10QSB 1 0001.txt FORM 10-QSB OMNIS TECHNOLOGY CORP Filing Type: 10-QSB Description: Quarterly Report Filing Date: November 6, 2000 Period End: September 30, 2000 Primary Exchange: NASDAQ - Small Cap Market Ticker: OMNS U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter period ended September 30, 2000 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act For the transition period from _________ to _________ Commission File number 0-16449 OMNIS TECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-3046892 (State of incorporation) (IRS Employer Identification No.) 981 Industrial Road, Building B San Carlos, CA 94070 (Address of principal executive offices) (650) 632-7100 (Registrant's telephone number) Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 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 [ ] As of October 20, 2000, there were 10,277,832 shares of registrant's Common Stock, $.10 par value, outstanding. OMNIS TECHNOLOGY CORPORATION AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements: 1 Condensed Consolidated Balance Sheets - 1 September 30, 2000 and March 31, 2000 Condensed Consolidated Statements of Operations - 2 Three and Six Months ended September 30, 2000 and 1999 Condensed Consolidated Statements of Cash Flows - 3 Six Months ended September 30, 2000 and 1999 Notes to Condensed Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial 6 Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 33 Item 2. Changes in Securities 34 Item 3. Defaults upon Senior Securities 34 Item 4. Submission of Matters to a Vote of Security Holders 34 Item 5. Other Information 34 Item 6. Exhibits and Reports on Form 8-K 34 Signatures 35 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements OMNIS TECHNOLOGY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS September 30, 2000 March 31, 2000 ------------------ -------------- (Unaudited) Current assets: Cash and cash equivalents $ 621,000 $ 1,238,000 Trade accounts receivable, less allowance for doubtful accounts and returns of $107,000 and $179,000 at June 30 and March 31, respectively 818,000 594,000 Inventory 14,000 26,000 Other current assets 194,000 397,000 ------------ ------------ Total current assets 1,647,000 2,255,000 ------------ ------------ Property, furniture and equipment, net 912,000 923,000 Intangibles 1,434,000 ------------ ------------ Total assets $ 3,993,000 $ 3,178,000 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Note payable $ 2,000 56,000 Note payable to stockholder 3,144,000 2,028,000 Accounts payable 620,000 460,000 Accrued liabilities 928,000 591,000 Deferred revenue 300,000 206,000 ------------ ------------ Total current liabilities 4,994,000 3,341,000 ------------ ------------ Long-term debt 1,003,000 -- ------------ ------------ Total liabilities 5,997,000 3,341,000 ------------ ------------ Stockholders' deficiency: Preferred stock 300,000 300,000 Common stock 1,026,000 1,004,000 Paid-in capital 51,349,000 50,374,000 Deferred compensation (1,507,000) (2,045,000) Accumulated deficit (53,477,000) (50,082,000) Accumulated other comprehensive income 305,000 286,000 ------------ ------------ Total stockholders' deficiency (2,004,000) (163,000) ------------ ------------ Total liabilities and stockholders' deficiency $ 3,993,000 $ 3,178,000 ============ ============ See notes to condensed consolidated financial statements.
1 OMNIS TECHNOLOGY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net revenues: Products $ 851,000 $ 948,000 $ 1,665,000 $ 2,052,000 Services 235,000 236,000 407,000 504,000 ------------ ------------ ------------ ------------ Total net revenues 1,086,000 1,184,000 2,072,000 2,556,000 Costs and expenses: Cost of product revenues 11,000 27,000 45,000 67,000 Cost of service revenues 146,000 44,000 378,000 98,000 Sales and marketing 1,164,000 569,000 2,529,000 1,099,000 Research and development 531,000 521,000 1,110,000 906,000 General and administrative 596,000 1,109,000 1,301,000 1,352,000 ------------ ------------ ------------ ------------ Total costs and expenses 2,448,000 2,270,000 5,363,000 3,522,000 ------------ ------------ ------------ ------------ Operating loss (1,362,000) (1,086,000) (3,291,000) (966,000) ------------ ------------ ------------ ------------ Other income (expense): Interest income 7,000 2,000 22,000 4,000 Interest expense and other, net (65,000) (3,000) (126,000) (10,000) ------------ ------------ ------------ ------------ (58,000) (1,000) (104,000) (6,000) ------------ ------------ ------------ ------------ Loss before income taxes (1,420,000) (1,087,000) (3,395,000) (972,000) Income tax expense 1,000 0 0 4,000 ------------ ------------ ------------ ------------ Net loss ($ 1,421,000) $ (1,087,000) $ (3,395,000) $ (976,000) ============ ============ ============ ============ Basic and diluted net loss per share $ (0.14) $ (0.11) $ (0.33) $ (0.10) ============ ============ ============ ============ Weighted average number of common shares outstanding 10,247,047 9,683,348 10,185,536 9,681,589 ============ ============ ============ ============ See notes to condensed consolidated financial statements.
2 OMNIS TECHNOLOGY CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended September 30, --------------------------- 2000 1999 ------------ ------------ Cash flows from operating activities: Net loss $(3,395,000) $ (976,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 151,000 183,000 Non cash compensation 538,000 555,000 Change in assets and liabilities: Trade accounts receivable (224,000) 33,000 Inventory 12,000 (10,000) Loss on disposal of property -- 1,000 Other assets 203,000 268,000 Accounts payable and accrued liabilities 497,000 33,000 Deferred revenues 94,000 54,000 ----------- ----------- Net cash provided by (used in) operating activities (2,124,000) 141,000 ----------- ----------- Cash flows from investing activities: Purchases of property, furniture and equipment (206,000) (70,000) Acquisition of software assets (534,000) -- Proceeds from sale of fixed assets -- 1,000 ----------- ----------- Net cash used in investing activities (740,000) (69,000) ----------- ----------- Cash flows from financing activities: Proceeds from incentive stock option exercise 110,000 2,000 Proceeds from stock issuance -- 39,000 Additions of debt 2,107,000 121,000 Repayments of debt (54,000) (72,000) ----------- ----------- Net cash provided by financing activities 2,163,000 90,000 ----------- ----------- Effect of exchange rate changes on cash 84,000 (70,000) ----------- ----------- Net increase (decrease) in cash and cash equivalents (617,000) 92,000 Cash and cash equivalents at beginning of period 1,238,000 271,000 ----------- ----------- Cash and cash equivalents at end of period $ 621,000 $ 363,000 =========== =========== Supplemental non-cash disclosure: Issuance of common stock for software system $ 900,000 -- =========== ===========
3 OMNIS TECHNOLOGY CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The unaudited financial information furnished herein reflects all adjustments, consisting only of normal recurring items, which in the opinion of management are necessary to fairly state the Company's financial position, the results of its operations and the changes in its financial position for the periods presented. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended March 31, 2000. The results of operations for the period ended September 30, 2000 are not necessarily indicative of results to be expected for any other interim period or the fiscal year ending March 31, 2001. 2. The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income (loss) by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities and other contracts to issue stock were exercised or converted into common stock, unless the effect of such securities would be anti-dilutive. As of September 30, 2000, the Company had 1,690,910 potentially dilutive securities outstanding. Six Months Ended September 30 ---------------------------- 2000 1999 ---- ---- Revenue by geographic region (1): Revenue from North America $ 793,000 $ 961,000 Revenue from Europe 1,279,000 1,595,000 Total $ 2,072,000 $ 2,556,000 =========== =========== Operating loss by geographic region (1): From North America $(2,963,000) $ (752,000) From Europe (328,000) (214,000) Total $(3,291,000) $ (966,000) =========== =========== (1) Revenues are broken out geographically by ship from location. 4 COMPREHENSIVE INCOME (LOSS) Comprehensive income includes changes in the balance of items that are reported directly in a separate component of stockholders' equity on the condensed consolidated balance sheets. The reconciliation of net loss to comprehensive loss is as follows.
Three Months Ended Six Months Ended September 30 September 30 ------------ ------------ 2000 1999 2000 1999 ---- ---- ---- ---- Net loss: $(1,421,000) $(1,087,000) $(3,395,000) $ (976,000) Other comprehensive (loss) gain Foreign currency translation adjustments 69,000 (20,000) 19,000 (57,000) ----------- ----------- ----------- ----------- Total comprehensive income (loss) $(1,352,000) $(1,107,000) $(3,376,000) $(1,033,000) =========== =========== =========== ===========
INTANGIBLES Intangibles includes the purchase of a software system which occurred in May 2000. The costs from this software system is amortized over its useful life estimated to be three years. Also, included is approximately $200,000 in legal fees related to an acquisition. LONG TERM DEBT The debt consists of a loan from a shareholder which is due September 30, 2002 and bears interests at ten percent. 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Item 2, as well as other portions of this document, includes certain forward-looking statements about the Company's business, revenues, expenditures and operating and capital requirements. In addition, forward-looking statements may be included in various other Company documents to be issued concurrently or in the future and in oral or other statements made by representatives of the Company to investors and others from time to time. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from predicted results. Such risks include, among others - the Company's liquidity, - significant variability in operating results, including variability in product revenues and gross margins, - fluctuating demand for new and established products, - dependence on development of new products, - increasing expenses for marketing and development of new products, - historical lack of profitability, - rapid technological change that affects the ability of the Company to respond to customer or market demands, - risks associated with global operations, - the continued and future acceptance of the Company's products, - the rate of growth in the industries of the Company's products, - the presence of competitors with greater technical, marketing and financials resources, and - the ability of the Company to successfully expand its operations. Any of such statements and this discussion should be read in conjunction with the discussion of "Risk Factors" in this Item 2 and the Company's audited consolidated financial statements, including the notes thereto, included in its annual report for the fiscal year ended March 31, 2000, on Form 10-KSB filed with the Commission on June 29, 2000 and the amended 10-KSB filed with the Commission on July 31, 2000. 