<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or 240.14a-12
</TABLE>
OneWorld Systems, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
ONEWORLD SYSTEMS, INC.
1144 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 28, 2000
To the Stockholders of OneWorld Systems, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of OneWorld
Systems, Inc., a Delaware corporation (the "Company"), will be held on April 28,
2000 at 8:00 a.m. local time at the offices of Wilson Sonsini Goodrich & Rosati,
P.C. located at 975 Page Mill Road, Palo Alto, California, for the following
purposes as more fully described in the Proxy Statement accompanying this
Notice:
1. To approve and adopt that certain Asset Purchase Agreement dated
February 7, 2000, as amended (the "Agreement") and the transactions
contemplated thereby, substantially as described in the Proxy Statement
accompanying this Notice, pursuant to which Tut Systems, Inc., a
Delaware corporation ("Buyer"), will purchase from the Company
substantially all of the Company's assets (collectively, the "Assets").
2. To approve and adopt the Plan of Dissolution of the Company.
3. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
Whether Proposals 1 and 2 are approved, and a dissolution of the Company
takes place, or Proposals 1 and 2 are rejected, and the Company files for
bankruptcy, the Company expects the holders of the Company's Common Stock will
lose their entire investment.
Information relating to the above matters is set forth in the attached
Proxy Statement. In addition, the Company has included with the attached Proxy
Statement copies of certain recent Company press releases containing information
related to the above matters. The Board of Directors has fixed the close of
business on March 24, 2000 as the record date for the determination of
stockholders entitled to notice of and to vote at this Special Meeting and at
any adjournment or postponement thereof. Both the approval of the Agreement and
the approval of the Plan of Dissolution require the affirmative vote of i) the
holders of a majority of the outstanding shares of the Company's Common Stock
and Series A Preferred Stock, voting together as a single class, and ii) the
holders of a majority of the outstanding shares of the Company's Series A
Preferred Stock voting separately as a class.
By Order of the Board of Directors
/s/ Marc E. Linden
Marc E. Linden
Secretary
Sunnyvale, California
March 28, 2000
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU STILL MAY VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE> 3
ONEWORLD SYSTEMS, INC.
1144 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086
------------------------
PROXY STATEMENT
------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors of
OneWorld Systems, Inc., a Delaware corporation (the "Company"), for use at the
Special Meeting of Stockholders to be held on April 28, 2000, at 8:00 a.m. local
time (the "Special Meeting"), or at any adjournment or postponement thereof, for
the purposes set forth herein and in the accompanying Notice of Special Meeting.
The Special Meeting will be held at the offices of Wilson Sonsini Goodrich &
Rosati, P.C. located at 975 Page Mill Road, Palo Alto, California. The Company
intends to mail this proxy statement and accompanying proxy card on or about
March 21, 2000, to all stockholders entitled to vote at the Special Meeting.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock and Series A Convertible Preferred
Stock at the close of business on March 24, 2000 will be entitled to notice of
and to vote at the Special Meeting. At the close of business on March 24, 2000,
the Company had outstanding and entitled to vote 4,465,226 shares of Common
Stock and 1,162,505 shares of Series A Convertible Preferred Stock. Each holder
of record of Common Stock on such date will be entitled to one vote for each
share held on all matters to be voted upon at the Special Meeting, and each
holder of Series A Convertible Preferred Stock will be entitled to one vote for
each share held on each matter to be voted upon at the Special Meeting.
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions will be counted toward the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes. Broker non-votes are counted toward a
quorum, but are not counted for any purpose in determining whether a matter has
been approved.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. The Company may reimburse persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of the Company.
No additional compensation will be paid to directors, officers or other regular
employees for such services. In addition, the Company anticipates engaging a
proxy solicitor to assist it in obtaining proxies.
STOCKHOLDER PROPOSALS
Proposals of stockholders that are intended to be presented at the 2000
Annual Meeting of Stockholders must be received by the Company not later than
February 20, 2000 to be included in the proxy statement and proxy relating to
that Annual Meeting.
<PAGE> 4
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. The proxy may be revoked by filing
with the Secretary of the Company at the Company's principal executive office,
1144 East Arques Avenue, Sunnyvale, California 94086, a written notice of
revocation or a duly executed proxy bearing a later date, or it may be revoked
by attending the meeting and voting in person. Attendance at the meeting will
not, by itself, revoke a proxy.
PROPOSAL 1
APPROVAL OF ASSET SALE
At the Special Meeting, stockholders are being asked to approve the Asset
Sale (as defined herein) pursuant to the Asset Purchase Agreement which has been
entered into on February 7, 2000, as amended (the "Agreement") between the
Company and Tut Systems, Inc., a Delaware corporation ("Buyer"). Pursuant to the
terms of the Agreement, the Company will sell to Buyer, and Buyer will purchase
from the Company, substantially all of the Company's assets (such assets are
herein after referred to as the "Transferred Assets" and this transaction is
herein after referred to as the "Asset Sale").
THE PARTIES
Buyer has its principal address at 2495 Estand Way, Pleasant Hill,
California 94523, telephone number (925) 682-6510. Buyer's principal business is
the design, development and marketing of advanced communications products which
enables data to be transmitted at high speeds over the copper wires used by
telephone companies, as well as the copper telephone wires found in homes,
businesses and other buildings.
The Company is a Delaware corporation having its principal address at 1144
East Arques Avenue, Sunnyvale, California 94086, telephone number (408)
523-1100. The Company develops and manufactures products that enhance and
simplify wide-area data communications for the small and medium sized office
market.
Prior to negotiations in connection with the Agreement, there have been no
material contracts, arrangements, understandings, relationships, negotiations or
transactions between the Company and any of its affiliates and the Buyer and any
of its affiliates.
PRINCIPAL TERMS OF THE AGREEMENT
Assets Affected
The Company shall sell to the Buyer the Transferred Assets, which
constitute substantially all of the assets of the Company other than cash and
accounts receivable. The Transferred Assets include the Company's property and
equipment, intellectual property, sales and marketing information, and research
and development assets.
Consideration
At the Closing, the Company is obligated to deliver to the Buyer the
Transferred Assets and the Buyer shall pay the Company $2.33 million in cash.
Preferential Rights of Series A Convertible Preferred Stock
The holder of the Series A Convertible Preferred Stock have certain
preferential rights, including the right to receive distributions upon
dissolution or liquidation in preference to the holders of the Common Stock.
These preferential rights provide that the holders of Series A Convertible
Preferred Stock will receive up to approximately $3.11 million of any such
distribution prior to any amount being distributed to the holders of Common
Stock. As such, the Company believes that all proceeds of the Asset Sale, and
the subsequent liquidation of the Company's assets, will accrue to the holders
of Series A Convertible Preferred Stock only.
