UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2001
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: 000-25687
OPENWAVE SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3219054
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 Seaport Blvd.
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 480-8000
(Registrant's telephone number, including area code)
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 preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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 Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $5,602,699,094 as of June 30, 2001 based upon the
closing sale price on the Nasdaq National Market reported for such date. Shares
of Common Stock held by each officer and director have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
There were 170,072,741 shares of the registrant's Common Stock issued and
outstanding as of June 30, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement relating to the Company's 2001
Annual Meeting of Stockholders to be filed hereafter incorporated by reference
into Part III hereof.
PART I
Forward-Looking Statements
In addition to historical information, this Annual 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. These forward-looking statements are based upon current expectations
and beliefs of our management and are subject to certain risks and
uncertainties, including economic and market variables. 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. Factors which could cause actual results to differ
materially include those set forth in the risks discussed below under the
subheading "Factors that may affect Future Results" under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this report. We undertake no obligation to revise or publicly
release the results of any revision to these forward-looking statements.
Readers should carefully review the risk factors described in this section
below and any subsequently filed reports.
Item 1. Business
We are a leading provider of infrastructure software, applications, and
services that enable the convergence of the Internet and wireless
communications. We were incorporated in Delaware in 1994. Our customers are
communication service providers, including wireless and wireline carriers,
Internet service providers, portals and broadband providers worldwide. Our
Openwave(TM) Services Operating System (Services OS) is a suite of Internet
protocol (IP) -based software products designed to be installed on
communication service providers' systems. Services OS(TM) is designed to
provide carrier-class scalability and reliability and work with industry
standards, such as WAP, XHTML, SyncML and VoiceXML, to allow our operator
customers to deploy our product modules and to integrate our offerings into
existing installed technology.
Using our software, communication service providers can offer Internet services
to their wireless and wireline subscribers, and wireless device manufacturers
can turn their mass-market mobile phones, personal digital assistants and other
wireless devices into mobile Internet appliances. Wireless subscribers thus can
gain access to Internet- and corporate intranet-based services, including e-
mail, news, stocks, weather, travel and sports. In addition, subscribers can
gain access via their wireless devices to communication service providers'
intranet-based telephony services, which can include over-the-air activation,
call management, billing history information, pricing plan subscription and
voice message management. As of June 30, 2001, over 85 communication service
providers have licensed our mobile Internet software, have commenced or
announced commercial service or are in market or laboratory trials.
Communication service providers using our software can also provide their
subscribers with a variety of messaging applications, including e-mail, mobile
e-mail, unified messaging (single inbox for e-mail, voice mail, and facsimile)
as well as short messaging services. As of June 2001, we had over 180 million
licensed mailbox seats and more than 35 predominantly wireline carriers with
licensed deployments of over one million mailboxes.
Our microbrowser software, Openwave Mobile Browser, is designed to be embedded
in wireless devices and to deliver the mobile Internet and the applications of
Services OS through a graphical user interface. As of June 30, 2001, over 134
million handsets have shipped with Mobile Browser embedded.
1
Recent Events
On August 8, 2000, Phone.com, Inc. and Software.com, Inc, signed an agreement
to merge the two companies subject to stockholder approval, regulatory reviews
and other conditions. On November 17, 2000, pursuant to the agreement, a
wholly-owned subsidiary of Phone.com was merged with and into Software.com so
that Software.com became a wholly-owned subsidiary of Phone.com. At the same
time, Phone.com changed its name to Openwave Systems Inc. Under the terms of
the agreement, approximately 94.5 million shares of Openwave common stock were
issued in exchange for all the outstanding shares of Software.com common stock
based on an exchange ratio of 1.6105 Openwave shares for each Software.com
share. Following the exchange, former stockholders of Phone.com owned
approximately 51% of the combined company and former Software.com shareholders
owned approximately 49%. The merger was accounted for as a pooling-of-
interests.
In connection with the merger, Donald Listwin, formerly an Executive Vice
President of Cisco Systems, Inc., became the President and Chief Executive
Officer of the combined company. In June 2001, Mr. Listwin also became Chairman
of the Board, replacing Alain Rossmann who resigned from the Company that same
month.
Most recently, Kevin Kennedy, former senior vice president of Cisco Systems
joined the Company to fill the newly-created position of Chief Operating
Officer (COO). At the same time, John MacFarlane, the former Executive Vice
President of Product Development was appointed to the newly-created position of
Chief Technology Officer (CTO).