6 OVERVIEW The Company, through its operating subsidiaries, Omnis Software Inc., a California corporation, Omnis Holdings Limited and Omnis Software Limited, limited liability companies organized under the laws of England, and Omnis Software GmbH, a German corporation, develops software tools and delivers consulting services. The Company's products are designed to allow customers to develop software solutions which can be continuously enhanced to respond to changing business and technical needs. The Company's products support the full life cycle of applications and are designed for rapid development and deployment of sophisticated Web and client/server applications, providing true reuse of software objects and the ability to integrate objects from disparate programming languages on a number of different operating system platforms. The Company's products are used by corporations, system integrators, independent software vendors, small businesses, and independent consultants to deliver custom software solutions for a wide range of uses including financial management, decision support, executive information, sales and marketing, and multi-media authoring systems. In addition to these products, the Company provides technical support and training to help plan, analyze, implement, and maintain application software based on the Company's technology. The Company was incorporated under the laws of the State of Delaware on August 5, 1987 pursuant to a reorganization of predecessor companies originally incorporated under the laws of England in 1983. Recent Developments On August 23, 2000 the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with PickAx, Inc., a Delaware corporation ("Pick"), one of the stockholders of Pick, Gilbert Figueroa, and Raining Merger Sub, Inc. ("Merger Sub"), a Delaware corporation and wholly owned subsidiary of Omnis. Pursuant to the Merger Agreement (attached hereto as an Exhibit) Merger Sub, will be merged with and into Pick. Pick as the surviving corporation will become a wholly-owned subsidiary of Omnis. Shareholder approval is required for consummation of the merger. A Preliminary Proxy Statement for a special meeting of the Shareholders was filed with the SEC on October 26, 2000. A revised Preliminary Proxy Statement will be filed with the SEC on about November 6, 2000. The Company's shareholders will be asked to approve the merger at the special meeting. There have numerous changes to the Company's work force and composition of the Board of Directors. On September 22, 2000, the Board decided to reduce the Company's employee work force. Between August 30, 2000 and October 6, 2000 approximately twenty employees were terminated thereby reducing the work force by approximately 29%. On August 14, 2000, Mr. James Dorst resigned as a director of the Company and Bryan Sparks was elected by the Board of Directors as a director to fill the vacancy 7 created by the resignation of Mr. Dorst. On September 22, 2000 Mr. Bryce J. Burns was appointed as the Chairman of the Board of the Company. On October 16, 2000 Mr. Dorst also resigned as the Chief Operating Officer and Chief Financial Officer to the Company. The Company has not hired a successor to replace Mr. Dorst but intends to identify and hire a successor Chief Financial Officer as soon as practicable. On August 23, 2000 the Company also obtained $750,000 in additional loans from three private parties (the "Lenders") pursuant to the terms of a Note Purchase Agreement. The Company issued three unsecured promissory notes to the Lenders in connection therewith (the "Notes"). The Notes bear interest at 4% per annum and shall be automatically converted into shares of common stock of the Company on the second anniversary of the date of issuance thereof at a conversion price equal to $6.17 per share. The Notes are also convertible at any time at the option of the holders thereof at the same conversion price per share. Subsequently, in September, 2000, the Company borrowed an additional $250,000 from The Philip and Debra Barrett Charitable Remainder Trust (the "Trust"). Philip Barrett, a director of the Company, is the trustee and a beneficiary of the Trust. The Company issued an unsecured promissory note to the Trust in connection with the loan (the "Barrett Note"). The Barrett Note is due and payable two years from the date of issuance and bears interest at 10% per annum. A future credit facility may be difficult to obtain with the Company's historical operating results. In order to obtain additional funds in the future for its continued operation, the Company will need to seek additional equity or debt capital. Other major shareholders have expressed the willingness to provide additional funds but no legally binding commitment has been made. On September 22, 2000, the Board of Directors determined that the Company would seek to raise additional equity capital prior to December 31, 2000 of between $5 Million to $10 Million by means of a private placement of common stock of the Company at an issue price in the range of $6 per share. There is no assurance that the Company will be able to raise such additional capital on commercially reasonable terms, if at all. In addition, the raising of any such capital would be dilutive to the Company's stockholders. 8 RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 Total Net Revenues Total net revenues for the six months ended September 30, 2000, were $2,072,000, representing a decrease of 18.9% as compared to total net revenues of $2,556,000 for the six months ended September 30,1999. This decrease is due primarily to the reduction in selling price of development kits and runtimes and the repositioning of the OMNIS Studio product line. Total net revenues for the three months ended September 30, 2000, were $1,086,000, representing a decrease of 8% as compared to total net revenues of $1,184,000 for the three months ended September 30, 1999. The change is due to the reduction in selling price of development kits and runtimes and the repositioning of the OMNIS Studio product line. Product revenues decreased during the six months ended September 30, 2000, to $1,665,000 from $2,052,000 in the six months ended September 30, 1999. This decrease is due to a reduction in sales price of OMNIS Studio development kit and license fees to motivate existing customers to upgrade from Omnis as well as attract new developers. Product revenues decreased during the three months ended September 30, 2000, to $851,000 from $948,000 in the three months ended September 30, 1999. This decrease is due to a reduction in sales price of Omnis Studio development kit and license fees to motivate existing customers to upgrade from Omnis 7 as well as attract new developers. Service revenues for the six months ended September 30, 2000 decreased 19.2% to $407,000 from $504,000 for the six months ended September 30, 1999. The majority of this decrease is due to the Company's decision to phase out its consulting offerings. Maintenance revenue, which primarily consists of email and telephone support to the Company's customers, decreased slightly during the period ending September 30, 2000, due to the decrease in the annual support fee being charged to customers. Service revenues for the three months ended September 30, 2000 decreased only by $1,000 to $235,000 from $236,000 for the three months ended September 30, 1999. The Company sells its products in U.S. Dollars in North America, British Pounds Sterling in the United Kingdom and German Deutsche Marks in Germany. As the Company recognizes revenues and expenses in U.S. Dollars, British Pounds Sterling, and German Deutsche Marks but reports its financial results in U.S. Dollars, changes in exchange rates may cause variances in the Company's period-to-period revenues and results of operations in future periods. Foreign exchange gains and losses have not been material to the Company's performance to date. 9 Cost of Product Revenues. Cost of product revenues as a percentage of product revenues decreased from 3.2% in the six months ended September 30, 1999 to 2.7% in the six months ended September 30, 2000 as a direct result of the decrease in average sales price of the Company's products. Cost of product revenues as a percentage of product revenues decreased slightly from 2.8% in the three months ended September 30, 1999 to 1.3% in the three months ended September 30, 2000. Cost of Services Revenues. Cost of service revenues increased as a percentage of service revenues from 19.4% in the six months ended September 30, 1999, to 92.76% in the six months ended September 30, 2000. This is due to the establishment of a technical support department in the US this year that offers real time telephone support to its North American customers. Previously, only email support was available from the engineering office in the United Kingdom. Cost of service revenues increased as a percentage of service revenues from 18.6% in the three months ended September 30, 1999, to 62% in the three months ended September 30, 2000. This is due to the establishment of a technical support department in the US this year that will offer real time telephone support to its North American customers. Previously, only email support is available from the engineering office in the United Kingdom. Selling and Marketing Expenses. Sales and marketing expenses increased to $2,529,000 for the six months ended September 30, 2000 as compared to $1,099,000 for the six months ended September 30, 1999. The increase in sales and marketing expenses was primarily due to increases in targeted advertising, direct mail programs, trade show participation and strategic marketing programs with partners. Sales and marketing expenses increased to $1,164,000 for the three months ended September 30, 2000 as compared to $569,000 for the three months ended September 30, 1999. The increase in sales and marketing expenses was primarily due to increases in targeted advertising, direct mail programs, trade show participation and strategic marketing programs with partners. Research and Development Expenses. Research and development costs increased to $1,110,000 for the six months ended September 30, 2000, as compared to $906,000 for the six months ended September 30, 1999, primarily due to an increase of staff at its Research and Development Center in the United Kingdom. The Company continues to invest in the development of its newer 10 product line, OMNIS Studio, aimed at sales opportunities that the Company believes will expand its installed base of customers. Research and