2
<PAGE> 5
Representations and Warranties
The Company and Buyer have made certain representations and warranties to
each other which relate to, among other things, each party's organization and
qualification, authority and liabilities, SEC reports and financial statements,
dealings with brokers and disclosure of material information, absence of certain
changes and undisclosed liabilities. In addition, the Company has made certain
additional, standard representations and warranties regarding the character and
quality of the Transferred Assets.
Covenants
Until the closing of the Asset Sale, the Company has agreed not to engage
in certain activities including, among other things not to: (i) amend any
employment, bonus, severance, or retirement contract or arrangement, or increase
any salary or other form of compensation payable or to become payable to any of
the Company's employees to which Buyer wishes to offer employment (the
"Transferred Employees"); (ii) purchase, lease or otherwise acquire any real
estate or any interest therein that would be assumed by Buyer; (iii) sell,
lease, or otherwise dispose of any of the Transferred Assets; (iv) incur any
liability, guarantee or obligation that would be assumed by Buyer; (v) place or
permit to be placed any Lien on any of the Transferred Assets, other than
statutory liens arising in the ordinary course of business; (vi) make or
authorize any amendments to the Company's Charter or Bylaws preventing the
consummation of the transactions contemplated by the Agreement; (vii) make an
investment in property, plant, equipment and other items of capital expenditure
that would be transferred to Buyer; (viii) fail to protect the character,
quality and transferability of the Transferred Assets, including without
limitation, the intellectual property to be transferred, at the same level of
care that the Company takes with its intellectual property.
The Company has agreed to give Buyer and its representatives full and free
access to all properties, assets, books, contracts, commitments and records of
the Company. It is understood and agreed by Buyer that any request for
information relates solely to the Transferred Assets and the Company's ability
to transfer the same.
The Buyer has entered into employment relationship with a number of the
Company's employees, the Transferred Employees, whereby, upon the close of the
Asset Sale, Buyer will assume the employment of, and preserve the tenure and
continuity of employment of these Transferred Employees.
In addition, the Company has agreed not to engage in discussions or
negotiations of any level with any other person or entity regarding the sale of
the Transferred Assets prior to the termination of the Agreement, except in the
event that the Company receives an unsolicited offer for the sale of the Company
or the Company's Transferred Assets which is superior to the Agreement with
Buyer in satisfaction of the fiduciary obligations to the Company's
stockholders.
Conditions Precedent to Closing of Asset Sale
Buyer's obligations to consummate the Agreement and the transactions
contemplated thereby are subject to the satisfaction of certain standard
conditions to Closing.
Indemnification
The Company and Buyer have agreed to indemnify each other, and each other's
officers, directors, employees, consultants, owners, agents and affiliates,
harmless from and in respect to any and all losses which may be sustained or
suffered by any of them arising out of or resulting from any breach or
inaccuracy of any representation or warranty or the breach of covenants or
agreements of the Company and Buyer contained in the Agreement.
Termination of the Agreement
The Agreement and the transactions contemplated thereby may (at the option
of the party having the right to do so) be terminated at any time on or prior to
closing upon the occurrence of certain events, including: (i) by mutual written
consent of Buyer and the Company; (ii) by Buyer or the Company if any court of
competent jurisdiction shall have issued an order pursuant to the request of a
third party restraining,
3
<PAGE> 6
enjoining or otherwise prohibiting the consummation of the transactions
contemplated by the Agreement; (iii) by Buyer or the Company if the transactions
contemplated by the Agreement shall not have been consummated on or before May
30, 2000 or if one of the parties is in material default which cannot be cured
by such date, provided, however, that such right to terminate the Agreement
shall not be available to any party whose failure to fulfill any obligation of
the Agreement has been the cause of, or resulted in, the failure of the
transactions contemplated thereby to be consummated on or before such date; (iv)
by Buyer or the Company by notice to the other party if the Company either
enters into any agreement with a third party that would have a material adverse
effect on the Company's ability to perform its obligations under the Agreement,
or makes any public announcement of a proposal, plan or intention to enter into
such a transaction.
Effect of Termination
If the Company elects to voluntarily terminate the Agreement, the Company
shall pay the Buyer an amount equal to all amounts paid by Buyer to the Company
pursuant to that certain Services Agreement between the Company and Buyer dated
December 20, 1999. In the event that the Buyer voluntarily terminates the
Agreement, it shall pay to the Company the lesser of $100,000 or the actual
expenses incurred by the Company for certain items previously agreed to between
the parties. As of March 13, 2000, the Buyer had paid the Company an aggregate
of $659,000 for services rendered by Buyer pursuant to the Services Agreement.
BACKGROUND AND BUSINESS RATIONALE
Beginning in September 1998, the Company was engaged in the development and
sale of multi-function communication servers aimed at the small and medium sized
business market. Specifically, the Company's products combined fax, remote
access and network modem functionality in a single, integrated communications
server. In September 1999, the product line was enhanced with the addition of
Internet routing capabilities, as well as an ISDN interface that enabled faster
connections to the Internet.
During the first year, sales of the product line failed to grow
significantly, and remained at low unit volumes. In March 1999, the Company
raised an additional $10 million in financing from two leading venture capital
firms, as well as a number of private individuals. This additional capital
allowed the Company to continue developing and marketing the product line.
However, the sales rate of the product remained at low levels, and the Company
continued to be unprofitable.
In an effort to increase the sales rate of the product line, in September
1999, coincident with the product line enhancements outlined above, the Company
changed its sales model from traditional two-tier sales, using distributors and
value-added resellers, to a direct sales model, where the OneWorld Systems sales
force would take orders directly. In addition, the Company established an
Internet store that allowed prospective customers to purchase the Company's
products on-line, and significantly reduced the price for the OneWorld servers.
Due primarily to these efforts, net revenues for the quarter ended December
31, 1999 increased to $162,000, an increase of approximately 98% over net
revenues of $82,000 for the quarter ended September 30, 1999. Although the
percentage increase in net revenues from quarter to quarter was significant, the
relatively small dollar amount fell well below that necessary to fund continued
operations.
Upon further review of the Company's business model as implemented and its
results to date, management concluded that net revenues from operations were
unlikely to ever increase sufficiently in the future to fund the Company's
ongoing operations. Realizing that the funds required to continue conducting the
Company's business would have to come from sources other than operations,
management and the Board of Directors considered the possibility of financing
further operations through a debt or equity securities offering. Management also
concluded that without further capital infusions, based on expected revenues
from ongoing operations, the Company would most likely be required to file for
bankruptcy protection in the near future, arrange for the sale of the Company or
dissolve.