Industry Background
Growth of the Internet, Messaging and Wireless Telecommunications
Use of the Internet and wireless telecommunications has grown rapidly in the
past few years. International Data Corporation estimates that from the end of
2000 to the end of 2005, the number of users of the Internet worldwide will
increase from 318 million to 717 million and the number of email mailboxes will
increase from 505 million to 1.2 billion. Industry analysts estimate that there
were approximately 750 million digital wireless subscribers worldwide at the
end of 2000, and the number of subscribers will grow to approximately 1.4
billion by the end of 2004. We cannot assure you that these estimates will be
achieved.
The Convergence of the Internet and Mobile Telephony
As people have become increasingly dependent on e-mail services, remote access
to corporate intranets, and other Internet-based services, mass-market wireless
devices that provide mobile access to these resources have become increasingly
useful tools. Openwave pioneered the convergence of the Internet and mobile
telephony. In 1993, we developed our first e-mail messaging server. In 1995, we
developed our initial mobile Internet technology which enables the delivery of
Internet-based services to wireless devices. In 1996, we introduced and
deployed our first products based on our mobile Internet technology.
To create a worldwide open standard enabling the delivery of Internet-based
services to mass-market wireless devices, we co-founded the Wireless
Application Protocol (WAP) Forum in 1997. A year later, the WAP Forum published
technical specifications for application and content development and product
interoperability based on Internet technology and standards. By complying with
WAP specifications, wireless device manufacturers, communication service
providers, content providers and application developers can provide Internet-
based products and services that are interoperable.
In 1998, the WAP Forum also published the Wireless Markup Language, or WML. WML
is compliant with the Extensible Markup Language, or XML, specification
published by the World Wide Web Consortium, or W3C.
2
Content providers and application developers use WML to optimize the display
of, and interaction with, Web-based data on wireless devices. Based
substantially on technology that Openwave contributed to the public domain,
WML is optimized for delivery of Internet content to mass-market wireless
devices, which have numeric keypads instead of full keyboards, small screens,
and limited memory capacity, processing power, battery life and bandwidth. In
2001, the WAP Forum published its WAP 2.0 specifications, to provide full
compatibility with the emerging W3C XHTML standards for Web content authoring.
The Market Opportunity
In response to an increasingly competitive environment, communication service
providers which own wireless, wireline, portal and Internet service provider
(ISP) businesses, seek to deliver Internet-based information, entertainment
and messaging services to their subscribers as a means to generate revenues
from new sources, differentiate their service offerings and reduce subscriber
turnover and operating costs. To do this, communication service providers
require a scalable software and services platform. Our Services OS and unified
messaging application allow our customers to offer common services across
their wireless, wireline, and ISP businesses, thereby improving their
efficiency and overall economies of scale.
The Openwave Systems Solution
We provide applications and services that enable the delivery of Internet-
based services to mass-market wireless telephones and other mobile devices, as
well as personal computers. Using our scalable products, communication
services providers can provide Internet-based content, applications and
services to their wireless subscribers and offer new revenue-generating
services across their wireless and wireline businesses. In addition, wireless
device manufacturers can turn their mass-market wireless devices into mobile
Internet appliances.
With our technology, wireless subscribers have access to advanced
communication services, Internet-based content and services and corporate
intranet-based services; in addition, subscribers have the ability to use a
single inbox for wireless and wireline voice messages, e-mails and facsimiles.
Existing carrier deployments, built on our platform, include such services as
unified messaging, e-mail, news, stock trading, weather, travel, sports,
commerce and calendaring. Our strategy is to design products that help our
customers derive incremental subscriber revenues and increase subscriber
loyalty.
Products and Services
Our software product suite, called Services OS, is an open, standards-based
suite of mobile Internet infrastructure software that is intended to enable
communication service providers to rapidly create, deploy and manage revenue-
generating services. Services OS consists of products in five broad
categories: Communication Services, Platform Services, Mobile Services
Infrastructure, Device Products and Developer Products.
Communication Services
. Openwave Email--an Internet-based, carrier-class e-mail messaging
application with high scalability, performance and features to achieve
reliable operation, smooth administration and integration with existing
systems and services.
. Openwave Mobile Email--a mobile messaging application that provides
subscribers with access to e-mail from wireless devices and PC's,
personal address book and instant, flexible notification of new
messages.
3
. Openwave Unified Messaging--a messaging application that delivers voice
mail, e-mail and facsimile in a single inbox, accessible through the
telephony user interface on any telephone, or the graphical user
interface on any wireless telephone or PC. Based on the VoiceXML
standard, our unified messaging solution is designed to be highly
scalable, flexible and extensible.
Platform Services
. Openwave Provisioning Manager--a flexible, extensible, centralized
provisioning solution for over-the-air provisioning of wireless
handsets, mobile Internet infrastructure and applications.