development costs increased to $531,000 for the three months ended September 30, 2000, as compared to $521,000 for the three months ended September 30, 1999, primarily due to an increase of staff at its Research and Development Center in the United Kingdom. The Company continues to invest in the development of its newer product line, OMNIS Studio, aimed at sales opportunities that the Company believes will expand its installed base of customers. General and Administrative Expenses. General and administrative expenses decreased to $1,301,000 for the six months ended September 30, 2000, as compared to $1,352,000 for the six months ended September 30,1999. General and administrative expense for the six months ended September 30, 2000 included the recognition of non-cash compensation expense of $538,000 that resulted from the issuance of certain options at below fair market value, offset by reductions in head count in the quarter ended September 30, 2000. General and administrative expenses decreased to $596,000 for the three months ended September 30, 2000, as compared to $1,109,000 for the three months ended September 30, 1999. General and administrative expense for the three months ended September 30, 2000 included the recognition of non-cash compensation expense of $269,000 that resulted from the issuance of certain options at below fair market value. During the three months ended September 30, 1999, non-cash compensation expense of $555,000 was recognized. Other Income (Expense), Net. Other income (expense) is comprised primarily of interest income earned on cash and cash equivalents, interest expense, and any gain or loss on foreign currency transactions. Interest income increased to $7,000 for the three months ended September 30, 2000, from $2,000 for the three months ended September 30, 1999, primarily due to higher average balances of cash and cash equivalents. Interest expense increased to $65,000 for the three months ended September 30, 2000, from $3,000 for the three months ended September 30, 1999 primarily due to the $3.0 million promissory note obtained from a significant stockholder and an aggregate of $1.0 million promissory notes obtained from others. Inflation. The Company believes that inflation has not had a material impact on the Company's operating results to date and does not expect inflation to have a material impact on the Company's operating results in fiscal year 2001. 11 RISK FACTORS Quarterly Fluctuations. The Company has experienced significant quarterly fluctuations in operating results and anticipates such fluctuations in the future. The Company generally ships orders as received and, as a result, typically has little or no backlog. Quarterly revenues and operating results, therefore, depend on the volume and timing of orders received during the quarter, which are difficult to forecast. Furthermore, the Company has typically sold to large corporate enterprises, significant partners, and distributors which often purchase in significant quantities, and therefore, the timing of the receipt of such orders could cause significant fluctuations in operating results. Historically, the Company has often recognized a substantial portion of its license revenues in the last month of the quarter. Service revenues tend to fluctuate as consulting projects, which may continue over several quarters, are undertaken or completed. Operating results may also fluctuate due to factors such as the demand for the Company's products, the size and timing of customer orders, changes in the proportion of revenues attributable to licenses and service fees, commencement or conclusion of significant consulting projects, changes in pricing policies by the Company or its competitors, the number, timing, and significance of product enhancements and new product announcements by the Company and its competitors, the ability of the Company to develop, introduce, and market new and enhanced versions of the Company's products on a timely basis, changes in the level of operating expenses, changes in the Company's sales incentive plans, budgeting cycles of its customers, customer order deferrals in anticipation of enhancements or new products offered by the Company or its competitors, nonrenewal of maintenance agreements, product life cycles, software bugs and other product quality problems, personnel changes, changes in the Company's strategy, the level of international expansion, seasonal trends and general domestic and international economic and political conditions, among others. Accordingly, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and should not be relied upon as indications of future performance. Expense Levels. The Company's expense levels are based, in significant part, on the Company's expectations as to future revenues and are therefore relatively fixed in the short term. If revenue levels fall below expectations, net income is likely to be disproportionately adversely affected because a proportionately smaller amount of the Company's expenses vary with its revenues. There can be no assurance that the Company will be able to achieve profitability on a quarterly or annual basis in the future. Due to all the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. 12 Future Operating Results. The Company's future operating results will depend, to a considerable extent, on its ability to rapidly and continuously develop new products that offer its customers enhanced performance at competitive prices. Inherent in this process are a number of risks. The development of new, enhanced software products is a complex and uncertain process requiring high levels of innovation from the Company's designers as well as accurate anticipation of customer and technical trends by the marketing staff. The Company's operating results will also be affected by the volume, mix, and timing of orders received during a period and by conditions in the industries that it serves as well as the general economy. Additionally, the Company operates on a global basis with offices or distributors in Europe, and Asia, as well as North America. Changes in the economies, trade policies, and fluctuations in interest or exchange rates may have an impact on its future financial results. Also, as the Company continues to operate more globally, seasonality may become an increasing factor in its financial performance. The Company's products are typically used to develop applications that are critical to a corporate customer's business and the purchase of the Company's products is often part of a customer's larger business process, reengineering initiative, or implementation of client/server or web-based computing. As a result, the license and implementation of the Company's software products generally involves a significant commitment of management attention and resources by prospective customers. Accordingly, the Company's sales process is often subject to delays associated with a long approval process that typically accompanies significant initiatives or capital expenditures. For these and other reasons, the sales cycle associated with the license of the Company's products is often lengthy and subject to a number of significant delays over which the Company has little or no control. There can be no assurance that the Company will not experience these and additional delays in the future. Therefore, the Company believes that its quarterly operating results are likely to vary significantly in the future. The development and introduction of new or enhanced products also requires the Company to manage the transition from older, displaced products in order to minimize disruptions in customer ordering patterns and excessive levels of older product inventory and to ensure that adequate supplies of new products can be delivered to meet customer demand. Because the Company is continuously engaged in this product development and transition process, its operating results may be subject to considerable fluctuations, particularly when measured on a quarterly basis. Liquidity and Capital Resources. For the six months ended September 30, 2000, the net operating use of cash was fueled by a net loss of $3,395,000, a change in net current assets of $582,000, depreciation and amortization expense of $151,000 and the amortization of non-cash compensation expense of $538,000. Net cash used by investing activities was used to purchase $206,000 in furniture and computer equipment and $543,000 for expenses 13 related to the acquisition of software assets to enhance the Omnis product line for a net use of $140,000. Cash flows from financing activities were provided by $2,107,000 additional borrowings under the Astoria Note noted above, $900,000 in proceeds from the issuance of common stock and $110,000 from the exercise of stock options offset by $54,000 repayment of debt. These total changes combined with a $84,000 cash provided from the effect of exchange rates for six month period contributed to a net decrease in cash for the period of $617,000. At September 30, 2000, the Company's principal sources of liquidity consisted of cash and cash equivalents of $621,000. The Company's working capital position was a deficit of $1,086,000 at March 31, 2000 and a deficit of $2,347,000 at June 30, 2000 compared to a deficit of $3,347,000 at September 30, 2000. On September 22, 2000, the Board of Directors determined that the Company would seek to raise additional equity capital prior to December 31, 2000 of between $5 Million to $10 Million by means of a private placement of common stock of the Company at an issue price in the range of $6 per share. There is no assurance that the Company will be able to raise such additional capital on commercially reasonable terms if at all. In addition, the raising of any such capital would be dilutive to the Company's stockholders. The Company does not currently have an established line of credit with a commercial bank and has funded operations over the past several months by means of the $3 million working capital facility provided by Astoria Capital Partners, LP, a California limited partnership ("Astoria"). On August 23, 2000 the Company also obtained $750,000 in additional loans from three private parties (the "Lenders") pursuant to the terms of a Note Purchase Agreement. The Company issued three unsecured promissory notes to the Lenders in connection therewith (the "Notes"). The Notes bear interest at 4% per annum and shall be automatically converted into shares of common stock of the Company on the second anniversary of the date of issuance thereof at a conversion price equal to $6.17 per share. The Notes are also convertible at any time at the option of the holders thereof at the same conversion price per share. Subsequently, in September, 2000, the Company borrowed an additional $250,000 from The Philip and Debra Barrett Charitable Remainder Trust (the "Trust"). Philip Barrett, a director of the Company, is the trustee and a beneficiary