The Board of Directors determined that the debt relief available through a
bankruptcy reorganization would not solve the revenue shortfalls underlying the
Company's continuing losses and that a bankruptcy filing would likely alarm the
Company's customer base and precipitate a further potentially substantial
decrease in revenues. The Company currently believes it has sufficient funds to
pay all of its liabilities in full and the Board of
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<PAGE> 7
Directors determined that the commencement of a bankruptcy proceeding was not
necessary to distribute the surplus to stockholders. The surplus would be
distributed to stockholders in accordance with the same preferences and
priorities held by the classes of stock in a bankruptcy proceeding as under the
Proposal 2. However, the Board of Directors determined that a bankruptcy
proceeding would present a significant risk of increased losses, entail greater
expense and delay, thereby diminishing the value of the distribution ultimately
received by stockholders.
After fully reviewing the available options, continuing to operate the
Company under its new business model, conducting a debt or equity offering,
filing bankruptcy, or arranging for the sale of the Company or its assets, the
Board of Directors reached the following conclusions:
- even if additional financing could be obtained upon acceptable terms, it
would not provide a long term solution for the Company, as operations
would continue to generate net losses for the foreseeable future;
- the most prudent course for the Company would be to sell the Company to a
third party, or to sell its assets to a third party; and
- dissolution of the Company, thereby avoiding the need for a bankruptcy
filing and allowing for the orderly wind-up of the Company's affairs, was
the best way to preserve stockholder value.
Accordingly, as authorized by the Board of Directors, Neil Selvin, the
Company's President and Chief Executive Officer, and Marc Linden, the Company's
Senior Vice President and Chief Financial Officer, contacted a variety of
entities they regarded as potential purchasers of the Company or its assets.
Hambrecht & Quist, a number of whose affiliates hold shares of both the Common
Stock and Series A Preferred Stock of the Company, acted as an advisor to
management in connection with such matters. Of the parties contacted, only Buyer
made a formal proposal to the Company. The proposal was for the sale of the
Company's assets only Mr. Selvin and Mr. Linden negotiated the agreement on
behalf of the Company with Buyer, and Hambrecht & Quist participated in these
negotiations in an advisory capacity, but not as principals. Other than Mr.
Selvin, none of the directors of the Company participated in the negotiation of
the Asset Purchase Agreement. Other than Hambrecht & Quist's participation in an
advisory capacity, none of the holders of the Series A Preferred Stock
participated in the negotiation of the Asset Purchase Agreement. Upon
consideration of Buyer's proposal and the Asset Purchase Agreement. Upon
consideration of Buyer's proposal and the Asset Purchase Agreement as
negotiated, the Board of Directors determined that the sale of the Company's
assets to Buyer as proposed was in the best interest of the Company and its
stockholders. Mr. Kevin Compton, a member of the Company's Board of Directors
and the holder of approximately ten percent of the outstanding Series A
Preferred Stock of the Company, recused himself from the deliberations and vote
of the Board of Directors as to whether or not to approve the Asset Sale.
SERVICES AGREEMENT
The Company and Buyer have entered into a Services Agreement dated December
20, 1999, whereby the Company has agreed to provide Buyer with employee,
management, and facility services. The term of the agreement is from December
20, 1999 until the earlier of April 14, 2000 or the close of the Asset Sale.
Buyer has agreed to pay the Company fees for employee services in the amount of
the out-of-pocket employee costs including among others, salary, wages, vacation
accruals, taxes, benefits, etc. Additionally, the Buyer has agreed to pay a
management fee to the Company for management services, including among others,
telecom, office and computer supplies, hardware and software maintenance, and
insurance.
5
<PAGE> 8
FAIRNESS OPINION
The Company considered seeking the opinion of a third party to evaluate the
fairness of the transaction to the Company and its stockholders. In this
situation, however, the Company determined that such an opinion was not
warranted for the following reasons:
- The Company was not able to generate a positive cash flow from
operations. Therefore, the Company had two options: to sell the Company
or its assets, or to declare bankruptcy or dissolve the Company with the
expectation of little or no proceeds upon liquidation.
- The Company received only one formal offer. The Company determined that
accepting the offer to sell its assets to the Buyer was a superior
outcome to its stockholders as compared to declaring bankruptcy or
dissolving the Company with the expectation of little or no proceeds upon
liquidation.
- The cost to the Company and its stockholders of engaging a third party to
prepare an opinion on the fairness of the transaction would have been
cost prohibitive and unnecessarily reduced the amount of any liquidating
distribution payable to stockholders.
ACCOUNTING TREATMENT
The Asset Sale will be treated as a sale for financial reporting and
accounting purposes, in accordance with generally accepted accounting
principles.
CERTAIN INCOME TAX CONSEQUENCES
The following is a general discussion of certain of the expected U.S.
federal income tax consequences of the disposition of the assets of the Company
pursuant to the Asset Sale in exchange for cash. Stockholders of the Company
should also be aware that the tax consequences of the transactions are governed
by the Internal Revenue Code of 1986, as amended, and interpretations, rulings
and regulations which are subject to change, including changes which may be
applied retroactively.
The Company will recognize a gain on the proposed sale reportable on the
Company's income tax returns for the fiscal year ending March 31, 2001. The
Company expects to fully offset the gain with the current year net operating
loss.
However, if the gain exceeds the current year operating loss, the Company
may incur alternative minimum tax (AMT) due to limitations on the utilization of
prior year net operating loss carryovers within the AMT system.
The above tax discussion was developed by the Company after consultation
with its tax and legal advisors.
6
<PAGE> 9
SELECTED FINANCIAL DATA
The following selected financial information for the years ended March 31,
1995 through March 31, 1999 is derived from the Company's consolidated financial
statements, which have been audited by the Company's independent auditors. The
information set forth below is qualified by reference to and should be read in
conjunction with the Financial Statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contained in the Company's Form 10-K filed on June 29, 1999 which
is incorporated by reference in this Proxy Statement.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- -------- -------- -------
IN THOUSANDS, EXCEPT PER SHARE DATA
<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(1)............................ (5,152) (4,709) (35,852) 12,148 (6,206)
Income (loss) from discontinued
operations............................... 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>
- ---------------
(1) In the second quarter of fiscal 1997, the Company adopted a formal plan to
discontinue the operations of its enterprise network server operation based
in the United Kingdom (formerly the Company's ISDN Division). Therefore,
operating results for the ISDN Division are classified as discontinued
operations on the Company's Consolidated Statements of Operations, and all
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 communications server
product offerings.
(3) On June 23, 1999, the Company adopted a one-for-ten reverse stock split
effective July 6, 1999. Earnings per share data has been retroactively
restated to adjust for the effect of the reverse stock split.