. Openwave Download Fun--a content delivery solution that provides a
platform for communication service providers to offer subscribers the
capability to download a wide variety of media objects to their mobile
handsets.
. Openwave M-Services Suite--a product bundle currently consisting of
Download Fun, Provisioning Manager and Mobile Access Gateway. We expect
that this bundle will enable GSM communication service providers to meet
the goal of the GSM Association's Mobile Services initiative to deliver
compelling, revenue-generating subscriber services.
Mobile Services Infrastructure
. Openwave Mobile Access Gateway--carrier-class infrastructure software
for exchanging data between the wireline Internet and wireless devices.
Our market-leading gateway includes advanced features such as security,
billing support and differentiated classes of service.
. Openwave Mobile Messaging Gateway--an IP-based solution for Short
Messaging System.
Device Products
. Openwave Mobile Browser--microbrowser software that is designed and
optimized for wireless devices and that we believe provides a rich,
easy-to-use subscriber experience.
. Openwave Device Applications--software applications for wireless
telephones and other wireless devices for mobile services such as
messaging, content download and synchronization.
Developer Products
. Openwave SDK--Software Development Kit for developers and content
providers seeking to build applications and content for the mobile
Internet.
Services
We also provide maintenance and engineering support services to wireless
device manufacturers who have ported our Mobile Browser and other device
applications to their telephones. In addition, we provide consulting
services to communication service providers who license our mobile Internet
platform software and engage us to perform integration services relating to
commercial launches of our technology.
New Products and Services under Development
We have released a suite of messaging products that includes e-mail and
unified messaging. This platform is built on Openwave Email messaging
products. We continue to focus resources on enhancing these products and
utilize technology obtained from various acquisitions, as well as technology
developed in-house.
We are continuously improving our software products for mobile telephones and
other personal mobile devices, including the ongoing enhancement of Mobile
Browser. Ongoing developments include an improved graphical
4
user interface and the addition of new functionality relating to WAP 2.0 and
over-the-air synchronization of data. We are also developing new messaging
applications for mobile devices.
Communication service providers around the world are rapidly deploying 2.5G
networks and preparing to deploy third-generation, or 3G, networks. We are
working together with our partners and customers to ensure successful
deployment of our products on 2.5G networks. We are engaged in ongoing testing
of our products to ensure that they will fully support 3G deployments in the
future. Currently, all of our products support IP transport, which is used by
3G networks.
Customers
Communication Service Providers
We sell our software products worldwide, primarily to communication service
providers, including wireless and traditional telecommunications carriers, and
also to Internet service providers, cable-based Internet access providers and
Internet portals.
We also provide our communication service provider customers with professional
services that enable them to rapidly adopt our technology and bring wireless
and wireline Internet-based services and applications to market. Our
professional services focus on those areas where our products interface with
our customers' internal systems such as billing, provisioning and customer
care.
Our agreements with our communication service provider customers grant them
non-exclusive licenses to use our Services OS software in connection with
providing Internet-based services to their subscribers. Pricing and payment
terms for licenses are negotiated with each customer based upon subscriber
count or transaction capacity. Products are licensed under either a perpetual
license model or under a monthly or quarterly time-based license model.
Although these agreements do not provide for a right of return, we typically
provide a limited warranty and indemnify customers, subject to certain
limitations, against intellectual property infringement claims. In addition, we
typically provide fee-based maintenance and support services to our customers,
under which they receive error corrections and remote support. Our customers
can also purchase new version coverage to receive new releases of our products
for a specified term. The Notes to Consolidated Financial Statements (See Note
8) quantify customers that represent more than 10% of revenues.
Wireless Device Manufacturers
We license our Mobile Browser software to wireless device manufacturers, who
embed it into their wireless device products. To encourage these manufacturers
to include Mobile Browser in their wireless device models, generally we do not
charge a per-unit royalty. In addition, we provide engineering and support
services to accelerate the introduction of new wireless device models that
contain Mobile Browser. These services typically are provided to manufacturers
on an annual flat-fee basis per digital wireless telephony standard.
Our agreements with wireless device manufacturers generally provide these
customers with a non-exclusive, royalty-free license to include the Mobile
Browser in the wireless devices that they sell. Under these agreements, we
typically indemnify our customers, subject to certain limitations, against
intellectual property infringement claims. In addition, customers can elect to
receive varying levels of fee-based maintenance and support services.