of the Trust. The Company issued an unsecured promissory note to the Trust in connection with the loan (the "Barrett Note"). The Barrett Note is due and payable two years from the date of issuance and bears interest at 10% per annum. A future credit facility may be difficult to obtain with the Company's historical operating results. In order to obtain additional funds in the future for its continued operation, the Company will need to seek additional equity or debt capital. Astoria and other major shareholders have expressed the willingness to provide additional funds but no legally binding commitment has been made. Key Personnel and Management. The success of the Company depends to a significant extent upon a number of key management and technical personnel, the loss of one or more of whom could adversely 14 affect its business. In addition the Company believes that its future success will depend to a significant extent on its ability to recruit, hire and retain highly skilled management and employees for product development, sales, marketing, and customer service. Competition for such personnel in the software industry is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. Management of the Company will also be required to manage any growth of the Company in a manner that requires a significant amount of management time and skill. There can be no assurance that the Company will be successful in managing any future growth or that any failure to manage such growth will not have a material adverse effect on the Company's business, operating results or financial condition. Intellectual Property. The Omnis products include technologies developed by the Company. The Company relies primarily on a combination of trade secret, copyright and trademark laws and contractual provisions to protect its proprietary rights in such technologies. There is no assurance that such laws and contractual provisions will adequately protect the intellectual properties and other proprietary rights of the Company. The Company has filed a final United States patent application for certain of its Studio Web Client technologies. The Company has initiated procedures for preparing and filing additional provisional and final patent applications as appropriate for its developing technologies. The Company has not been granted any patents on any of its proprietary technologies and there is no assurance that any such patents will be granted. Patent protection may become important in the protection of the commercial viability of the Company's innovative products and the failure to obtain such patent protection could have an adverse effect on the commercial viability of such products. The Company's success therefore may in part depend on its ability to obtain strong patent protection or licenses to strong patents in the future. It is not possible to anticipate the breadth or degree of protection that patents would afford any product of the Company or the underlying technologies. There can be no assurance that any patents issued or licensed to the Company will not be successfully challenged in the future or that any Omnis product will not infringe the patents of third parties. As the number of software products available in the market increases and the functions and features of these products further overlap, the Company anticipates that software products may become increasingly subject to infringement claims. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to any current or future product. Any such assertion, whether with or without merit, could require the Company to enter into costly litigation or royalty arrangements. If required, such royalty arrangements may not be available on reasonable terms, or at all. Dependence on Principal Products. Any factor adversely affecting sales of the Company's principal products, including but not limited to Omnis Studio and Omnis Studio Web Client, would have a material adverse effect on the Company. The future financial performance of the Company will depend in significant part upon the successful development, introduction and customer acceptance of new or enhanced versions of its principal products and other 15 products. There can be no assurance that the Company will be successful in marketing its principal products or any new or enhanced products the Company may develop in the future. In addition competitive pressures or other factors may result in price erosion that could have a material adverse effect on the Company's results of operation. International Operations. Additionally, the Company operates on a global basis with offices or distributors in Europe and Asia as well as in North America. International operations are subject to inherent risks, including costs and difficulties in staffing and managing foreign operations; difficulties in obtaining and managing local distributors; the costs and difficulties in localizing products into languages other than English for foreign markets; political or economic instability, unexpected regulatory changes and fluctuations in interest or exchange rates in the specific countries in which the Company distributes its products or in international markets in general; longer receivables collection periods and greater difficulty in accounts receivable collection; import/export duties and quotas; reduced protection for intellectual property rights in some countries; and potentially adverse tax consequences. Also, as the Company continues to operate more internationally, seasonality may become an increasing factor in its financial performance. There can be no assurance that these factors or any combination of these factors will not adversely affect the international revenues or overall financial performance of the Company. Delays in Sales and Commitments. The Company's products are typically used to develop applications that are critical to a customer's business and the purchase of the Company's products is often part of a customer's larger business process, reengineering initiative, or implementation of client/server computing. As a result, the license and implementation of the Company's software products generally involves a significant commitment of management attention and resources by prospective customers. Accordingly, the Company's sales process is often subject to delays associated with a long approval process that typically accompanies significant initiatives or capital expenditures. For these and other reasons, the sales cycle associated with the license of the Company's products is often lengthy and subject to a number of significant delays over which the Company has little or no control. There can be no assurance that the Company will not experience these and additional delays in the future. Therefore, the Company believes that its quarterly operating results are likely to vary significantly in the future. Changes in Pricing Structure. The Company announced a reduction in certain portions of its pricing structure for fiscal year 2000 and beyond. There is no guarantee that this reduction in price will lead to increased unit volume or other additional revenue streams to replace this lost revenue, which could lead to a significant cash flow strain on the core operations of the Company. Additionally, the Company is relying on increased revenues related to its new OMNIS Studio product line, which have not generated revenues as originally projected 16 by the Company. There is no assurance that this product line will generate the revenues needed to sustain the Company in coming quarters and beyond. The Company has committed to decreasing sales conflicts with its partners particularly in the service revenue area and has already taken a number of steps in this regard. This has had and will continue to have a negative effect on service revenues as compared to previous quarters and years. There can be no guarantee that the Company will be able replace the decreasing service revenues with new product revenues. 17 INDUSTRY AND TRENDS Evolution of Enterprise Computing The evolution of computing has been characterized by several distinct stages. In the 1970s, main-frame and minicomputer systems with character-oriented user terminals emerged as the principal structure for enterprise computing. This was followed in the 1980s by the introduction of personal computers and workstations which primarily addressed personal productivity applications such as word processing and spreadsheets. In the late 1980s, local and enterprise-wide networks connecting these desktop systems became increasingly prevalent, initially for accessing file storage archives (Me servers) and electronic mail communications. Building on this infrastructure, client/server computing emerged as an important new architecture for corporate computing in the early 1990s. In the client/server computing model, application software is divided into two components: a "client" handling functions such as the user interface, local data storage, manipulation and presentation, and a "server" handling tasks such as data management and access, storage, and retrieval for multiple clients. Typically, the client software runs in a single-user desktop system, while the server operates utilizing a shared mainframe or workstation, and messages linking client and server are exchanged through connecting networks. These networks could be either Local Area Networks ("LANs") or Wide Area Networks ("WANs") with the distinction being intuitive; LANs generally connected clients together with a server within a building or department while WANs typically utilized dedicated communication lines and linked remote facilities together over greater distances. In the last several years the Internet has become a viable alternative to dedicated communication lines for the dissemination and collection of information, with clients accessing data from remote servers using applications known as "browsers" via the Internet. Virtual Private Networks ("VPNs") where individual clients can access departmental and enterprise servers have become commonplace. The existence of this new infrastructure has led to an explosion in electronic commerce, the development of electronic communities and "Portals" and password protected corporate "Intranets" for the secure transmission of critical corporate information. This evolution continues with the client/server paradigm moving to an Application Service Provider ("ASP") model, where clients access remote servers which host the entire application and related data. In essence the classic "computer room" is being replaced by off-site Internet hosting facilities where the bulk of the computing is handled in larger more economic computing facilities. New wireless technologies fit into this movement of computing power to larger Internet-enabled facilities, with Wireless Access Protocols ("WAPs") emerging. These new wireless technologies are being designed to allow remote clients to access and transmit data efficiently