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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 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
ONEWORLD SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3095680
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1144 EAST ARQUES AVE.
SUNNYVALE, CA 94086
(Address of principal executive offices, including zip code)
(408) 523-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
The number of shares of Common Stock outstanding as of December 31, 1999 was
4,465,226.
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ONEWORLD SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements........................................................3
Condensed Consolidated Balance Sheets
as of December 31, 1999 and March 31, 1999 (unaudited).....................................3
Condensed Consolidated Statements of Operations
for the three and nine months ended December 31, 1999 and 1998 (unaudited).................4
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 1999 and 1998 (unaudited)...........................5
Notes to Condensed Consolidated Financial Statements...........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................15
Item 2. Changes in Securities and Use of Proceeds..............................................15
Item 3. Defaults Upon Senior Securities........................................................15
Item 4. Submission of Matters to a Vote of Security Holders....................................15
Item 5. Other Information......................................................................15
Item 6. Exhibits and Reports on Form 8-K.......................................................16
SIGNATURES.........................................................................................17
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,086 $ 11,175
Accounts receivable, net 106 79
Inventories, net -- 184
Other current assets 101 254
-------- --------
Total current assets 2,293 11,692
Property and equipment, net 277 268
Other assets 78 168
-------- --------
Total assets $ 2,648 $ 12,128
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 335 $ 796
Accrued and other liabilities 830 1,796
-------- --------
Total current liabilities 1,165 2,592
-------- --------
Stockholders' equity:
Convertible preferred stock, $0.001 par value (involuntary
liquidation value of $3,114,338 and $8,304,900) 5,000,000 shares
authorized, 1,162,505 and 3,100,000 shares issued and outstanding 1 3
Common stock, $0.001 par value; 30,000,000 shares authorized,
4,465,226 and 2,524,429 shares issued and outstanding 4 2
Additional paid in capital 53,515 53,511
Accumulated deficit (52,037) (43,980)
-------- --------
Total stockholders' equity 1,483 9,536
-------- --------
Total liabilities and stockholders' equity $ 2,648 $ 12,128
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
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ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue $ 162 $ 122 $ 394 $ 12,840
Cost of revenue 316 64 473 9,742
-------- -------- -------- --------
Gross profit (deficit) (154) 58 (79) 3,098
-------- -------- -------- --------
Operating expenses:
Research and development 789 850 2,636 4,469
Marketing and sales 1,601 777 4,082 4,243
General and administrative 477 807 1,879 2,925
Restructuring costs -- -- -- 404
-------- -------- -------- --------
Total operating expenses 2,867 2,434 8,597 12,041
-------- -------- -------- --------
Loss from operations (3,021) (2,376) (8,676) (8,943)
-------- -------- -------- --------
Other income, net:
Gain on sale of modem business 23 -- 291 6,128
Other income, net 34 61 192 166
-------- -------- -------- --------
Total other income, net 57 61 483 6,294
-------- -------- -------- --------
Loss before income taxes (2,964) (2,315) (8,193) (2,649)
Income tax benefit (provision) -- -- (25) 22
-------- -------- -------- --------
Loss from continuing operations (2,964) (2,315) (8,218) (2,627)
-------- -------- -------- --------
Discontinued operations:
Income from discontinued operations, net 161 -- 161 90
-------- -------- -------- --------
Net loss $ (2,803) $ (2,315) $ (8,057) $ (2,537)
======== ======== ======== ========
Basic and diluted per share data:
Loss per share from continuing operations $ (0.66) $ (1.35) $ (2.17) $ (1.53)
Income per share from discontinued operations 0.03 -- 0.04 0.05
-------- -------- -------- --------
Net loss per share $ (0.63) $ (1.35) $ (2.13) $ (1.48)
======== ======== ======== ========
Shares used in basic per share computations 4,468 1,718 3,779 1,717
Dilutive effect of stock options -- -- -- --
-------- -------- -------- --------
Shares used in diluted per share computations 4,468 1,718 3,779 1,717
======== ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
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ONEWORLD SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
December 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net loss $ (8,057) $ (2,537)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 153 691
Gain on sale of modem operations (291) (6,128)
Loss on disposal of property and equipment -- 2
Changes in operating assets and liabilities:
Accounts receivable, net (27) (1,007)
Inventories, net 184 28
Other current assets 153 31
Accounts payable (461) 910
Accrued and other liabilities (514) (671)
-------- --------
Net cash used in operating activities:
Continuing operations (8,860) (8,681)
Discontinued operations (161) (184)
-------- --------
Net cash used in operating activities (9,021) (8,865)
-------- --------
Investing activities:
Proceeds from sale of modem business -- 7,000
Proceeds from sale of property and equipment -- 28
Purchases of property and equipment (162) (66)
Other assets 90 --
-------- --------
Net cash provided in (used in) investing activities (72) 6,962
-------- --------
Financing activities:
Proceeds from issuance of common stock 4 9
-------- --------
Net cash provided in financing activities 4 9
-------- --------
Net decrease in cash and cash equivalents (9,089) (1,894)
Cash and cash equivalents at beginning of period 11,175 3,097
-------- --------
Cash and cash equivalents at end of period $ 2,086 $ 1,203
======== ========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 7 $ 198
Income taxes $ 25 $ 19
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
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ONEWORLD SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
OneWorld Systems, Inc. ("OneWorld Systems" or the "Company") (founded in
1989 and incorporated in Delaware as Global Village Communication, Inc.)