5
Research and Product Development
Our ability to meet our customer's expectation of innovation and enhancement
depends on a number of factors, including our ability to identify and respond
to emerging technological trends in our target markets, develop and maintain
competitive products, enhance our existing products by adding features and
functionality that differentiate them from those of our competitors and bring
products to market on a timely basis and at competitive prices. Consequently,
we continue to enhance the features and performance of our existing products
and have made and intend to continue to make, significant investments in
research and product development. Our research and development expenses were
$135.8 million, $59.9 million and $28.9 million for the years ended June 30,
2001, 2000 and 1999, respectively. As of June 30, 2001, we had 808 employees
engaged in research and product development activities. We continue to hire
skilled engineers for research and product development, and our business could
be adversely affected if we are unable to hire these engineers in a timely
basis.
Technology
Technology and innovation are core elements of our Company's value. We have
contributed significantly to the development of the mobile Internet and its
emergence as a viable technology. Our messaging products have substantial
innovation and technology dedicated to the unique and stringent needs of the
service provider marketplace. Our products are based on open standards, and we
contribute significantly to the development of such standards, in particular
in the areas of mobile Internet protocols, messaging, mobile Internet
technology and enabling technologies for 2.5G and 3G networks.
Our technology is designed for deployment on very large-scale networks. Our
customers require highly scalable systems, tools for monitoring and managing
systems and other features unique to the size, scale and performance
characteristics of their networks and service offerings. Our technology is
designed with these requirements in mind and includes features such as:
. The ability to segment and structure data for high performance access,
enabling a much larger number of supported users
. The ability to replicate directory information for increased performance
and reliability
. The ability to perform certain management and operations activities on
the systems without downtime
. Implementation techniques that utilize so-called multi-threaded
architectures, to enable efficient utilization of multiple CPU Unix
servers
Mobile Access Gateway Technology
We have designed our Mobile Access Gateway to be modular, expandable,
flexible, scalable and reliable. Using an architecture based on scalable,
object-oriented technology, the Mobile Access Gateway typically runs on a
large, distributed set of servers. Mobile Access Gateway is intended to meet
the stringent performance, scalability and reliability requirements of
communication service providers. The Mobile Access Gateway implements WAP
Forum specifications for communications with mobile WAP phones and other
mobile terminals.
Mobile Device Software Technology
Our mobile device software technology is designed to be embedded in limited-
function devices, such as wireless devices, and has minimum hardware resource
requirements. The technology includes multiple applications, such as browsing
and messaging, and platform support to enable the correct and efficient
operation of these applications in a wide variety of mobile devices.
6
Internet Messaging Technology
We have developed a scalable platform for building messaging and other
Internet-standard, data intensive applications. Our platform is based on a
partitioned cluster architecture, which enables excellent scalability and
performance across a wide variety of configurations. Our Internet messaging
technology implements a wide variety of messaging standards, including SMTP,
MIME, IMAP4 and POP3. The message storage subsystem reliably and efficiently
stores, organizes and retrieves a variety of messaging media types, including
text, graphics, voice, audio, video and facsimile.
Unified Messaging Technology
Our Unified Messaging technology utilizes an IP-based architecture to provide a
single inbox for e-mail, voice mail and facsimile. Users can interact with the
e-mail, voice mail and facsimile messages in their inbox from any device,
including a PC, PDA, mobile phone or voice telephone. Edge voice servers, from
companies such as Cisco, can be used to link the telephone network with our
Unified Messaging technology using VoiceXML, a W3C standard markup language
designed for voice applications.
Directory Technology
Many of our products require access to common information, such as a user name,
password, phone number or e-mail address. Our directory technology has a core
database that contains the common information, and a set of high-speed replicas
of that information. By using multiple replicas, the common information can be
repeatedly accessed in a reliable and efficient manner. The replicas support
the industry-standard Lightweight Directory Access Protocol (LDAP), so that
third-party applications can access the information contained within the
directory by using this standard format.
Sales and Marketing
We sell our products through both a direct sales force and third-party
resellers. As of June 30, 2001, we had 579 people in Sales and Marketing
worldwide. Our sales force focuses on selling products and related professional
services and provides some assistance to our third-party resellers. Our third-
party resellers are telephony infrastructure companies such as Siemens, systems
integrators such as Itochu Techno-Science Corporation and systems providers
such as Sun Japan.
International sales of products and services accounted for 64%, 62% and 66% of
our total revenues for our fiscal years ended June 30, 2001, 2000 and 1999,
respectively. We expect international revenues to continue to account for a
significant portion of our revenues. Our international sales strategy is to
sell directly to large carriers and to partner with leading distributors and
systems integrators who have strong industry backgrounds and market presence in
their respective markets and geographic regions.
We believe that customer service and ongoing technical support are an essential
part of the sales process in the wireless communications industry. To provide
high levels of customer service, we established our Customer Advocacy
organization which is dedicated to the success and satisfaction of customers.