without the requirement of a hard-wired physical connection. As a result of these watershed changes in the computing environment, the market for application development tools has grown rapidly as businesses seek to develop 18 applications which will address these new paradigms and allow for secure data transmission across the Internet. At the same time the overall computing environment is becoming more complex, and businesses are seeking to reduce application development times and efficiently utilize their software development resources. As a result, businesses are increasingly seeking software development tools which allow them to take advantage of the software re-use potential of object-oriented programming. Object-Oriented Programming Environments Software development tools based on object-oriented programming models are generally recognized as the most efficient solution to enterprise application development. Object-oriented programming languages aggregate functions and data into classes and objects. Object-based application development tools then provide a set of software components and libraries for the creation and storage and manipulation of objects in the relevant programming language. This structure enables re-use of the software in the development of other applications. By contrast traditional non-object or imperative mode programming models require the developer to "start from scratch" with each new application, which is extremely inefficient. Object-oriented programming environments, such as Omnis Studio software, allow the development of object components that are easy to use, modify, and re-use so that developers do not need to commit to lengthy and complex development of applications. This permits businesses to support their most recent product offerings and corporate positioning by deploying and modifying applications more rapidly and efficiently. Browser Technology Increasingly, businesses also have been using the Internet to reach more customers and to create an extended virtual "corporation" among their vendors, partners, and contractors. While Internet browsers will continue to become more sophisticated, they are likely to remain primarily viewing tools. Other applications are used to provide the actual customer solutions, with most of the processing performed on the servers. In addition to browsers, in the current environment most businesses need powerful crossware applications (software that supports cross database, cross platform, cross object and cross component uses) that have the ability to operate across the Internet with a wide variety of: -- Platforms (e.g., Windows 95, 98 and 2000, Windows NT, Macintosh and Linux); -- Databases (e.g., DB2, Oracle, Informix, Sybase and SQL); ` -- Object Types built using the C++ and other programming languages; and -- Component Formats (e.g., ActiveX from Microsoft Corporation ("Microsoft") and Java Beans from JavaSoft and others). 19 Products Omnis 7(3) has been the Company's main product line for many years and continues to be a major source of revenue. Omnis Studio is an enhanced object-oriented product offering with technical features and cross-platform capabilities which exceed those of Omnis 7(3). Omnis 7(3) Omnis 7(3) (the "Classic") is the Company's long standing product fine, covering the full range of application development and deployment needs from prototyping through build and release. Omnis 7(3) is a high performance tool for rapid development of business enterprise applications that has established a large customer base. With its cross-platform, cross-database capabilities, the Company expects this product to continue to generate some level of demand among programmers and developers of client/server software for at least the next 18 months. Written in C++, the Classic product was widely embraced by the Company's customers, partners, and VARs. The Company has continued to develop, support and upgrade Omnis 7(3) , but recently announced its intention to drop enhancements to the product in the Fall of 2001. Management believes that for the near-term there continues to be worldwide demand for a low-cost, high performance procedural application development tool for business enterprise applications in client/server and Internet environments, but that, in the longer term, customers would be best served by migrating to the Omnis Studio product. The Classic product family includes several products: the Omnis 7(3) development environment, Omnis Change Management System, and Omnis Version Control System, which together address a wide range of team and application management tasks, including version tracking and control, change management, and turnkey build-and-release functionality. The Classic product line also includes Web enabling functionality that allows users of Omnis 7(3) to adapt their applications for the Internet. Web Enabler supports leading industry standards, including SMTP/POP3, FTP, HTTP, TCP/IP, and HTML, along with GIF and JPEG Me formats. The license fees and pricing for the Classic remain unchanged and varies with the configuration of the product licensed. List prices range from $585 to $1,499. The Classic applications can be deployed with data access services through the Omnis 7(3) proprietary database or configured with data access services to leading databases such as DB2, Oracle, Sybase and Informix. When customers deploy an application, they require a deployment license for each end-user. The global list prices for the database deployment licenses of Omnis 7(3) generally range from $18 to $165 per user, depending upon quantities purchased and the distribution channel used. Omnis Studio Omnis Studio is the Company's premium product line and was the first commercially available application development tool which integrated ActiveX and Java 20 Beans components. Omnis Studio is an object-oriented rapid application development tool, offering easy visual assembly of components and objects. Key features of Omnis Studio include cross-platform support for Windows 95, Windows 98, Windows NT, Windows 2000, MacOS and Linux; local and portable data caching; a powerful code inspector; a versatile report writer; a multiple-mode debugger; and support for localization and multilingual implementation. At the time of this filing Omnis Studio was the only known commercially released rapid application development tool which runs on all of the foregoing platforms. Omnis Studio includes two powerful subsystems: the Component Integrator and the Omnis Studio Web Client. The Component Integrator provides a development environment where software developers can combine, integrate, optimize, and extend third-party components such as ActiveX and Java Beans. Because Omnis Studio understands different object models, developers can work in a single integration environment using a single interface, regardless of component or object type. The Omnis Studio Data Access Manager enables developers to use a single interface to view, access and manipulate all industry-leading databases. High performance drivers provide fast and easy access to IBM's DB2 Universal Server, and databases supplied by Oracle Corporation, Sybase Incorporated, and Informix Corporation. Most other leading databases, including Microsoft's SQL Server database, are accessible via ODBC. The Omnis Studio Version Control System ("VCS") provides application development teams and application development managers with better control over developing their crossware applications. The Omnis Studio VCS offers a complete tool set for version tracking and control, component storage and security, and build-and-release, so that team managers can easily roll-back changes, split development, or create custom builds. The Omnis Studio Web Client was released in April 1999 and provides a novel way of deploying business solutions on the World Wide Web. Web solutions are written using Omnis Studio, bringing all the benefits of a 4GL to the Internet, such as rapid prototyping, easy customization, and straightforward debugging. With Omnis Studio, web forms are developed using drag and drop techniques and helpful wizards, and can include controls like dropdown lists, tabs and sidebars to ease navigation through the solution in a web browser. The server application is developed using standard Omnis technology. Once developed, the solution can be efficiently set up. The server runs an Omnis engine that sits between the web server and the database, and Omnis applications can be viewed on the Internet using a standard web browser, such as newer versions of Microsoft Internet Explorer or Netscape Navigator. Business Strategy The Company's product development strategy is to continue to develop sophisticated application development tools to enable businesses to build mission-critical software applications which have the following characteristics: 21 o Provide integration with existing systems and execute across a variety of platforms and databases. o Allow the extension of the Client/Server model across the Internet into the ASP and emerging WAP markets. o Deliver superior object-oriented functionality at a lower cost than any of its competitors. o Enable its customers to provide solutions faster than the Company's competitors. o Encourage the development of reusable program components and reduce the cost of solution delivery. The Company's growth strategy is focused on continuing to garner revenue from its existing customer base, reconnecting with corporate customers lost during the past several years and at the same time attracting a large number of new customers. The Company has a very loyal core group of software developers among its customer base, many of whom have used the Company's products for several years and who are interested in expanding the number of applications which are developed using the Company's products. In order to capitalize on the commitment of existing customers as well as introducing Omnis Studio to new developers the Company has implemented the following: o In recognition of the importance of the initial user installation experience Omnis has significantly improved the ease of installation by providing a more intuitive interface and by creating Wizards (i.e. our "Application Builder") to illustrate how quickly meaningful applications can be created. o The sales price of an Omnis Studio developers kit has been reduced to eliminate cost as a barrier to product adoption. Omnis now offers a range of support programs coupled with moderate runtime license fees. These support programs are designed to give existing developers a defined path to migrate from our Classic products to Omnis Studio and to provide new developers with the help they need to become productive Omnis programmers as quickly as possible. o A complete Website redesign to allow for downloading evaluation versions of Omnis Studio as well as an on-line store allowing the purchase of development kits directly from our Website. In