developed and manufactured products that enhanced and simplified wide-area
data communications for the small and medium sized office market. The
Company's OneWorld(R) OfficePort(TM) family of network communication
appliances were designed to be versatile, easy-to-use, cost-effective and
expandable solutions that combine Internet access and routing, remote
access, modem pooling and fax capabilities. On December 21, 1999 the
Company announced its intent to sell substantially all of its non-cash
assets to Tut Systems, Inc. and ceased ongoing operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The interim condensed consolidated financial
statements as of December 31, 1999 and for the three and nine months ended
December 31, 1999 and 1998, include all adjustments that in the opinion of
management are necessary to present fairly the financial information set
forth therein, in accordance with generally accepted accounting principles.
Certain reclassifications have been made for consistent presentation. These
financial statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto contained in the
Company's Form 10-K for the fiscal year ended March 31, 1999.
NET LOSS PER SHARE. Net loss per share has been computed using the weighted
average number of shares of common stock outstanding in accordance with
SFAS No. 128, "Earnings per Share." Basic earnings per share ("EPS")
excludes dilutive securities and is computed by dividing net loss by the
weighted-average number of common shares outstanding for the period.
Diluted EPS includes dilution and is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during
the period. The Company incurred a net loss for all periods presented.
Therefore, common stock equivalents of approximately 2,311,000 and 460,000
representing outstanding options, warrants, and convertible preferred stock
(using the if-converted method) were not included in the computation for
the periods ended December 31, 1999 and December 31, 1998, respectively,
because they were anti-dilutive.
INVENTORIES. Inventories are primarily comprised of finished goods and are
stated at the lower of cost or market. Costs are calculated using standard
cost, which approximates the lower of actual cost (first-in, first-out
method) or market.
3. RESTRUCTURING COSTS
As of December 31, 1999, the Company's total accrued restructuring costs
balance was approximately $8,000 and is primarily comprised of the
remaining lease liabilities on one of its facilities.
On March 31, 1998 the Company announced a fundamental shift in business
strategy to refocus its efforts on its new line of communication servers
for small and medium size offices and a change of its name to OneWorld
Systems, Inc. During the first quarter of fiscal 1999, the Company recorded
a restructuring charge of approximately $404,000. As of December 31, 1999
the accrual balance associated with the March 1998 restructuring was
completely utilized leaving a zero balance.
In December 1996, the Company announced a restructuring plan to streamline
its operations, reduce its workforce and enable the Company to improve its
operating results. As of December 31, 1999 the accrual balance associated
with the December 1996 restructuring was approximately $8,000 and relates
primarily to the remaining lease payments on the Marietta, Georgia
facility.
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4. DISCONTINUED OPERATIONS
In the second quarter of fiscal 1997, the Company adopted a formal plan to
discontinue its enterprise network server operation based in the United
Kingdom (formerly, the Company's ISDN Division). The disposition of the
division has been accounted for as a discontinued operation in accordance
with Accounting Principles Board (APB) No. 30.
During the three month period ended December 31, 1999, the Company recorded
income from discontinued operations of $161,000 representing the release of
reserves accrued for certain contingencies related to the Company's former
ISDN Division which have expired.