Senior management and assigned account managers play a role in ongoing account
management and relationships. We believe these customer relationships will
enable us to improve customer satisfaction and develop products to meet
specific customer needs.
We actively recruit content and application developers to our platform and
provide to them free of charge our software development kit, Openwave SDK. We
also provide them with free membership in the Openwave Developer Program, free
e-mail-based support and the opportunity to participate in the Openwave
Alliances Program.
7
The Openwave Developer Alliance Program has a select group of our content and
application developers as members. We screen applications to the Developer
Alliance Program based on the availability and quality of the content or
applications produced by the applicants. We perform joint marketing activities
with Alliance partners, as well as provide introductions between our wireless
communication service providers and our Developer Alliance Program members.
Standards
We believe the growth and development of standards is key to the success of
our industry and our Company. Therefore, we take an active role in a number of
industry standards organizations including the WAP Forum (which we co-founded
in 1997) the World Wide Web Consortium (W3C), CDMA Developer Group, SyncML
Consortium and Internet Engineering Task Force among others. To facilitate
success of the GSM Mobile Services Initiative, we have agreed to license
certain intellectual property rights on a royalty-free basis to mobile handset
vendors. We intend to continue to work closely with key standard
organizations.
Competition
The market for wireless and wireline Internet standards-based infrastrucure
and applications software products and services continues to be intensely
competitive. The widespread adoption of open industry standards may make it
easier for new market entrants and existing competitors to introduce products
that compete with our software products. In addition, a number of our
competitors, including Nokia, have announced, or are expected to announce,
enhanced features and functionality as proprietary extensions to the WAP
standard. Furthermore, some of our competitors have introduced, or may
introduce, services based on proprietary wireless protocols that are not
compliant with the WAP specifications.
We expect that we will continue to compete primarily on the basis of quality,
breadth of product and service offerings, functionality, price and time-to-
market.
Our current and potential competitors include the following:
. Wireless equipment manufacturers, such as Ericsson and Nokia, which are
developing and marketing competitive server, browser and application
software products. These companies already sell billions of dollars
worth of wireless devices and other telecommunications products to
communication service providers which are our existing and potential
customers.
. Microsoft, which has produced a Mobile Explorer microbrowser to run on
wireless handheld devices, including wireless telephones. This system is
currently featured on handsets being marketed in the United Kingdom by
Sony.
. Comverse, a telecommunications messaging provider of voice mail, which
has extended its product offerings to include unified messaging,
personal information management software solutions and other advanced
communications applications.
. Software companies, such as Oracle Corporation, which are marketing
portal platform software that is compliant with the specifications
promulgated by the WAP Forum. Oracle has additionally launched a
separate Oracle Mobile division which supplies consumers with mobile
information services.
. NTT DoCoMo, a customer of ours, is pursuing a strategy to become a
global wireless carrier. As part of that strategy, NTT DoCoMo, through
an agreement with its MID subsidiary, may seek to offer or sublicense
its iMode service to other wireless service providers in a manner that
would be competitive with our wireless Internet service offerings.
8
Many of our existing competitors, as well as potential competitors, have
substantially greater financial, technical, marketing and distribution
resources than we have. Several of these companies also have greater name
recognition and better established relationships with our target customers.
Furthermore, these competitors may be able to adopt more aggressive pricing
policies and offer more attractive terms to customers than we can. We may face
increasing price pressure from our communication service provider customers. In
addition, current and potential competitors have established, or may establish,
cooperative relationships among themselves or with third parties to compete
more effectively.
Finally, existing and potential competitors may develop enhancements to, or
future generations of, competitive products that will have better performance
features than our products.
Intellectual Property Rights
Our performance depends significantly on our ability to protect our proprietary
rights to the technologies used in our products. If we are not adequately
protected, our competitors could use the intellectual property that we have
developed to enhance their products and services, which could harm our
business.
We rely on a combination of copyright, trademark, trade secret laws,
confidentiality provisions and other contractual provisions to protect our
proprietary rights, but these legal means afford only limited protection.
Despite the measures we take to protect our intellectual property, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information which we regard as proprietary. In addition, the laws of some
foreign countries may not protect our proprietary rights as fully as do the
laws of the United States. Thus, the measures we take to protect our
proprietary rights in the United States and abroad may not be adequate. In
addition, our competitors may independently develop similar technologies.