addition the Company provides enhanced web-based functionality for our developer community as well as an on-line database of solutions that our developers offer potential customers. o A tactical marketing effort which emphasizes efficient advertising in targeted developer communities and attendance at appropriate trade shows. This 22 provides the Company with exposure to the potential customer base and, combined with leads generated from downloads; at our website, provides a database of sales leads that our inside sales team can pursue. The North American team also prequalifies corporate opportunities for appropriate follow-up by our North American technical sales team. The Company believes its Omnis Studio products are easy to use and easy to learn and enable developers to assemble their applications with drag-and-drop ease via an elegant and intuitive user interface. The Company believes that the practical and visual interface of Omnis Studio, along with its component and web integration, allows developers from many different backgrounds and skill levels to build more types of applications more quickly and less expensively by following common rules for assembly. The license fees for Omnis Studio Developer Kits were substantially reduced in fiscal year 2000 and generally have a United States list price of $149. The Company has shifted its revenue model to a support-based program, with a variety of supported developer programs priced at an annually renewable fee of $999. The Company has also instituted special support programs for the North American market: o Incubator Partner Program - The Incubator Program is designed to attract new developers and to provide a migration path for Classic developers to transition their applications to Omnis Studio. This program provides North American technical voice support, subsidized training and, upon completion of training, subsidized runtime licenses for applications which are developed within the first 12 months of participation in the program. In addition the program provides access to the Omnis Developer Portal where developers can share information, code snippets and where additional wizards are provided as a part of the program. o Preferred Partner Program - Incubator "graduates" and established Studio developers can participate in the Preferred Program offering many of the same benefits of the Incubator Programs with additional functionality In particular, Preferred Partners have access to more robust Omnis Studio enhancements and externals, appropriate for the more experienced user. Omnis Studio applications can be deployed with data access services through the Omnis Proprietary database (generally suitable for smaller departmental applications) or configured with data access services to leading databases (e.g., DB2, Oracle, Sybase and Informix). When customers deploy an application a deployment license is required for each end-user. 23 SALES, MARKETING AND DISTRIBUTION Sales The Company sells its products in North America primarily through technical sales representatives who follow-up on qualified leads generated by the Company's inside sales department. Inside sales leads are generated from responses to targeting advertising in technical trade media, trade show attendees, web-site downloads of evaluation copies of Omnis Studio and legacy customer inquiries. For larger enterprise sales, the Company employs a technical sales group to meet directly with qualified potential customers. North American technical account representatives are located throughout the country and inside sales personnel are located at the corporate offices in San Carlos, California. The Company sells Omnis Studio directly over the Internet on its Website at www.omnis.net, as well as through established Internet based software retailers. Overseas, the Company sells its products primarily through a direct sales force operating from sales offices in the United Kingdom, Germany, Scandinavia, and Benelux. The Company is committed to expanding sales growth by making additional sales to its current customer base and increasing the number of new customers. The Incubator and Preferred Partner Programs are designed to enable Omnis to give its customers the tools they need to build their own businesses as quickly and successfully as possible. Sales initiatives are focused upon the following markets: o Existing customers and legacy opportunities: The Company is committed to retaining and building its existing and former customer base. In the years Omnis has been in business many of the Fortune 500 companies have been Omnis users. It is our aim to return them to the fold, reeducate and transition Classic developers to Omnis Studio over the next 24 months. o Linux Marketplace: We are focusing marketing efforts on capturing the new Linux software developer community. We believe this represents a new wave of younger developers who will soon be writing significant enterprise applications. Presently Omnis Studio is the only known commercially released rapid application development tool that runs on Windows, MacOS and Linux operating systems. o Application Service Providers: Management believes that the Company's Web Client technology can offer significant advantages in the small to medium sized ASP market. We expect that, as our customers evolve to this newer model of providing hosted applications solutions, Omnis Studio and Web Client will be a part of their success. The Company recognizes that, given all the internal changes of the past several years, our products have not achieved the market penetration that the technology deserves. We also recognize that our competitors are generally much stronger than we 24 are financially and organizationally. While we plan to focus on the foregoing markets, we also will be working hard to "Align and Redirect" Omnis Studio in development environments where Omnis is not presently the preferred tool. International Distribution The Company has non-exclusive distributor relationships in over 25 countries as well as an exclusive distribution relationship in France. All of the Company's exclusive distributors provide primary customer service and support for their markets. Distributors in Latin America and in the Pacific Rim are managed from the San Carlos, California office, while distributors in Europe, Middle East and Africa are managed from the United Kingdom office of the Company. The Company believes that in order to increase sales opportunities, it will be required to expand its international operations. The Company has committed and continues to commit significant management time and financial resources to developing direct and indirect international sales and support channels. There can be no assurance, however, that the Company will be able to maintain or increase international market demand for its products. To the extent that the Company is unable to do so in a timely manner, the Company's international sales will be limited, and the Company's business operating results and financial condition could be materially and adversely affected. International operations are subject to inherent risks, including the impact of possible recessionary environments in economies outside the United States, additional costs of localizing products for foreign markets, longer receivables collection periods, greater difficulty in accounts receivable collection, unexpected changes in regulatory requirements, difficulties and costs of staffing and managing foreign operations, reduced protection for intellectual property rights in some countries, potentially adverse tax consequences, and political and economic instability. There can be no assurance that the Company or its distributors or resellers will be able to sustain or increase international revenues from licenses or from maintenance and service, or that the foregoing factors will not have a material adverse effect on the Company's future international revenues, and consequently, on the Company's business, operating results, and financial condition. Marketing In fiscal 2000, the Company substantially increased both its Marketing team and its expenditure on Marketing. In support of its direct and reseller sales efforts, the Company conducts numerous marketing programs including print and web media advertising, direct mail programs, trade show presentations, and strategic marketing programs with partners. The purpose of these efforts is to build awareness and generate quality sales prospects that lead to increased market share and revenues. The Company has also initiated a comprehensive rebranding campaign that included a complete redesign of its web site and change of corporate identity giving it a much more professional and substantive feel. 25 Current initiatives include leveraging the Company's first mover advantage in the Linux market through partnerships, aggressively promoting the Company's powerful web application deployment technology, and providing technical papers and collateral material to support the new developer programs and pricing infrastructure that were introduced early this year. Training Services As part of its global sales efforts, the Company offers professional training programs to its customers and prospective customers. These classes, held at various locations throughout the world, emphasize foundation skills (for the newer developer), advanced classes (for the more experienced developer) and classes designed to assist existing customers in the migration from 7(3) to Omnis Studio. Training services are offered as fundamental components of our Partner Programs as wen as to augment sales efforts. The Company believes that appropriate training programs in combination with ease of installation and use, low cost of initial adoption and web-based provision of additional developer services, will maximize the probability of future success. Technical Support Because the Company's products are used by customers to build applications which may become a critical component of their business operations, continuing customer technical support services are an important element of the Company's business strategy. The Company offers customer service programs to meet customer support requirements. Customers who participate in the Company's annual support programs receive maintenance releases and associated technical support and documentation. Recently, the Company has begun to offer real-time telephone support to its North American customers as well as high-level e-mail support from its primary engineering offices in the United Kingdom. The Company's technical support team focuses on problem solving and resolution in installation and other ongoing technical issues. Technical support representatives are trained in basic and advanced uses of Omnis products. The Company operates the technical support function through a consolidated database, combining customer information from the United States, United Kingdom, and German support center databases into single database structure, thereby enabling its worldwide technical support staff to work from the same database and have simultaneous access to the same information. The global support strategy includes a worldwide high-level support center in the United Kingdom, which supports the Company's United States, Canadian and United Kingdom customers and some of the Company's foreign distributors. These distributors are responsible for supporting those customers to whom they have sold the Company's products. A support center in Germany provides support for the Company's direct customers in Europe and the Company's European based distributors. In addition, the Company has improved its website to better provide technical support to its customers. The Company believes its customers are now better able to find answers to many of their questions quickly and easily on the Company's website. 