5. SALE OF MODEM OPERATIONS
On June 18, 1998 the Company completed the sale of its modem operations to
Boca Research, Inc. ("Boca"). Included in the sale were substantially all
of the Company's assets related to the Company's single user modem and
software product offerings. Additionally, the Company issued to Boca a five
year Warrant to purchase up to 42,500 shares of the Company's Common Stock
at approximately $10.00 per share. In consideration for these assets, Boca
assumed certain of the Company's liabilities related to the modem
operations, paid the Company $4.0 million in cash, and delivered a
non-interest bearing promissory note for $6.0 million payable in two equal
installments on September 30 and December 31, 1998, which was recorded at
$5.855 million. The difference between the recorded value and the face
value of the note was recognized as interest income over the life of the
note. The loan was fully paid by the end of the fiscal year ended March 31,
1999.
During the quarter ended June 30, 1998, the Company recorded a gain on the
sale of the modem business of $6.128 million and during the quarter ended
March 31, 1999 recorded an additional gain of $47,000 representing the
release of reserves for contingencies determined to be fully resolved.
During the quarter ended June 30, 1999, the Company recorded an additional
gain on the sale of the modem business of $268,000 representing the release
of the remaining reserves for contingencies which expired on June 18, 1999.
During the quarter ended December 31, 1999, the Company recorded an
additional gain on the sale of the modem business of $23,000 representing
the release of the reserves for contingencies which expired during the
quarter. As of December 31, 1999 the cumulative net gain on of the sale of
the modem business was $6.466 million.
The assets purchased by Boca included products which represented the
overwhelming majority of the Company's revenues and gross profits in prior
years. These products did not contribute to the Company's reported net
revenue or gross profit after June 18, 1998.
6. STOCKHOLDERS' EQUITY
On June 22, 1999 the Company's stockholders approved the proposed amendment
to the Company's Certificate of Incorporation to authorize the Board of
Directors to adopt a reverse stock split with respect to the Company's
Common Stock. On June 23, 1999 the Board of Directors approved a
one-for-ten reverse split ratio effective July 6, 1999. The effect of the
reverse split has been accounted for retroactively throughout these
financial statements.
On July 6, 1999, in connection with the one-for-ten reverse split, 50% of
the then outstanding Series A Convertible Preferred Stock (or 1,550,000
shares) was automatically converted into Common Stock at a conversion ratio
of one-for-one.
On July 7, 1999, the closing price of the Company's Common Stock, as quoted
on the Over The Counter Bulletin Board (the "OTCBB"), exceeded a specific
price resulting in the automatic conversion of an additional 12.5% of the
originally outstanding Series A Convertible Preferred Stock (or 387,500
shares) into Common Stock at a conversion ratio of one-for-one.
As of December 31, 1999, 1,162,505 shares of Series A Convertible Preferred
Stock remain outstanding. Although these shares may be converted by the
holder at any time, the remaining Series A Convertible Preferred Stock
would automatically convert into common stock in three equal amounts as a
result of the Company's common stock achieving certain future closing
prices.
7
<PAGE> 8
7. SALE TO TUT SYSTEMS
On December 20, 1999, the Company signed a letter of intent to sell
substantially all of the assets, other than cash, accounts receivable, and
other financial assets, of the Company to Tut Systems, Inc. (Tut Systems) a
Delaware corporation. The assets to be transferred in the sale include the
Company's property and equipment, intellectual property, sales and
marketing information, and research and development assets. In
consideration for the assets, the Company will receive a total of
approximately $2.33 million comprised of up to $580,000 in cash and the
balance in shares of Tut Systems common stock having an assigned value of
$44.4125 per share. In addition, Tut Systems has entered into an employment
relationship with a number of the employees of the Company, whereby Tut
Systems will assume the employment of, and preserve the tenure and
continuity of employment of these individuals. These employees consist of
engineering and sales employees. The balance of the Company's employees,
including executive management, will be terminated and offered severance
packages based upon their current salary and years of service or specific
arrangements. The officers of the Company have voluntarily modified their
prior Change of Control Agreements to reduce their severance to a payment
of between 6 and 12 months of their respective salaries.
On December 21, 1999 the Company announced that it had ceased business
operations. The Company will seek stockholder approval of the planned asset
sale to Tut Systems and for the voluntary plan of liquidation and
dissolution of the Company at a Special Meeting of Stockholders currently
scheduled in March 2000. Substantially all employees not hired by Tut
Systems were terminated on December 20, 1999.
Upon the dissolution of the Company, the remaining assets of the Company
will be distributed to the stockholders. The Series A Preferred Stock has
certain preferential rights, including the right to receive distributions
upon dissolution. Currently, these preferential rights provides that the
holders of Series A Preferred Stock will receive 100% of the first $3.11
million of any such distribution. The Company believes that at the time of
dissolution, the assets available for distribution will be less than $3.11
million, therefore, the entire distribution will accrue to the preferred
stockholders only.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with the
Company's audited consolidated financial statements and notes thereto for the
fiscal year ended March 31, 1999. This report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those anticipated in forward-looking
statements as a result of the risk factors and other cautionary disclosures set
forth below and elsewhere in this report.