The market for wireless communications and the delivery of Internet-based
services are characterized by the existence of a large number of patents and
frequent litigation based on allegations of patent infringement. As the number
of entrants into our market increases, the possibility of infringement claims
against us grows. For example, we inadvertently may be infringing a patent of
which we are unaware. In addition, because patents can take many years to
issue, there may be one or more patent applications now pending of which we are
unaware, and which we may be accused of infringing when patent(s) issue from
the application(s) in the future. To address any patent infringement claims, we
may need to enter into royalty or licensing agreements on disadvantageous
commercial terms. We may also have to incur significant legal expenses to
ascertain the risk of infringing a patent and the likelihood of that patent
being valid. A successful claim of patent infringement against us, and our
failure to license the infringed or similar technology, could harm our
business. In addition, any infringement claims, with or without merit, would be
time-consuming and expensive to litigate or settle and could divert management
attention from administering our core business. As of June 30, 2001, the
Company is involved in certain legal proceedings that involve patents and
trademarks (see Item 3, Legal Proceedings).
As a member of several groups involved in setting standards for the industry,
the WAP Forum, for example, we have agreed to license our intellectual property
to other members of those groups on fair and reasonable terms to the extent
that the intellectual property is essential to implementing the specifications
promulgated by those groups. Each other member of the groups has entered into a
reciprocal agreement.
9
Employees
As of June 30, 2001, we had approximately 2,200 employees. None of our
employees is covered by any collective bargaining agreements, except for
certain employees located in Europe. We believe that our relations with our
employees are good.
Item 2. Properties.
Our principal office is located in Redwood City, California, where we occupy a
280,000 square foot building that is leased for a period of 12 years,
commencing in the fourth quarter of the fiscal year ended June 30, 2001. In
addition, we have two options to extend the lease for five years each. We also
have numerous other facility leases in other locations in the United States and
throughout the world.
Item 3. Legal Preceedings.
On February 2, 2001, a complaint, Leon Stambler v. RSA Security Inc., Verisign
Inc., First Data Corporation, Openwave Systems Inc. and Omnisky Corporation,
Civil Action No. 01-00065, was filed in the U.S. District Court for the
district of Delaware against us and certain other companies. The complaint
alleges that the defendants have infringed claims of one or more patents that
Mr. Stambler asserts have been granted to him. On March 26, 2001, we responded
to the complaint. We denied the allegations that we have infringed any claim in
either of the patents asserted against us. In addition, we asserted
counterclaims against Mr. Stambler seeking a declaratory judgment that the
asserted patents are not infringed by us and that the patents are also invalid
and unenforceable. Although the parties have exchanged some written discovery,
discovery is still in its initial stages and no trial date has been set. Based
on the facts known to date, we believe that we have meritorious defenses and
claims. We are unable to estimate the range of potential loss, if any.
On April 30, 2001, a complaint, Opuswave Networks, Inc. v. Openwave Systems
Inc. and Alain Rossmann, Civil Action No. 01-1681, was filed in the U.S.
District Court for the Northern District of California against us and a former
affiliate. The complaint alleges that the defendents have infringed claims of a
common law trademark that plaintiff asserts it has acquired. On June 5, 2001,
we responded to the complaint. We denied allegations that we have infringed any
trademark rights asserted against us. In addition, we asserted a counterclaim
against Opuswave Networks seeking a declaratory judgment that the asserted
trademark rights are not infringed by us. On June 13, 2001, Opuswave Networks
responded to the counterclaims denying its allegations. Discovery has not
commenced and no trial date has been set. Based on the facts known to date, we
believe that we have meritorious defenses and intend to defend this suit. We
are unable to estimate the range of potential loss, if any.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Price Range of Common Stock
Our common stock has been listed for quotations on the National Association of
Securities Dealers, Inc. Automated Quotation System, under the symbol OPWV
since the merger of Phone.com, Inc. and Software.com, Inc. on November 17,
2000. The following table sets forth the fiscal periods indicating the high and
low closing sales prices for our common stock.
Stock price by quarter High Low
---------------------- ------- -------
Fiscal year ended June 30, 2000:
First quarter............................................. $ 92.66 $ 22.69
Second quarter............................................ $170.00 $ 74.81
Third quarter............................................. $208.00 $102.00
Fourth quarter............................................ $160.63 $ 50.22
Fiscal year ended June 30, 2001:
First quarter............................................. $126.88 $ 60.50
Second quarter............................................ $116.88 $ 37.00
Third quarter............................................. $ 76.19 $ 15.96
Fourth quarter............................................ $ 46.90 $ 13.51
As of August 24, 2001, there were 899 holders of record of our common stock. We
have not paid any dividends and currently intend to retain future earnings for
reinvestment in our business or the repurchase of outstanding shares of our
common stock. Therefore, we do not anticipate paying cash dividends in the
foreseeable future.
