-Fact
-----------------------------------------------
ACCESS TECHNOLOGY PARTNERS, L.P.
By: ACCESS TECHNOLOGY MANAGEMENT, L.L.C.
Its: General Partner
By: H&Q VENTURE MANAGEMENT, L.L.C.
Its: Managing Member
By: /S/ Robert N. Savoie
-----------------------------------------------
Its: Robert N. Savoie Tax Director, Attorney-in-Fact
-----------------------------------------------
[SIGNATURE PAGE TO THE INVESTOR RIGHTS AGREEMENT]
<PAGE> 15
HAMBRECHT & QUIST CALIFORNIA
By: /S/ Robert N. Savoie
-----------------------------------------------
Its: Robert N. Savoie Tax Director, Attorney-in-Fact
-----------------------------------------------
HAMBRECHT & QUIST EMPLOYEE VENTURE FUND, L.P. II
By: H&Q VENTURE MANAGEMENT, L.L.C
Its: General Partner
By: /S/ Robert N. Savoie
-----------------------------------------------
Its: Robert N. Savoie Tax Director, Attorney-in-Fact
-----------------------------------------------
DANIEL H. CASE III
By: /S/ Daniel H. Case III
----------------------
DELAWARE CHARTER GUARANTEE & TRUST
COMPANY, CUSTODIAN FOR DANIEL H. CASE
By: /S/ Daniel H. Case
--------------------
Name: Daniel H. Case
--------------------
STEPHEN M. CASE
By: /S/ Stephen M. Case
-----------------------
[SIGNATURE PAGE TO THE INVESTOR RIGHTS AGREEMENT]
<PAGE> 16
DAVID GOLDEN
By: /S/ David Golden
---------------------------------
MARK ZANOLI
By: /S/ David Yao, Attorney-in-Fact
---------------------------------
[SIGNATURE PAGE TO THE INVESTOR RIGHTS AGREEMENT]
<PAGE> 17
INTEGRAL CAPITAL PARTNERS IV, L.P.
By: INTEGRAL CAPITAL MANAGEMENT IV, LLC
Its: General Partner
By: /S/ PAMELA K. HAGENAH
----------------------------------
Pamela K. Hagenah
A Manager
INTEGRAL CAPITAL PARTNERS IV MS SIDE FUND, L.P.
By: ICP MS MANAGEMENT, LLC
Its: General Partner
By: /s/ PAMELA K. HAGENAH
--------------------------------
Pamela K. Hagenah
A Manager
[SIGNATURE PAGE TO THE INVESTOR RIGHTS AGREEMENT]
<PAGE> 18
COMPTON FAMILY TRUST, APRIL 19, 1996
By: /s/ KEVIN COMPTON
-----------------------------------------
Its: Trustee
-----------------------------------------
[SIGNATURE PAGE TO THE INVESTOR RIGHTS AGREEMENT]
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
OneWorld Systems, Inc.
We consent to incorporation by reference in the registration statements (Nos.
333-19899, 333-40999, and 333-44917 on Forms S-3 and S-8 of OneWorld Systems,
Inc. of our report dated, May 4, 1999, except as to Note 11, which is as of June
23, 1999, relating to the consolidated balance sheets of OneWorld Systems, Inc.
and subsidiaries as of March 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1999, and the related schedule,
which report appears in the March 31, 1999, annual report on Form 10-K of
OneWorld Systems, Inc.
/s/ KPMG LLP
Mountain View, California
June 28, 1999
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<NAME> ONEWORLD SYSTEMS, INC.
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
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<ALLOWANCES> (32)
<INVENTORY> 184
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<BONDS> 0
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<COMMON> 25
<OTHER-SE> 52,488
<TOTAL-LIABILITY-AND-EQUITY> 12,128
<SALES> 13,067
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<TOTAL-COSTS> 9,850
<OTHER-EXPENSES> 14,765
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<INCOME-PRETAX> (5,174)
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