OVERVIEW
OneWorld Systems, Inc. (the "Company", "we", or "us") was founded in June 1989
and incorporated in Delaware as Global Village Communication, Inc. On December
21, 1999 the Company announced that it had signed a letter of intent to sell
substantially all of the non-cash assets of the Company to Tut Systems, Inc. and
had ceased business operations. The Company will seek stockholder approval of
the planned asset sale to Tut Systems and for a subsequent voluntary plan of
liquidation and dissolution of the Company at a Special Meeting of Stockholders
currently scheduled in March 2000. The Company's core engineering group and
sales team will become employees of Tut Systems after the asset sale is
completed. Substantially all employees not hired by Tut Systems were terminated
on December 20, 1999.
From the sale of our single-user modem operations to Boca Research, Inc. in June
1998 to December 20, 1999, we developed and manufactured products that enhanced
and simplified wide area data communications for the small and medium sized
office market. Our OneWorld(R) OfficePort(TM) family of network communication
appliances were designed to be versatile, easy-to-use, cost-effective and
expandable solutions that combine Internet access and routing, remote access,
on-line service access and fax capabilities. Since September 1999, our primary
source of operating revenue has been from the sale of these products.
In conjunction with the introduction of our OfficePort appliance, we refocused
our sales efforts around a direct sales and support model. Utilizing telesales
and electronic commerce via the Internet, we attempted to sell directly to our
end-user customers rather than selling through value-added resellers and other
indirect sales channels. Our new product line was dependent upon the commercial
acceptance of the products, which in turn depended on continued development and
technical enhancement of the products, sales and marketing efforts, technical
reviews by independent parties, introductions of new technologies, performance
of our suppliers, and announcements by competitors, among other factors. Sales
of our products failed to grow as quickly as hoped, and revenues from such sales
were consistently below expectations, which had a materially adverse affect on
our business, financial condition and results of operations. On December 20,
1999, we ceased all ongoing business operations.
NET REVENUE
On June 18, 1998, we sold our single-user modem operations to Boca Research,
Inc. The modem operations accounted for substantially all of our revenue during
the prior fiscal year. On December 20, 1999, we ceased all ongoing business
operations. Consequently, the comparisons below should not be relied upon as
predictors of future performance.
Net revenues include revenues from gross shipments, licenses and royalties, less
returns and allowances.
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
(dollars in thousands) 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total net revenue $ 162 $ 122 $ 394 $12,840
------- ------- ------- -------
Percentage increase (decrease) compared to
prior fiscal year period 33% (97%)
------- -------
</TABLE>
The increase in net revenue for the third quarter of fiscal 2000 as compared to
the same period in fiscal 1999 was primarily attributable to the increase in
revenues from direct online sales of our OfficePort products. During the quarter
ended December 31, 1998, revenue from our discontinued legacy products made up
the substantial majority of total net revenue for the quarter. The decrease in
revenue for the nine months ended December 31, 1999 when compared to the same
nine month period in the prior year is primarily attributable to the sale of our
modem operations in June 1998. We sold no modem business products after the
close of the transaction with Boca Research on June 18, 1998.
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Net revenues for the quarter ended December 31, 1999 increased 122% from $82,000
for the quarter ended September 30, 1999. The increase is primarily attributable
to an improved sales volume of the OfficePort appliances.
We have established revenue allowances for estimated future customer returns.
There can be no assurance that our historical experience regarding returns and
allowances will continue or that our projections will prove accurate.
COST AND EXPENSES
On June 18, 1998, we sold our modem operations to Boca Research. The modem
operations accounted for substantially all of our gross profit and a significant
portion of our research and development, marketing and sales, and general and
administrative expenses during the prior fiscal year. On December 20, 1999, we
ceased all ongoing business operations. Consequently, the comparisons below are
not 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 (deficit) as a percentage of net revenue was:
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
(dollars in thousands) 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $ 162 $ 122 $ 394 $12,840
Cost of revenue 316 64 473 9,742
------- ------- ------- -------
Gross profit (deficit) $ (154) $ 58 $ (79) $ 3,098
======= ======= ======= =======
Gross profit (deficit) margin (95%) 48% (20%) 23%
======= ======= ======= =======
</TABLE>
The decrease in gross profit margin as a percentage of net revenue for the third
quarter ended December 31, 1999 as compared to the comparable period in the
prior fiscal year was attributable to an increase in inventory reserves
associated with the Company's decision to cease operations. Similarly, gross
profit margins as a percentage of net revenues decreased to -95% in the current
fiscal quarter from 9% in the fiscal quarter ended September 30, 1999.