26 Customers The Company has customers in a wide range of industries, including financial services, pharmaceuticals, manufacturing, telecommunications, aerospace, defense, and universities. In fiscal year 2000, one customer, Nortel, accounted for approximately 16.7 percent of total net revenues. No other customer accounted for more than 10 percent of total net revenues. As is the case with other participants in the software industry, the Company generally ships products as orders are received. As a result, the Company has historically operated with little backlog. Because of this short cycle between receipt of an order and shipment, the Company does not believe that its backlog as of any particular date is meaningful. The Company's customers can be segmented into two general categories: 1. Corporate IT Departments -- The bulk of the Company's revenue has been generated from sales to information technology departments of large corporations. 2. Independent Software Vendors ("ISV"), Developers -- ISVs typically have written their own vertical application software which they sell as a complete package to end-user customers. This category would also include Value Added Resellers ("VARs") and software consulting companies who provide contract programming services to their customers. The Company's products are designed to enable the development of applications which operate in traditional client/server environments as well as across the Internet. Some of the Company's customers have purchased copies of the Company's products for evaluation purposes. There can be no assurance that these customers will broadly implement new projects or that they will purchase additional products from the Company. The Company's future financial performance will depend on the growth of the Company's sector of the computing market and on its ability to compete effectively in this market. There can be no assurance that this market will continue to grow or that the Company Will be able to respond effectively to customer requirements and competitive offerings in this market. As the market evolves, the Company anticipates that competition is likely to increase from both existing and future market participants, most of whom are larger companies and have greater financial, technical, marketing, sales, and distribution resources and a larger installed base of customers than the Company. There can be no assurance that the Company could compete effectively with such competitors. Product Development Since its inception in the United Kingdom, the Company has benefited from having a global perspective in terms of partners, customers, technological outlook and products. The Company's corporate research facilities are based in England. 27 The Company believes that developing new products is best accomplished with a cross-disciplinary approach, combining the talents and perspectives of a multi-faceted virtual development team that includes developers, customers, VARs, sales and marketing, technical support, quality assurance, and technical services. In the course of planning products, the Company's product development team filters industry trends, ideas from customers and potential customers, partners and potential partners, feedback from the Company's own sales, marketing, technical support, and professional services staff, and general business information and then analyzes the potential risks and benefits of pursuing a given strategy. The software industry is characterized by rapid technological advances, frequent new product introductions, rapid enhancements of existing products through new releases, and changing customer requirements. The future success of the Company will largely depend on its ability to enhance its current products and to successfully develop new products which keep pace with technology trends, competitive offerings, and evolving customer requirements. In particular, the Company believes it must continue to enhance the basic functionality of its products and extend the product line to keep pace with the advances in hardware, operating systems, programming languages, databases, and Internet-related technology. Any failure of the Company to anticipate new technology developments and customer needs or any significant delays in product development and introduction could result in a loss of competitiveness and revenues. Because of the complexity of software products, new product introductions may contain undetected software errors that, despite quality assurance testing by the Company, are discovered only after a product has been installed and used by customers. Although the Company has not experienced any material adverse effects from such errors to date, there can be no assurance that errors will not be discovered in the future which would cause delays in shipments, loss of revenues or require significant design changes that could adversely affect the Company's competitive position and operating results. There can be no assurance that any of the Company's product development efforts will lead to a commercially viable product, and the Company is unable to predict whether or when proposed new products, product enhancements, or product extensions might be released or whether, when released, they will achieve market acceptance. The Company markets its products to customers for the development, deployment, and management of Internet and client/server applications. The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's license agreements may not be effective as a result of existing or future federal, state or local laws, or ordinances or unfavorable judicial decisions. Although the Company has not experienced any product liability claims to date, the sale and support of its products by the Company may entail the risk of such claims, which are likely to be substantial in fight of the use of its products in business-critical applications. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results, and financial condition. 28 Competition The applications development tools software market is rapidly changing and intensely competitive. The Company currently encounters competition from several direct competitors, including Microsoft Corporation (Visual Basic), Inprise Corporation (Delphi), Allaire Corporation (Cold Fusion) and Magic Software Enterprises. In addition, the Company competes indirectly with several other companies. These include (a) the relational database vendors, such as Oracle, Sybase and Informix, who provide application development tools primarily for customers who use their database technology; (b) 4GL application tools vendors such as Progress Software Corporation and Cognoscente Software International Incorporated; (c) CASE tools vendors such as Knowledgeware Inc. and Intersolv Inc.; (d) shrink-wrap database software suppliers such as Lotus, Microsoft Access, and ACIUS, and (e) developers in Java as competition for the Omnis web client technology. The Company believes that its ability to compete depends on factors both within and outside its control, including the timing and success of new products developed by the Company and its competitors, product performance and price, distribution, and customer support. There can be no assurance that the Company will be able to compete successfully with respect to these factors. In particular, competitive pressures from existing and new competitors who offer lower prices or introduce new products, including "native" products that fully utilize the capabilities of a particular operating platform, could result in delays in purchase decisions by or loss of sales to potential customers or cause the Company to institute price reductions, any of which would adversely affect the Company's results of operations. In particular, software licenses which permit developers to develop configurable applications and deliver those applications to end-users, have been and may continue to be subject to significant pricing pressures which could have an adverse effect on the Company's business and results of operations. There can be no assurance that the Company will be able to maintain its price structure or that entry of future competitors in the Company's current market will not result in pricing pressures in the future. Additional competitive factors influencing the market for the Company's products include product functionality and features, platforms, performance, vendor and product reputation, product and service quality. These items may also result in market confusion, delays in purchases, intensified competition, price restructuring, or price reductions. The Company believes that the broad functionality of its products, including its cross platform capability and its important features for group development, application deployment and maintenance has enabled the Company to compete effectively to date, particularly for professional development environments in major corporations. The Company's primary focus on client/server application development tools may be a disadvantage in competing with vendors who can provide a greater range of products to customers who wish to deal with a limited number of suppliers (i.e. Oracle, Sybase, and Informix). As the web-based market evolves, the Company anticipates that competition is likely to increase from both existing and future market participants, most of whom are larger companies and have greater financial, technical, marketing, sales, and distribution 29 resources and a larger installed base of customers than the Company. Moreover, if such competition were to enter the crossware market, which is the principal market in which the Company participates, the Company might be required to increase defensive measures to maintain its position in these target markets. This increased effort could adversely affect operating results due to increased marketing programs, price declines, longer sales cycles, and increased product development expenses, among other things. There can be no assurance that the Company could compete effectively with such new products. Intellectual