Item 6. Selected Financial Data
The tables that follow present portions of our consolidated financial
statements and are not complete. You should read the following selected
consolidated financial data in conjunction with our consolidated financial
statements and related notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Form 10-K. The consolidated statements of operations data for the years
ended June 30, 2001, 2000 and 1999, and the consolidated balance sheet data as
of June 30, 2001 and 2000 are derived from our financial statements which have
been audited by KPMG LLP. The consolidated statements of operations for the
years ended June 30, 1998 and 1997, and the consolidated balance sheet data as
of June 30, 1999, 1998 and 1997 represent information that is unaudited. The
information is presented for illustrative purposes only and is not necessarily
indicative of the periods shown, nor is it necessarily indicative of future
results or financial position.
You should also consider that on November 17, 2000, we merged with
Software.com, Inc. in a transaction that was accounted for as a pooling-of-
interests. In recording the pooling-of-interests combination, Software.com,
Inc.'s consolidated financial statements for the year ended December 31, 1999,
1998 and 1997 were combined with our consolidated financial statements for the
years ended June 30, 1999, 1998 and 1997. As of the merger date, Software.com
changed its fiscal year end to June 30 to conform to our fiscal year end.
Software.com's consolidated financial statements for the twelve months ended
June 30, 2000 were combined with our consolidated financial statements for the
same period. Software.com's unaudited results of operations for the six months
ended December 31, 1999 included revenues of $29.0 million, expenses of
$37.2 million and net loss of $8.2 million. An adjustment has been made in
stockholders' equity as of June 30, 2000 to eliminate the effect of including
Software.com's unaudited results of operations for the six months ended
December 31, 1999 in both the years ended June 30, 2000 and 1999.
11
Years ended June 30,
---------------------------------------------------
2001 2000 1999 1998 1997
---------- --------- -------- -------- --------
(in thousands except per share data)
Consolidated Statements of
Operations Data:
Revenues:
License.................. $ 344,990 $ 93,126 $ 32,076 $ 17,984 $ 7,939
Maintenance and support
services................ 60,264 25,835 13,507 4,396 212
Professional services.... 60,004 27,447 14,800 6,558 2,963
---------- --------- -------- -------- --------
Total revenues......... 465,258 146,408 60,383 28,938 11,114
---------- --------- -------- -------- --------
Cost of revenues:
License.................. 21,945 6,742 3,046 1,663 776
Maintenance and support
services................ 28,875 14,889 5,797 2,700 266
Professional services.... 36,950 16,971 8,685 5,161 1,915
---------- --------- -------- -------- --------
Total cost of
revenues.............. 87,770 38,602 17,528 9,524 2,957
---------- --------- -------- -------- --------
Gross profit........... 377,488 107,806 42,855 19,414 8,157
---------- --------- -------- -------- --------
Operating expenses:
Research and
development............. 135,768 59,889 28,934 17,822 10,669
Sales and marketing...... 148,811 68,421 33,597 19,541 12,786
General and
administrative.......... 59,320 24,061 12,099 7,277 5,742
Stock-based
compensation............ 10,223 10,184 2,236 335 --
Amortization of goodwill
and other intangible
assets.................. 636,282 216,614 329 -- --
In-process research and
development............. -- 27,700 3,210 -- --
Merger, acquisition, and
integration-related
costs................... 88,850 10,395 -- -- --
---------- --------- -------- -------- --------
Total operating
expenses.............. 1,079,254 417,264 80,405 44,975 29,197
---------- --------- -------- -------- --------
Operating loss......... (701,766) (309,458) (37,550) (25,561) (21,040)
Interest and other, net... 24,760 23,220 2,829 446 736
---------- --------- -------- -------- --------
Loss before income
taxes................. (677,006) (286,238) (34,721) (25,115) (20,304)
Income taxes.............. (12,988) (2,019) (2,316) (446) (1)
---------- --------- -------- -------- --------
Net loss............... (689,994) (288,257) (37,037) (25,561) (20,305)
Accretion on redeemable
convertible preferred
stock.................... -- -- (403) (825) (730)
---------- --------- -------- -------- --------
Net loss attributable
to common
stockholders.......... (689,994) $(288,257) $(37,440) $(26,386) $(21,035)
========== ========= ======== ======== ========
Basic and diluted net loss
attributable to common
stockholders per share... $ (4.17) $ (2.06) $ (0.52) $ (0.47) $ (0.38)
========== ========= ======== ======== ========
Shares used in computing
basic and diluted net
loss attributable to
common stockholders per
share.................... 165,426 139,921 71,514 56,617 54,838
========== ========= ======== ======== ========
June 30,
----------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- -------- ------- -------
(in thousands)
Consolidated Balance Sheet
Data:
Cash, cash equivalents and
short-term investments........ $ 348,493 $ 523,007 $186,009 $40,222 $11,182
Total assets................... 1,725,715 2,361,225 250,825 60,892 28,637
Capital lease obligations and
long-term debt, less current
portion....................... 754 3,319 6,254 4,030 552
Total stockholders' equity..... 1,557,953 2,192,376 177,456 15,324 2,535
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Fiscal Years Ended June 30, 2001, 2000 and 1999
Revenues
We produce three different types of revenue. License revenues are primarily
associated with licensing our product to communication service providers;
maintenance and support revenues are derived from providing support services to
wireless device manufacturers and communication services providers; and
professional services revenues, which are primarily a result of consultants
providing deployment and integration services to the communication service
providers.