OPERATING EXPENSES
Operating expenses are comprised of the following:
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
------------------------------------------ -----------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
% of net % of net % of net % of net
(dollars in thousands) $ revenue $ revenue $ revenue $ revenue
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Research and development $ 789 487% $ 850 697% $ 2,636 669% $ 4,469 35%
Marketing and sales 1,601 988 777 637 4,082 1036 4,243 33
General and administrative 477 294 807 661 1,879 477 2,925 23
Restructuring costs -- -- -- -- -- -- 404 3
------- ------- ------- -------
Total operating expenses $ 2,867 $ 2,434 $ 8,597 $12,041
------- ------- ------- -------
</TABLE>
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 7% to $789,000 for the third quarter
of fiscal 2000 from $850,000 in the comparable quarter of fiscal 1999. For the
nine month period ended December 31, 1999, research and development expenses
decreased 41% to $2.6 million when compared to the same period of the prior
fiscal year. The decrease in
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research and development expenses for the fiscal quarter comparison is primarily
related to a reduction in headcount. The decrease in research and development
expenses for the nine month period is primarily related to reductions in
headcount and other costs resulting from the sale of the single-user modem
operations to Boca Research, Inc. Costs incurred in the research and development
of new software products and enhancements to existing software products are
expensed as incurred until technological feasibility has been established, in
compliance with SFAS No. 86, "Accounting for the Costs of Software to be Sold,
Leased, or Otherwise Marketed." Historically, software development has been
substantially completed concurrently with the establishment of technological
feasibility, and, accordingly, no costs have been capitalized to date.
MARKETING AND SALES
Marketing and sales expenses increased 106% to $1.6 million in the third quarter
of fiscal 2000 compared to $777,000 during the corresponding period of fiscal
1999. The increase in marketing and sales expense is primarily due to a national
advertising campaign for the OfficePort product family and an increase in direct
marketing expenses.
Marketing and sales expenses decreased 4% to $4.1 million during the nine months
ended December 31, 1999 from $4.2 million from the corresponding nine month
period of the prior year. The decline over the nine month period was primarily
attributable to a reduction in advertising and promotional expenses, as well as
a reduction in personnel costs associated with the sale of the single-user modem
operations.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 41% to $477,000 in the third
quarter of fiscal 2000 from $807,000 in the third quarter of fiscal 1999. The
decrease is primarily due to a reduction in headcount and temporary labor.
General and administrative expenses decreased 36% to $1.9 million during the
nine month period ended December 31, 1999 from $2.9 million during the same nine
month period in the prior fiscal year. General and administrative expenses
decreased primarily due to a reduction in personnel costs associated with the
sale of the single-user modem operations.
RESTRUCTURING COSTS
On March 31, 1998 we announced a fundamental shift in business strategy to
refocus our efforts on our new line of communication servers for small and
medium sized offices and a change of our name to OneWorld Systems, Inc. During
the first fiscal quarter of 1999, we recorded a restructuring charge of
approximately $404,000 comprised of additional one-time costs for severance and
employee related costs (approximately $247,000), lease abandonment
(approximately $88,000), and fixed asset write-offs (approximately $69,000)
associated with the transition to OneWorld Systems. As of December 31, 1999 an
accrual balance of approximately $8,000 remained, associated with the lease
abandonment of the Marietta, Georgia facility.
NET OTHER INCOME
Other net income consisted of the following:
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
------------------- -------------------- -------------------- --------------------
1999 1998 1999 1998
------------------- -------------------- -------------------- --------------------
% of net % of net % of net % of net
(dollars in thousands) $ revenue $ revenue $ revenue $ revenue
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 34 21.0% $ 70 57.4% $ 199 50.5% $ 182 1.4%
Interest expense -- -- (6) (4.9) (7) (1.8) (27) (0.2)
Gain on sale of modem business 23 14.2 -- -- 291 73.9 6,128 47.7
Other income (expense), net -- -- (3) (2.5) -- -- 11 0.1
------- ------- ------- -------
Total other income, net $ 57 $ 61 $ 483 $ 6,294
------- ------- ------- -------
</TABLE>
Net other income decreased to $57,000 for the third quarter of fiscal 2000 from
$61,000 for the third quarter of fiscal 1999. The decrease in other net income
is primarily due to the decreased balance of invested surplus cash. By December
31, 1999, all investments were liquidated to meet short term cash requirements.