The selected consolidated financial data has been derived from, and should
be read in conjunction with, the related Consolidated Financial Statements
contained in the Company's Form 10-K filed on June 29, 1999.
The information set forth below is qualified by reference to and should be
read in conjunction with the Financial Statements and the related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," for the applicable periods contained in the Company's Form 10-Q's
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<PAGE> 10
filed on August 12, 1999, November 12, 1999, and February 14, 2000, which are
incorporated by reference in this Proxy Statement.
<TABLE>
<CAPTION>
FISCAL YEAR 2000
------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER
------------- -------------- -------------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenue............................... $ 150 $ 82 $ 162
Loss from operations...................... (2,928) (2,727) (3,021)
Loss from continuing operations........... (2,583) (2,671) (2,964)
Net loss.................................. (2,583) (2,671) (2,803)
Basic and diluted earnings(1)
Loss from continuing operations........ $ (1.02) $ (0.61) $ (0.66)
Net loss............................... $ (1.02) $ (0.61) $ (0.63)
Shares used in computing loss per
share................................ 2,524 4,359 4,468
BALANCE SHEET DATA
Working capital........................... $ 6,474 $ 3,837 $ 1,128
Total assets.............................. 9,022 6,138 2,648
Total liabilities......................... 2,066 1,852 1,165
Stockholders' equity...................... $ 6,956 $ 4,286 $ 1,483
</TABLE>
- ---------------
(1) On June 23, 1999, the Company adopted a one-for-ten reverse stock split
effective July 6, 1999. Earnings per share data has been retroactively
restated to adjust for the effect of the reverse stock split.
The selected consolidated financial data has been derived from, and should
be read in conjunction with, the related Form 10-Q's filed by the Company on
August 12, 1999, November 12, 1999, and February 14, 2000.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated balance sheet at
March 31, 1999, and the discussion of the unaudited pro forma condensed
consolidated statements of operations data for the fiscal year ended March 31,
1999 and the nine months ended December 31, 1999 give pro forma effect to the
estimated financial impact of the Asset Purchase Agreement (the "Agreement").
The pro forma condensed consolidated balance sheet at March 31, 1999 gives pro
forma effect to the Agreement as if the transaction it contemplates was
consummated on March 31, 1999. The discussion of the unaudited pro forma
condensed consolidated statements of operations data for the fiscal year ended
March 31, 1999 and the nine months ended December 31, 1999 present the results
of operations of the Company as if the transaction contemplated in the Agreement
occurred on April 1, 1998.
The unaudited pro forma information is based on the historical consolidated
financial statements of the Company giving effect to the assumptions and
adjustments set forth in the following notes and discussions. The overall
assumption has been made that the effect of the Agreement would have been to
transfer the substantial majority of the Company's assets and operating
activities and associated revenues, assets (excluding cash and any tax related
benefits) and liabilities, and a significant amount of related expenses to the
Buyer. The Company would have retained no marketable products, corporate general
and administrative activities, and associated expenses, assets and liabilities,
henceforth referred to as the "Retained Business". Further, the unaudited pro
forma information assumes that the Retained Business has no going concern and
will dissolve subsequent to the Asset Sale.
The unaudited pro forma condensed financial data and discussions have been
prepared by Company management and are not necessarily indicative of how the
Company's balance sheet and operating results would have been presented had the
transaction contemplated in the Agreement been consummated on the assumed dates,
nor are they necessarily indicative of the presentation of the Company's balance
sheet and statements of operations for any future period. The unaudited pro
forma condensed consolidated balance sheet
8
<PAGE> 11
at March 31, 1999, and the discussion of the unaudited pro forma condensed
consolidated statements of operations data should be read in conjunction with
the financial statements and related notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations contained in the
Company's Form 10-K and Form 10-Q, annexed herein.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------------
COMPANY PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS RESULTS
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 11,175 $2,330(A) $ 13,505
Accounts receivable, net.............................. 79 (79)(B) --
Inventory, net........................................ 184 (184)(B) --
Other current assets.................................. 254 254
-------- ------ --------
Total current assets.......................... 11,692 2,067 13,759
Property and equipment, net............................. 268 (268)(C) --
Other assets............................................ 168 (168)(B) --
-------- ------ --------
Total assets.................................. $ 12,128 $1,631 $ 13,759
======== ====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 796 $ 796
Accrued and other liabilities......................... 1,796 1,796
-------- ------ --------
Total current liabilities..................... 2,592 -- 2,592
-------- ------ --------
Stockholders' equity:
Convertible preferred stock........................... 3 3
Common stock.......................................... 25 25
Additional paid-in capital............................ 53,488 53,488
Accumulated deficit................................... (43,980) 1,631(D) (42,349)
-------- ------ --------
Total stockholders' equity.................... 9,536 1,631 11,167
-------- ------ --------
Total liabilities and stockholders' equity.... $ 12,128 $1,631 $ 13,759
======== ====== ========
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
- ---------------
(A) The Company will receive total consideration of $2.33 million on the Closing
Date. The consideration will be in cash on the Closing Date. These pro forma
calculations assume that had the transaction been consummated on March 31,
1999 the purchase price would not have been reduced based upon the Company's
net current asset position at that time.
(B) As stipulated in the Agreement, the Buyer will purchase all of the Company's
current assets with the exception of cash, accounts receivable, tax assets,
and certain corporate assets. This adjustment represents the net value of
those assets which would have been transferred to the Buyer as well as the
increase of certain reserves for assets retained that may become impaired as
a result of the dissolution of the Company.
(C) The Agreement stipulates that the Buyer will purchase property and equipment
of the Company. This adjustment represents an estimate of the net book value
of the property and equipment that is to be transferred to the Buyer.
(D) This adjustment represents the amount of the gain that would have been
realized had the transaction been consummated on March 31, 1999. No income
tax expense associated with the gain has been assumed, given the Company's
available tax benefits. The actual amount of the gain will not be determined
until the actual Closing Date. While the Company expects to realize a
substantial gain upon Closing, it believes that gain will be materially less
than the amount of this pro forma adjustment.
9
<PAGE> 12
DISCUSSION OF THE UNAUDITED PRO FORMA DISCUSSION OF CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS DATA
The assets being purchased by the Buyer include products which represent
the overwhelming majority of the Company's consolidated revenues. For the year
ended March 31, 1999 these products accounted for approximately 5% of the
Company's reported net revenues, and for the nine months ended December 31,
1998, approximately 100%. The remaining 95% of the net revenue reported for the
year ended March 31, 1999 were attributable to the Modem business products which
were sold to Boca Research, Inc. on June 18, 1998. Similarly, these products
represent the overwhelming majority of the Company's gross profit. For the year
ended March 31, 1999 these products accounted for in excess of 13% of the
Company's reported gross profit, and for the nine months ended December 31,
1998, approximately 100%. The remaining 87% of the gross profit reported for the
year ended March 31, 1999 were attributable to the Modem business products which
were sold to Boca Research, Inc. on June 18, 1998. The operations utilizing the
assets of the Company being sold to the Buyer are not separate from, nor are
they accounted for separately from, the other activities of the Company.