Properties and Other Proprietary Rights The Company relies primarily on a combination of trade secret, copyright, and trademark laws and contractual provisions to protect its proprietary rights. In addition to trademark and copyright protections, the Company licenses its products to end users on a "right to use" basis pursuant to a perpetual license agreement that restricts use of products to a specified number of users. The Company generally relies on shrink-wrap or "click-wrap" licenses which become effective when a customer opens the package or downloads and installs software of its system. Because they are not negotiated with or signed by the licensees, in order to retain exclusive ownership rights to its software and technology, the Company generally provides its software in object code only, with contractual restrictions on copying, disclosure, and transferability. There can be no assurance that these protections will be adequate, or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. Copyright and other protection for intellectual property may be unavailable or restricted in certain foreign countries. In addition, shrink-wrap or click-wrap licenses may be unenforceable under the laws of certain jurisdictions. Nevertheless, the Company believes that its copyright and license protections are important. However, because of the rapid pace of technological change in the computer software industry, factors such as the product knowledge, ability, and experience of the Company's personnel, brand name recognition, customer support, and ongoing product maintenance and enhancement may be more significant in maintaining the Company's competitive advantage. As the number of software products available in the market increases and the functions and features of these products further overlap, the Company anticipates that software products may become increasingly subject to infringement claims. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to any current or future product. Any such assertion, whether with or without merit, could require the Company to enter into costly litigation or royalty arrangements. If required, such royalty arrangements may not be available on reasonable terms, or at all. The Company has filed a final patent application in the United States for certain of its Omnis Studio Web Client technologies and has instituted a procedure for preparing and filing additional provision and final patent applications as appropriate for its developing technologies. At this time the Company has not been granted any patents on 30 any of its proprietary technologies and there is no assurance that any such patents will be granted. Patent protection may become important in the protection of the commercial viability of the Company's innovative products and the failure to obtain such patent protection could have an adverse effect on the commercial viability of such products. The Company's success therefore may in part depend on its ability to obtain strong patent protection or licenses to strong patents in the future. It is not possible to anticipate the breadth or degree of protection that patents would afford any product of the Company or the underlying technologies. There can be no assurance that any patents issued or licensed to the Company will not be successfully challenged in the future or that any Omnis product will not infringe the patents of third parties. The level of research and development efforts in areas related to the Omnis. products makes it possible that third parties will obtain patents or other proprietary rights that may be necessary or useful to its products. In recent years the practice of applying for and issuing software patents in the United States and other jurisdictions has accelerated and the scope and validity of such patents are frequently in dispute. In cases where third parties are the first to invent a particular product or technology, it is possible that such parties would obtain patents that would be sufficiently broad to prevent the Company from marketing the same or similar products. Although the Company is not presently aware that any patents necessary to its products have been issued for which licenses are not available to the Company, it is possible that applications for such patents have been made or that such patents have been issued. The scope and validity of such patents, if issued, the extent to which the Company may desire or need to obtain licenses under such patents, and the cost and availability of such licenses are currently unknown. There can be no assurance others may not independently develop or obtain technology similar to that of the Company. As the number of software products available in the market increases and the functions and features of these products further overlap, the Company anticipates that software products may become increasingly subject to infringement claims. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to any current or future product. Any such assertion, whether with or without merit, could require the Company to enter into expensive litigation or royalty arrangements. If required, such royalty arrangements may not be available on reasonable terms, or at all. Production The Company uses subcontractors in the United Kingdom to perform its manufacturing operations, which include duplication and preparation of software media, documentation, and packaging. The principal materials used in the manufacture of the Company's products are CD ROMs, boxes, binders, and multi-color printed materials which the Company obtains from its manufacturers. The Company utilizes certain of its distributors in some international markets to localize the products, including conversion of the product and product documentation to 31 native languages, where necessary. The production of the resulting localized product is then handled by the distributor for that market. The Company requires that quality control tests be performed on all duplicated disks and finished products. Quality control personnel work in the United Kingdom operation to help ensure product quality. The Company produces software and documentation based upon forecasts of monthly sales. 32 PART II OTHER INFORMATION ITEM 1. Legal Proceedings Compass Litigation. In March 1998 the Company was sued by Compass Software ("Compass") in the Federal district court for the Eastern District of Washington claiming damages in the range of $2 Million for software copyright infringement and related claims. The Company obtained a full dismissal of that case with prejudice on November 29, 1999, and no appeal was filed by Compass within the time allowed by law. In this connection the Company previously had sued Compass in 1994 for illegally infringing and distributing the Company's software products. This matter was settled with an agreement that Compass would pay certain amounts and would not make illegal copies of the Company's software in the future. Compass failed to pay the promised amounts when due. The Company then obtained a judgment for breach of contract against Compass. As part of its efforts to enforce its judgment against Compass, the Company purchased, at a judgment Hen sale, certain intangible property of Compass including the rights to the 1998 infringement suit brought by Compass ("Execution Sale"). Compass then requested the applicable trial court to set aside the Execution Sale. The trial court granted the request and the Company appealed the judgment. The court of appeals subsequently ruled in favor of the Company and directed the trial court to determine the amount of fees to be awarded to the Company. That amount has not yet been determined. The Company also filed a second lawsuit against Compass alleging additional acts of infringement for periods after 1994. A trial was conducted in this case before Judge Barbara J. Rothstein of the United States District court for the Western District of Washington. On July 25, 2000, the District Court ruled that Compass reproduced and distributed unauthorized copies of Omnis Software using duplicates of existing serial numbers. The Court awarded statutory damages to Omnis in the amount of approximately $150,000 in addition to injunctive relief and attorney fees from Compass. On October 20, 2000 a mediation hearing was conducted to review the amount of damages to be paid by Compass to Omnis. At the mediation Compass offered to pay approximately $25,000 in damages. Omnis is currently preparing a motion for judgment to collect the $150,000 judgment awarded in July, 2000 and for an additional $245,000 in legal fees. BTN -- Germany Litigation. The Company entered into a professional development services agreement with BTN Versandhandel GmbH of Leiferde, Germany for the development of an Omnis application. The Company developed and delivered a version of the application to BTN. BTN failed to pay the Company as agreed, claiming there were flaws in the application and the project was suspended by the Company awaiting their payment. BTN commenced legal action against the Company in Germany claiming damages of approximately DM250,000 for failure to perform under the services agreement. The Company has countersued BTN claiming the balance owed under the contract of approximately DM60,000. The Company is defending against the BTN claim and is pursuing its counterclaim against BTN. 33 ITEM 2. Changes in Securities None. ITEM 3. Defaults Upon Senior Securities None. ITEM 4. Submission of Matters to a Vote of Security Holders None. ITEM 5. Other Information None. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3.1 Restated Certificate of Incorporation, as amended and corrected.(1) 3.2 Certificate of Amendment of Certificate of Incorporation dated February 9, 1999(2) 3.3 Certificate of Designations dated March 31, 1999, as corrected.(3) 3.4 Bylaws, as amended.(4) 10.1 Merger Agreement dated as of August 23, 2000 between the Company, PickAx, Inc., Gilbert Figueroa, and Raining Merger Sub, Inc. 27.1 Financial Data Schedule (1)Incorporated herein by reference to the Current Report on Form 8-K filed by the Company with the Commission on June 16, 1998. (2)Incorporated herein by reference to the Company's Annual Report on Form 10-KSB/A, as amended, for the fiscal year ended March 31, 1999, filed by the Company with the Commission on July 29, 1999. (3)Incorporated herein by reference to the Current Report on Form 8-K filed by the Company with the Commission on April 15, 1999. (4)Incorporated herein by reference to the Annual Report on form 10-KSB, as amended, for the fiscal year ended March 31, 1998, filed by the Company with the Commission on June 29, 1998. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended September 30, 2000. 34 SIGNATURES In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 6, 2000 OMNIS TECHNOLOGY CORPORATION (Registrant) /s/ GWYNETH GIBBS -------------------------- Gwyneth Gibbs, President and Interim Chief Executive Officer 35