Other income earned during the quarter ended
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December 31, 1999 was primarily comprised of earnings from invested surplus cash
and the release of certain contingencies related to the sale of the modem
operations that expired during the quarter. For the nine months ended December
31, 1999, other net income decreased to approximately $483,000 from $6.3 million
earned in the nine month period of the prior fiscal year. The decrease is
primarily attributable to a one time gain of $6.1 million on the sale of the
modem operations recorded in the first fiscal quarter of 1999.
The effective tax rates for the third quarter of fiscal 2000 and 1999 were zero.
For the nine months ended December 31, 1999 the effective tax rate was
approximately 0.3%. The income tax provision recorded includes minimum state
income taxes for fiscal year 2000 recorded during the first quarter of the
fiscal year net of refunds of prior year state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents totaled $2.1 million at December 31, 1999,
representing 79% of total assets. Our working capital was $1.1 million at
December 31, 1999, a decrease of $8.0 million as compared to $9.1 million at
March 31, 1999. The decrease in working capital was primarily attributable to
the net loss from operations incurred during the nine months ended December 31,
1999.
On December 31, 1999, our principal source of liquidity was $2.1 million in cash
and short term investments.
On December 21, 1999 we announced that we have ceased ongoing operations and our
intent to sell substantially all of the Company's assets to Tut Systems, Inc. We
anticipate that our only future source of liquidity will be the proceeds of this
asset sale. The total proceeds of this transaction will be $2.33 million,
comprised of up to $580,000 of cash and the balance in Tut Systems Common Stock.
We expect that the current capital and the proceeds of the assets sale will
provide sufficient cash to satisfy all financial obligations and liabilities
through the final dissolution of the Company. The preceding sentence is a
forward-looking statement, and actual results could differ materially from those
indicated. Failure to meet our expectations of the proceeds of the Asset Sale,
operating expenses in excess of expectations, or other unforeseen expenditures
could have a material adverse impact on our business, financial condition and
results of operations.
Following the close of the asset sale to Tut Systems, the Company will formally
dissolve by filing a certificate of dissolution with the Delaware Secretary of
State. Upon the dissolution of the Company, the remaining assets of the Company
will be distributed to the stockholders. The Series A Preferred Stock has
certain preferential rights, including the right to receive distribution upon
dissolution. Currently, these preferential rights provide that the holders of
Series A Preferred Stock will receive 100% of the first $3.11 million of any
such distribution. The Company believes that at the time of dissolution the
assets available for distribution will be less than $3.11 million, therefore,
the entire distribution will accrue to the preferred stockholders only.
YEAR 2000 ISSUES
Although we are not aware of any material Year 2000 disfunction with respect to
any of our systems or products to date, we are aware of the potential for Year
2000 software failures. Since we ceased ongoing business operations on December
20, 1999, we believe it is unlikely that we will be materially impacted by the
Year 2000 readiness of our customers, suppliers and other business partners. We
have not experienced any disfunction of such third parties' systems to date.
SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY AND CESSATION OF
OPERATIONS
On February 7, 2000, the Company entered into an agreement to sell substantially
all of its assets, other than cash, accounts receivable, and other financial
assets, to Tut Systems, Inc., a Delaware corporation. Pursuant to the terms of
the agreement, and subject to receipt of any required stockholder approvals, the
Company will sell to Tut Systems, and Tut Systems will purchase from the
Company, substantially all of the Company's assets. The assets to be transferred
in the sale include the Company's property and equipment, intellectual property,
sales and marketing information, and research and development assets. In
consideration for the assets, the Company will receive a total of approximately
$2.33 million comprised of up to $580,000 in cash and the balance in shares of
Tut Systems common stock having an assigned value of $44.4125 per share. In
addition, Tut Systems has entered into an employment relationship with a number
of the employees of the Company, whereby Tut Systems will assume the employment
of, and preserve the tenure and continuity of employment of these individuals.
These employees
12
<PAGE> 13
consist of engineering and sales employees. The balance of the Company's
employees, including executive management, will be terminated and offered
severance packages based upon their current salary and years of service or
specific arrangements. The officers of the Company have voluntarily modified
their prior Change of Control Agreements to reduce their severance to a payment
of between 6 and 12 months of their respective salaries.