Although substantially all of the assets are being sold to the Buyer, the
operations of the Company that are not transferred were shared resources
including facilities, management, systems, development, marketing and sales
personnel and corporate general and administrative functions. Therefore, the
Company is unable to accurately estimate the operating expenses associated with
the assets being purchased by the Buyer. Had the transaction contemplated in the
Agreement been consummated on April 1, 1998, the Company would only have final
corporate dissolution activities from that date through the final dissolution of
the Company.
Giving effect to the transaction based on this methodology, for the year
ended March 31, 1999 no significant operating expenses would have been incurred
since the Company would have ceased operations on April 1, 1998.
The aforementioned results also do not consider the amount of any gain or
loss on the transaction itself that would have been realized had the transaction
been consummated on April 1, 1998. The Company expects to realize a gain upon
closing, however it believes that gain will be materially less than that implied
in these pro forma statements.
Had the transactions contemplated in the Agreement been consummated on
April 1, 1998 it would have had no effect on the Company's provision for income
taxes as reported for the fiscal year ended March 31, 1999 and for the nine
months ended December 31, 1998.
STOCK PRICES BEFORE AND AFTER ANNOUNCEMENT OF ASSET SALE
On December 20, 1999, the day preceding the public announcement of the
Asset Sale, the high and low sales prices of the Company's Common Stock on the
Over the Counter Bulletin Board were $3.063 and $2.125, respectively. The day
following the public announcement, December 22, 1999, the high and low sales
prices of the Company's Common Stock on the Over the Counter Bulletin Board were
$0.625 and $0.500 respectively.
AVAILABILITY OF PRINCIPAL ACCOUNTANTS
The Company's independent auditors will be available to answer questions at
the Special Meeting.
INTERESTS OF CERTAIN PERSONS IN THE MATTERS TO BE ACTED UPON
Management and Directors
In September 1997, the Company entered into Change of Control Agreements
with the executive officers. Neil Selvin, president and chief executive officer,
and Marc Linden, senior vice president and chief financial officer, entered into
these agreements with the Company. Pursuant to these agreements, Mr. Selvin and
Mr. Linden would be entitled to between 18 and 24 months each of their
respective salaries upon a change of Control Transaction or Dissolution of the
Company. In December 1999, Mr. Selvin and Mr. Linden agreed to reduce the
amounts to which they would otherwise be entitled. Pursuant to these amended
Agreements,
10
<PAGE> 13
Mr. Selvin and Mr. Linden will receive payments of between 6 and 12 months each
of their respective salaries upon a qualifying event. Closing of the Asset Sale
would be such an event.
Employees
As of the close of the transaction, Buyer will assume the employment of the
Transferred Employees. It is anticipated that such employees will continue
developing the technology, distribution, and assets transferred to Buyer. As a
condition of the Agreement, employees hired by Buyer are to be offered a salary
no less than their current salary with the Company, including all salary
increases given in the ordinary course of business.
The balance of the employees, including the executive management, will
terminate prior to the date of final dissolution of the Company. All such
employees, other than Mr. Selvin and Mr. Linden, have been or will be offered
severance packages by the Company based upon their current base salary and years
of service or specific arrangements.
ANNEXED DOCUMENTS
To aid the stockholders in their review of information contained herein
before voting upon the matters to be decided at the Special Meeting, the Company
has attached the following documents as Annexes to this proxy statement:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1999, attached hereto as Annex A;
2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1999, attached hereto as Annex B;
THE BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE ASSET SALE IS IN
THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND STRONGLY RECOMMENDS A
VOTE IN FAVOR OF THE ASSET SALE.
Whether Proposals 1 and 2 are approved, and a dissolution of the Company
takes place, or Proposals 1 and 2 are rejected, and the Company files for
bankruptcy, the Company expects the holders of the Company's Common Stock will
lose their entire investment.
PROPOSAL 2
APPROVAL AND ADOPTION OF THE PLAN OF DISSOLUTION
Stockholders are being asked to approve the dissolution of the Company and
the winding up of its affairs in accordance with the applicable provisions of
Subchapter X of Delaware General Law ("Delaware Dissolution Law"). Delaware
Dissolution Law provides for the dissolution of a corporation by the filing of a
certificate of dissolution with the Delaware Secretary of State after approval
by the Board of Directors and the holders of a majority of the outstanding stock
of the corporation. Following dissolution, a corporation continues in existence
for three years for the sole purpose of winding up its affairs, including: the
defense and prosecution of legal actions; the liquidation of its remaining
assets; the discharge and satisfaction of its liabilities; and the distribution
of any surplus to stockholders.
Promptly following the close of the sale of substantially all of its assets
to Buyer, the Company will formally dissolve by filing a certificate of
dissolution with the Delaware Secretary of State. Inasmuch as the sale will
substantially complete the liquidation of the property of the Company, the
principal tasks remaining to be performed will be the satisfaction of
liabilities -- that is, the payment of the debts of the Company -- and the
distribution of any remaining property to the stockholders in accordance with
the relative priorities and preferences accorded to the different classes of
outstanding stock. The Company currently is not engaged in any litigation and
does not anticipate engaging in any litigation in the future.
Delaware Dissolution Law provides that following dissolution, no
distribution of corporate assets to a stockholder on account of its shares of
stock can occur until all of the liabilities of the corporation have been
11
<PAGE> 14
discharged or adequately provided for. Delaware Dissolution Law provides two
alternative procedures for discharging or providing for such liabilities. First,
Section 280 provides that a corporation may proceed by giving a written notice
of dissolution to known claimants and publishing such notice in a newspaper of
general circulation and then commencing a detailed procedure for resolving
claims asserted against the corporation. Alternatively, Section 281(b) provides
that a corporation may adopt a plan of distribution pursuant to which it will
pay or make reasonable provision for all known claims. The distribution plan
must also make such provisions as will be reasonably likely to be sufficient to
satisfy disputed claims and claims that are likely to arise or become known
within ten (10) years after the date of dissolution. Under either procedure,
liabilities of the corporation will be satisfied in the order of their priority
if the available funds are insufficient to pay all liabilities in full.
This proposal contemplates that the Company will comply with the procedures
set forth in Section 280. However, the Company will retain the option to proceed
under either procedure and the Company may adopt a plan of distribution at any
time within three (3) years of this notice if unforeseen circumstances render
compliance with all of the requirements of Section 280 impractical. Similarly,
while not currently anticipated, the Company will retain the ability to file a
petition for relief under the United States Bankruptcy Code if such action
become advisable in light of unforeseen circumstances arising before the
dissolution process is completed.
Pursuant to the this proposal, Neil Selvin president and chief executive
officer and Marc Linden, senior vice president and chief financial officer will
be authorized to supervise the dissolution process and to take all steps to
complete the dissolution and winding up of the affairs of the Company. Upon the
filing for dissolution of the Company, Mr. Selvin and Mr. Linden will each
receive a salary of $1.00 (one dollar) per year. Mr. Linden and Mr. Selvin have
the authority to reject claims submitted by claimants as well as settle and
admit claims against the Company. Mr. Selvin will be authorized to adopt a plan
of distribution or authorize the filing of a petition for relief under U.S.
Bankruptcy Code if he deems such action appropriate and advisable in light of
unforeseen circumstances.
EFFECTS OF DISSOLUTION
By effecting a dissolution as contemplated under the Proposal 2, management
can wind up the business affairs of the Company in an orderly fashion and
achieve a final resolution of the rights and liabilities of its creditors,
stockholders, officers and directors. In approving the proposed dissolution the
Board of Directors considered other alternatives for winding up the Company,
including a petition for relief under the U.S. Bankruptcy Code. However, in
anticipation that the sale of substantially all of the assets of Company to
Buyer will yield cash proceeds more than sufficient to satisfy the liabilities
of the Company in full, the Board of Directors has determined that dissolution
under the provisions of Delaware Dissolution Law is the best alternative for
winding up the affairs of the Company.
If the Company were to commence a bankruptcy proceeding, it would most
likely file a petition for relief under Chapter 11 of the United States
Bankruptcy Code. Under Chapter 11, the Company's management would continue to
exercise management and control over the Company's assets. The Company would be
required to notify all potential creditors as well as stockholders of the
commencement of the Chapter 11 proceeding and prepare and file with the
Bankruptcy Court detailed financial disclosure documents. In order to distribute
any surplus to stockholders through the Chapter 11 proceeding, the Company would
be required to prepare and file with the Bankruptcy Court a Chapter 11 Plan and
accompanying Disclosure Statement. The Chapter 11 Plan would have to be accepted
by at least one class of creditors or stockholders entitled to vote on it and
then confirmed by the Bankruptcy Court. A Chapter 11 proceeding can involve
significant legal fees and related expenses, and all such fees and expenses
would be paid from the funds that would otherwise be available for distribution
to the Company's stockholders.
A petition for bankruptcy relief would not alter the liquidation
preferences and priorities in distribution held by the Company's various classes
of outstanding stock. The Board of Directors determined that utilizing a
bankruptcy procedure to distribute the surplus to stockholders would entail
greater expense and delay and thereby diminish the value of the distribution to
stockholders. The Company expects that a bankruptcy
12
<PAGE> 15
proceeding would have no material effect on the interests of the holders of the
common stock of the Company, because they will receive no distribution in the
event of a dissolution or in a bankruptcy proceeding. However, the Company has
determined that a bankruptcy proceeding would be likely to unnecessarily
diminish the value of the distribution to the holders of the Series A
Convertible Preferred Stock.
Another advantage of following the procedures set forth in Delaware
Dissolution law is the protection extended to stockholders and directors of the
corporation. Under Section 282, a stockholder of a dissolved corporation cannot
be held liable for certain claims against the corporation except to the extent
of the amount, if any, distributed to the stockholder on liquidation. Under
Section 281(c), the directors of a dissolved corporation are not liable for
claims against the corporation provided that the requirements of either of the
two alternative dissolution procedures have been satisfied.
As of December 31, 1999 the Company's balance sheet listed assets with a
total book value of approximately $2.6 million and liabilities totaling $1.2
million. The Company expect that the sale of the assets to Buyer will yield net
cash proceeds of approximately $2.33 million. The Company expects that the
proceeds of the sale to Buyer will more than satisfy all the liabilities of the
Company and the Company will make a distribution to stockholders in accordance
with the preferences and priorities of their class of stock.
If the transactions contemplated by Proposals 1 and 2 occurred on December
31, 1999, the unaudited pro forma effect on the Company's net assets resulting
from the Asset Sale (Proposal 1) and the subsequent Corporate Dissolution
(Proposal 2) would be as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
Total assets as of December 31, 1999, as reported........... $ 2,648
Total liabilities as of December 31, 1999, as reported...... (1,165)
-------
Net assets as of December 31, 1999, as reported........... 1,483
Pro Forma effect of the approval of Proposal 1
Proceeds of sale.......................................... 2,330
Net book value of assets sold............................. (348)
-------
Pro Forma net assets as of December 31, 1999................ 3,465
Estimated operating expenditures from January 1, 2000
through the date of dissolution (net of Services
Agreement)................................................ (400)
Contingent liabilities upon sale or dissolution............. (1,050)
-------
Estimated book value available for liquidating
distributions............................................. $ 2,015
=======
Estimated liquidating distributions, in order of preference:
Creditors................................................. $ --
Series A Preferred Stock.................................. $ 2,015
Common Stock.............................................. $
</TABLE>
Total liabilities as of December 31, 1999 are comprised of accounts payable
and other accrued liabilities for items such as warranty costs, employee costs,
and sublessee deposits. Estimated operating expenditures from January 1, 2000
through the date of dissolution include facility rent, payroll, utilities, and
other costs incurred that are not reimbursed to the Company pursuant to the
Services Agreement. The contingent liabilities upon the dissolution or sale
include employee severance costs, director and officer insurance and other final
expenses.
The unaudited pro forma effect on the net assets resulting from the Asset
Sale and subsequent Corporate Dissolution have been prepared by Company
management and are based on historical consolidated financial statements of the
Company giving effect to the assumptions and estimates required to approximate
the net asset value of the Company at a future date. The actual net asset value
of the Company as of dissolution could be materially different than the amount
estimate above due to among other things, costs to maintain personnel and
outside services should the duration of the dissolution process exceed estimates
and the identification of currently unknown creditors with claims against the
Company.
13
<PAGE> 16
The Company is currently paying all creditors as invoices become due, and
believes it will have no material debts outstanding at the time of dissolution.
Therefore, the Company does not anticipate that creditors will have a material
claim against liquidating distributions upon dissolution. Nonetheless, there may
be certain non-material accrued liabilities to creditors outstanding as of the
date of dissolution, which will have to be paid prior to any liquidating
distribution to stockholders. After any such payments to creditors, the holders
of the Series A Preferred Stock will have preferential rights to the first $3.11
million of any liquidating distribution. Please read the following section,
"PREFERENTIAL RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK" for further
discussion of these preferential rights. In light of the preferential rights of
the holders of the Series A Preferred Stock and the amount of proceeds expected
from the Asset Sale, the Company does not believe that there will be sufficient
assets remaining to make any distribution to Common Stockholders after the
liquidating distribution to the holders of the Series A Preferred stock is made
in connection with the dissolution.