On December 21, 1999 the Company announced that it had ceased business
operations. The Company will seek stockholder approval of the planned asset sale
to Tut Systems and for the voluntary plan of liquidation and dissolution of the
Company at a Special Meeting of Stockholders currently scheduled in March 2000.
Substantially all employees not hired by Tut Systems were terminated on December
20, 1999.
Upon the dissolution of the Company, the remaining assets of the Company will be
distributed to the stockholders. The Series A Preferred Stock has certain
preferential rights, including the right to receive distributions upon
dissolution. Currently, these preferential rights provides that the holders of
Series A Preferred Stock will receive 100% of the first $3.11 million of any
such distribution. The Company believes that at the time of dissolution, the
assets available for distribution will be less than $3.11 million, therefore,
the entire distribution will accrue to the preferred stockholders only.
13
<PAGE> 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from interest rate changes, and changes in the
market value of our investments.
INTEREST RATE RISK
We invest our excess cash in debt instruments of the U.S. Government and its
agencies, and of high-quality corporate issuers. By policy, we limit the amount
of our credit exposure to any one issue. We attempt to protect and preserve our
invested funds by limiting default, market and reinvestment risk. We also
require that a certain level of liquidity be maintained, and as a result, we
invest in debt instruments that will mature in the short-term. As instruments
mature, funds are reinvested in similar short-term investments. We began
actively investing our surplus cash in these types of investment vehicles in
July 1999.
Investments in both fixed and floating rate interest earning instruments carry a
degree of interest rate risk. Fixed rate securities may have their fair market
value adversely impacted due to a rise in interest rates, while floating rate
securities may produce less than expected returns if interest rates fall. Due in
part to these factors, our future investment income may fall short of
expectations due to changes in interest rates and we may suffer losses in
principal if forced to sell securities that have declined in market value due to
changes in interest rates.
The effect of interest rate fluctuations on us during the third quarter of
fiscal 2000 and during the nine month period ended December 31, 1999 was not
material, nor do we currently anticipate that it will have a significant impact
prior to our planned dissolution.
INVESTMENT RISK
We are exposed to investment risk as the result of the impact of interest rate
fluctuations on the market value of our investments. We currently hold no equity
investments. However, in the event that the Company closes the asset sale with
Tut Systems, as part of the consideration for the sale, the Company will receive
up to 52,500 unregistered shares of Tut Systems common stock. This equity
carries the risk of any equity security that has experienced value fluctuations
in a volatile market. The shares to be received will be unregistered, therefore
the Company carries the additional risk associated with the inability to sell
the securities in the public markets should the market value of the Tut stock
decline. The effect of market risk arising from our investment holdings during
the third quarter of fiscal 2000 and during the nine month period ended December
31, 1999 was not material, nor do we currently anticipate that it will have a
significant impact prior to our planned dissolution.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS- Not applicable.
ITEM 5. OTHER INFORMATION - Not applicable.
15
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
--------- -----------------------------------------------------------------
<S> <C>
3.1(a) + Amended and Restated Certificate of Incorporation of OneWorld
Systems, Inc.
3.1(b) ++ Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of OneWorld Systems, Inc., dated
March 3, 1999
3.1(c) ++ Certificate of Amendment to Amend and Restate Certificate of
Incorporation of OneWorld Systems, Inc., dated June 25, 1999
3.2 * Form of Bylaws of Global Village Communication, Inc.
4.1 Reference is made to Exhibits 3.1 and 3.2
4.9 ++ Warrant to purchase 42,500 Shares of Common Stock granted by the
Company to Boca Research, inc. dated as of June 18, 1998
4.10 ++ Unit Purchase Agreement between the Company and other parties
named therein, dated as of March 3, 1999
4.11 ++ Investor Rights Agreement dated as of March 3, 1999 by and among
the parties to the Unit Purchase Agreement
10.1 * Form of Indemnity Agreement entered into between the Company and
its directors and officers, with related schedule
10.2 + 1991 Stock Option Plan, as amended (the "Option Plan")
10.3 * Form of Incentive Stock Option under the Option Plan
10.4 * Form of Supplemental Stock Option under the Option Plan
10.5 * 1993 Employee Stock Purchase Plan
10.16 *> Lease agreement between Herman Christensen, Jr. and Raymond P.
Christensen and the Company dated July 14, 1994
10.17 *> Management Incentive Plan
10.18 +++ 1999 Stock Plan
10.19 +++ Form of Agreement for Employees under the 1999 Stock Plan
10.20 +++ Form of Agreement for Automatic Grants under the 1999 stock Plan
27.1 Financial Data Schedule
</TABLE>
* Filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (Registration No 33-73878 as amended)
and hereby incorporated by reference herein.
+ Filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q filed with the Commission on November 13, 1998, and
hereby incorporated by reference herein.
++ Filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q filed with the Commission on August 12, 1998, and
hereby incorporated by reference herein.
+ Filed as an exhibit to the Registrant's Annual Report on Form
10-K/A filed with the Commission on July 2, 1998, and hereby
incorporated by reference herein.
++ Filed as an exhibit to the Registrant's Annual Report on Form
10-K filed with the Commission on June 29, 1999, and hereby
incorporated by reference herein.
+++ Filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (Registration No 333-86259) filed with
the Commission on August 31, 1999, and hereby incorporated by
reference herein
> The Company has requested confidential treatment with respect
to portions of this document.
(b) Reports on Form 8-K
On December 27, 1999 the Company filed an 8-K in which the Company
announced its intent to sell the assets of the Company to Tut Systems,
Inc. and the immediate cessation of business operations.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OneWorld Systems, Inc.
Date: February 14, 2000 /S/ Neil Selvin
------------------------------------------
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2000 /S/ Marc E. Linden
------------------------------------------
Senior Vice President Finance and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
--------- -----------------------------------------------------------------
<S> <C>
3.1(a) + Amended and Restated Certificate of Incorporation of OneWorld
Systems, Inc.
3.1(b) ++ Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of OneWorld Systems, Inc., dated
March 3, 1999
3.1(c) ++ Certificate of Amendment to Amend and Restate Certificate of
Incorporation of OneWorld Systems, Inc., dated June 25, 1999
3.2 * Form of Bylaws of Global Village Communication, Inc.
4.1 Reference is made to Exhibits 3.1 and 3.2
4.9 ++ Warrant to purchase 42,500 Shares of Common Stock granted by the
Company to Boca Research, inc. dated as of June 18, 1998
4.10 ++ Unit Purchase Agreement between the Company and other parties
named therein, dated as of March 3, 1999
4.11 ++ Investor Rights Agreement dated as of March 3, 1999 by and among
the parties to the Unit Purchase Agreement
10.1 * Form of Indemnity Agreement entered into between the Company and
its directors and officers, with related schedule
10.2 + 1991 Stock Option Plan, as amended (the "Option Plan")
10.3 * Form of Incentive Stock Option under the Option Plan
10.4 * Form of Supplemental Stock Option under the Option Plan
10.5 * 1993 Employee Stock Purchase Plan
10.16 *> Lease agreement between Herman Christensen, Jr. and Raymond P.
Christensen and the Company dated July 14, 1994
10.17 *> Management Incentive Plan
10.18 +++ 1999 Stock Plan
10.19 +++ Form of Agreement for Employees under the 1999 Stock Plan
10.20 +++ Form of Agreement for Automatic Grants under the 1999 stock Plan
27.1 Financial Data Schedule
</TABLE>
* Filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (Registration No 33-73878 as amended)
and hereby incorporated by reference herein.
+ Filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q filed with the Commission on November 13, 1998, and
hereby incorporated by reference herein.
++ Filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q filed with the Commission on August 12, 1998, and
hereby incorporated by reference herein.
+ Filed as an exhibit to the Registrant's Annual Report on Form
10-K/A filed with the Commission on July 2, 1998, and hereby
incorporated by reference herein.
++ Filed as an exhibit to the Registrant's Annual Report on Form
10-K filed with the Commission on June 29, 1999, and hereby
incorporated by reference herein.
> The Company has requested confidential treatment with respect
to portions of this document.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,086
<SECURITIES> 0
<RECEIVABLES> 131
<ALLOWANCES> (25)
<INVENTORY> 0
<CURRENT-ASSETS> 2,293
<PP&E> 3,578
<DEPRECIATION> (3,301)
<TOTAL-ASSETS> 2,648
<CURRENT-LIABILITIES> 1,165
<BONDS> 0
0
1
<COMMON> 4
<OTHER-SE> 1,478
<TOTAL-LIABILITY-AND-EQUITY> 2,648
<SALES> 394
<TOTAL-REVENUES> 394
<CGS> 473
<TOTAL-COSTS> 473
<OTHER-EXPENSES> 8,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (8,193)
<INCOME-TAX> 25
<INCOME-CONTINUING> (8,218)
<DISCONTINUED> 161
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,057)
<EPS-BASIC> (2.34)
<EPS-DILUTED> (2.34)
</TABLE>