The above discussion in the section titled "EFFECTS OF DISSOLUTION" and the
estimates of future liquidation distributions 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.
PREFERENTIAL RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK
The Series A Convertible Preferred Stock has certain preferential rights,
including the right to receive distributions in preference to Common Stock upon
the dissolution or liquidation of the Company. Currently, these preferential
rights provide that the holders of the Series A Preferred Stock will receive
100% of the first $3.11 million of any such distribution before the holders of
the Common Stock may receive any amount in such distribution. As the Company
expects to receive approximately $2.3 million from the sale of its assets to
Buyer, and will be required to satisfy its debts to creditors before making any
distribution to stockholders, the Company does not expect that there will be
sufficient assets to pay the full liquidation preference to the holders of the
Series A Preferred Stock. Any amount available for distribution up to $3.11
million will be distributed ratably to the holders of the Series A Preferred
Stock by the Company. Any amount available for distribution in excess of $3.11
million will be distributed ratably among the holders of the Common Stock and
the Series A Preferred Stock on an as converted to Common Stock basis. The
Company currently does not expect that the holders of Common Stock will receive
any proceeds from the dissolution of the Company.
INCOME TAX CONSEQUENCES
The following is a discussion of the expected U.S. federal income tax
consequences to the Company's stockholders of the dissolution of the Company.
Stockholders of the Company should be aware that the tax consequences of the
dissolution are governed by the Internal Revenue Code of 1986, as amended, and
interpretations, rulings and regulations thereof which are subject to change,
including changes which may be applied retroactively.
The Company's Series A Preferred Stock has certain preferential rights with
respect to distributions made to stockholders as part of the Company's
liquidation or dissolution. Please see the section titled "PREFERENTIAL RIGHTS
OF SERIES A CONVERTIBLE PREFERRED STOCK" for a discussion of these rights and
their impact on the stockholders in the event that Proposal 2 is approved.
The Company expects that stockholders will recognize a capital loss from
the dissolution of the Company on their respective income tax returns. The loss
for each stockholder will be equal to the amount paid by such stockholder for
the shares held, minus the total amount distributed to such stockholder in the
dissolution. The Company believes that it is not likely that Common Stockholders
will receive any liquidating distribution. For most individual taxpayers and
others that maintain a calendar tax year, the loss should be recognized on their
2000 tax return.
14
<PAGE> 17
The above discussion of future income tax consequences as a result of the
transactions contemplated by this proposal 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.
The above tax discussion is a general discussion of the tax implications to
stockholders developed by the Company after consultation with its tax and legal
advisors. The actual impact of this transaction on any particular stockholder's
income tax return may differ due to capital loss deduction limitations and other
factors specific to their particular tax situation. Stockholders should consult
their tax professionals for a complete analysis of the effect of this
transaction.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE PLAN OF
DISSOLUTION IS IN THE BEST INTEREST OF THE COMPANY AND ITS STOCKHOLDERS, AND
STRONGLY RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL OF THE PLAN OF
DISSOLUTION.
Whether Proposals 1 and 2 are approved, and a dissolution of the Company
takes place, or Proposals 1 and 2 are rejected, and the Company files for
bankruptcy, the Company expects the holders of the Company's Common Stock will
lose their entire investment.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 28, 2000, with respect to:
(i) each person (or group of affiliated persons) who is known by the Company to
own beneficially more than 5% of the Common Stock, (ii) each of the Company's
directors, (iii) each of the four highest paid executive officers of the
Company, and (iv) all directors and executive officers of the Company as a
group. Except as set forth below, the address of each individual is the address
of the Company as set forth herein.
<TABLE>
<CAPTION>
COMMON STOCK
AFTER CONVERSION OF
SERIES A REMAINING SERIES A
PREFERRED STOCK COMMON STOCK PREFERRED STOCK
----------------------- ----------------------- -----------------------
SHARES PERCENT SHARES PERCENT SHARES PERCENT
BENEFICIALLY OF BENEFICIALLY OF BENEFICIALLY OF
BENEFICIAL OWNER(1) OWNED(1) CLASS(2) OWNED(1) CLASS(3) OWNED(1) CLASS(4)
------------------- ------------ -------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Leonard A. Lehmann(5).................... -- -- 50,798 1.1% 50,798 *
Neil Selvin.............................. -- -- 30,937 * 30,937 *
Kevin R. Compton......................... 116,250 10.0% 274,795 6.2% 391,045 7.0%
Kenneth A. Goldman....................... -- -- 400 * 400 *
Roger Roberts............................ -- -- -- -- -- --
Marc Linden.............................. -- -- 197 * 197 *
All Directors and Officers as a group (6
persons)(6)............................ 116,250 10.0% 357,127 8.0% 473,377 8.4%
CERTAIN BENEFICIAL OWNERS:
Hambrecht & Quist(7)..................... 499,532 43.0% 1,178,892 26.5% 1,678,424 29.8%
One Bush St., San Francisco, CA 94104
Integral Capital Partners(8)............. 523,125 45.0% 1,234,574 27.7% 1,757,699 31.2%
2750 San Hill Road, Menlo Park, CA
94025
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that deem shares to be beneficially owned
by any person who has or shares voting or
15
<PAGE> 18
investment power with respect to such shares. Unless otherwise indicated,
the persons named in the table have sole voting and sole investment power
with respect to all shares shown as beneficially owned, subject to community
property laws where applicable. Common Stock subject to options that are
currently exercisable or are exercisable within 60 days of the date of this
proxy are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership. As of the date of this proxy no options are "in-the-money" and
therefore no options are contemplated in the calculation of beneficial
ownership.
(2) Percent of Beneficial Ownership is based on 1,162,500 shares of Series A
Preferred Stock outstanding as of January 28, 2000.
(3) Percent of Beneficial Ownership is based on 4,465,989 shares of Common Stock
outstanding as of January 28, 2000.
(4) Percent of Beneficial Ownership is based upon 5,627,489 shares if Common
Stock as of January 28, 2000 assuming a complete conversion of 1,170,365
shares of Series A Preferred Stock into 1,170,365 shares of Common Stock.
(5) Includes 50,798 shares held by Lehmann family trusts.
(6) Includes 116,250 shares held by officers and directors or entities
affiliated with officers and directors of the Company.
(7) Based on Schedule 13D filed by Hambrecht & Quist LLC with the Securities and
Exchange Commission, dated March 12, 1999, adjusted for the one-for-ten
reverse stock split with respect to the Common Stock and the automatic
conversion of 62.5% of the Series A Preferred Stock to Common Stock.
(8) Based on Schedule 13D filed by Integral Capital Partners with the Securities
and Exchange Commission, dated March 12, 1999, adjusted for the one-for-ten
reverse stock split with respect to the Common Stock and the automatic
conversion of 62.5% of the Series A Preferred Stock to Common Stock.
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented for
consideration at the Special Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.
By Order of the Board of Directors
/s/ Marc E. Linden
Marc E. Linden
Secretary
March 28, 2000
16
<PAGE> 19
AVAILABLE INFORMATION
The Company is subject to the information reporting requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy statements
and other information may be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located
at Seven World Trade Center, Suite 1300, New York, NY 10048, and at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60611-2511. Copies of such material may be obtained by mail from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The SEC also maintains a website
that contains reports, proxy statements and other information regarding
registrants that file electronically with the SEC at http://www.sec.gov. The
Company's Common Stock is quoted on Over The Counter Bulletin Board (OTCBB).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the SEC by the Company (File
No. 0-23260) pursuant to the Exchange Act are hereby incorporated by reference
in this Proxy Statement:
1. The Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1999; and
2. The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended June 30, 1999, September 30, 1999, and December 31, 1999; and
3. The Company's Current Report on Form 8-K filed on December 27, 1999.
All documents and reports subsequently filed with the SEC by the Company
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date
of this Proxy Statement prior to the date of the Special Meeting of the
Company's Stockholders shall be deemed to be incorporated by reference in this
Proxy Statement and to be part hereof from the dates of filing of such documents
and reports.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any statement
so modified or superseded shall not be deemed to constitute a part hereof except
as so modified or superseded.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS AND
SCHEDULES TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS AND SCHEDULES ARE SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN) ARE ALSO AVAILABLE, WITHOUT CHARGE, UPON
WRITTEN REQUEST BY ANY PERSON TO WHOM THIS PROXY STATEMENT HAS BEEN DELIVERED,
FROM ONEWORLD SYSTEMS, INC., 1144 EAST ARQUES AVENUE, SUNNYVALE, CALIFORNIA,
94086, ATTENTION: INVESTOR RELATIONS.
17
<PAGE> 20
UNITED STATES
SECURITIES AND EXCHANGES COMMISSION
WASHINGTON, D.C. 20549
-------------------
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
-------------------
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.
- -------------------
(1) Excludes 2,657,393 shares of Common Stock held by directors, officers
and affiliates as of June 23, 1999.
<PAGE> 21
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>
<PAGE> 22
- --------------------------------------------------------------------------------
PART I
- --------------------------------------------------------------------------------
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.
-3-
<PAGE> 23
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.
-4-
<PAGE> 24
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
-5-
<PAGE> 25
The following table shows the currently available products within our
OneWorld Network Communications Server family - Model 5000 series:
- --------------------------------------------------------------------------------
ONEWORLD NETWORK COMMUNICATIONS SERVERS - MODEL 5000
- --------------------------------------------------------------------------------
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.
-6-
<PAGE> 26
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
-7-
<PAGE> 27
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
-8-
<PAGE> 28
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>
<CAPTION>
Name Age Position
---------------------------------------------------------------------------------------------------------
<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> 29
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.
-10-
<PAGE> 30
- --------------------------------------------------------------------------------
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> 31
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.
-12-
<PAGE> 32
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
-13-
<PAGE> 33
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> 34
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> 35
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> 36
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.
-17-
<PAGE> 37
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> 38
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> 39
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> 40
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> 41
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> 42
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> 43
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
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<PAGE> 44
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> 45
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.
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<PAGE> 46
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.
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<PAGE> 47
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> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
- --------------------------------------------------------------------------------
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> 59
(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> 60
* 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> 61
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> 62
================================================================================
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.
================================================================================
<PAGE> 63
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>
<PAGE> 64
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
<PAGE> 65
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
<PAGE> 66
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
<PAGE> 67
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.
6
<PAGE> 68
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> 69
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.
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<PAGE> 70
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.
9
<PAGE> 71
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
10
<PAGE> 72
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
11
<PAGE> 73
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> 74
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> 75
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> 76
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> 77
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.
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<PAGE> 78
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> 79
PROXY
ONEWORLD SYSTEMS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY FOR THE APRIL 28, 2000 SPECIAL MEETING OF STOCKHOLDERS
The undersigned stockholder of OneWorld Systems, Inc., a Delaware corporation,
hereby acknowledges receipt of the Notice of Special Meeting of Stockholders and
the Proxy Statement, each dated March 28, 2000, and hereby appoints Neil Selvin
and Marc Linden and each of them, proxies and attorneys-in-fact, with full power
to each of substitution, on behalf and in the name of the undersigned, to
represent the undersigned at the Special Meeting of Stockholders of OneWorld
Systems, Inc., to be held on April 28, 2000 at 8:00 a.m., local time, at the
offices of Wilson Sonsini Goodrich & Rosati P.C. located at 975 Page Mill Road,
Palo Alto, California, and at any adjournment or adjournments thereof, and to
vote all shares of Common Stock and Series A Preferred Stock which the
undersigned would be entitled to vote, if then and there personally present, on
the matters set forth below.
<TABLE>
<S> <C>
Please mark
[X} votes as in this
example.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED, IT WILL BE VOTED FOR PROPOSALS 1
THROUGH 4 AND IN THE DISCRETION OF THE PROXIES AS TO OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
For Against Abstain
1. To approve and adopt that certain Asset Purchase Agreement, as amended, [ ] [ ] [ ]
dated February 7, 2000 (the "Agreement") and the transactions contemplated
thereby, substantially as described in the Proxy Statement accompanying this
Notice, pursuant to which Tut Systems, Inc., a Delaware corporation
("Buyer"), will purchase from the Company substantially all of the Company's
assets (collectively, the "Assets").
2. To approve and adopt the Plan of Dissolution of the Company. [ ] [ ] [ ]
Grant Withhold
3. To transact such other business as may properly come before the meeting or [ ] [ ]
any adjournment or postponement thereof.
MARK HERE FOR ADDRESS CHANGE AND NOTE BELOW [ ]
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE
(Please sign exactly as your name appears on the stockholder
list. If shares are held jointly, each holder should sign.
When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such. If a corporation,
please sign in full corporate name by the president or other
authorized officer. If a partnership, sign in partnership name
by authorized person.)
Dated: , 2000
--------------------------------
-------------------------------------------------------------
Printed name of Stockholder(s)
-------------------------------------------------------------
Signature
-------------------------------------------------------------
Signature, if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE
</TABLE>