License Revenues
License revenues increased from $32.1 million in the fiscal year ended June 30,
1999 to $93.1 million in the fiscal year ended June 30, 2000 and $345.0 million
for the fiscal year ended June 30, 2001. The increase in license revenues is
due to an increase in our customer base and the wider adoption of wireless and
wireline data services generally, which resulted in a higher number of active
subscribers using our applications and infrastructure software. License
revenues represented 74%, 64% and 53% of total revenues for fiscal years ended
June 30, 2001, 2000 and 1999, respectively.
Maintenance and Support Services Revenues
Maintenance and support services revenues increased from $13.5 million in the
fiscal year ended June 30, 1999 to $25.8 million in the fiscal year ended June
30, 2000 and $60.3 million for the year ended June 30, 2001. The increase in
maintenance and support services revenues reflects an increase in services
provided to wireless device manufacturers and increased support fees from
communication service providers. Maintenance and support services as a percent
of total revenues represented 13%, 18% and 22% for fiscal years ended June 30,
2001, 2000 and 1999, respectively.
Professional Services Revenues
Professional services revenues increased from $14.8 million in the fiscal year
ended June 30, 1999 to $27.4 million in the fiscal year ended June 30, 2000 and
$60.0 million in the fiscal year ended June 30, 2001. The increase in
professional services revenue was primarily due to higher billable hours as a
result of the increased number of communication service providers who have
licensed our products and engaged us to perform integration services relating
to the deployment of those products. Professional services as of percent of
total revenues represented 13%, 18% and 25% for fiscal years ended June 30,
2001, 2000 and 1999, respectively.
Cost of License Revenues
Cost of license revenues consists primarily of third-party license and related
support fees, as well as costs associated with our Applications Service
Provider (ASP) model. Cost of licenses increased from $3.0 million for the
fiscal year ended June 30, 1999 to $6.7 million for the fiscal year ended June
30, 2000 and $21.9 million for the fiscal year ended June 30, 2001. As a
percentage of license revenues, costs of license revenues represented 6%, 7%
and 9% in the fiscal years ended June 30, 2001, 2000 and 1999, respectively.
The $3.7 million and $15.2 million increase in cost of license revenues for
fiscal year 1999 compared to fiscal year 2000 and fiscal year 2000 compared to
fiscal year
13
2001, respectively, was attributed to increased cost related to the ASP model
of Onebox.com, which was acquired in April 2000. Under an ASP model, certain
costs such as the depreciation costs associated with operating a data center
are charged to cost of license revenues. In addition, amortization of software
licenses that were purchased during the last quarter of fiscal year ended 2001,
contributed to increased cost of licenses for fiscal year 2001. In May 2001, we
subcontracted the Onebox ASP services to iBasis, Inc. As a result of this
arrangement and the continuing growth of revenue, we anticipate the cost of
license revenues to continue to decrease as a percent of related revenue over
the next year.
Cost of Maintenance and Support Services Revenues
Cost of maintenance and support services revenues consists of compensation and
related overhead costs for personnel engaged in training and support services
to wireless device manufacturers and communication service providers. Cost of
maintenance and support services increased from $5.8 million for the fiscal
year ended June 30, 1999 to $14.9 million for the fiscal year ended June 30,
2000 to $28.9 million for the fiscal year ended June 30, 2001. As a percentage
of maintenance and support services revenues, cost of maintenance and support
services revenues in the fiscal years ended June 30, 2001, 2000 and 1999
represented 48%, 58% and 43%, respectively. The $9.1 million and $14.0 million
increase in cost of maintenance and support services for fiscal year 1999
compared to fiscal year 2000 and fiscal year 2000 compared to fiscal year 2001,
respectively, was attributed to an increase in personnel dedicated to support
the increase in wireless device manufacturers and communication service
providers. We anticipate that the cost of maintenance and support services will
remain constant as a percentage of related revenues in future operating
periods.
Cost of Professional Services Revenues
Cost of professional services revenues consists of compensation and independent
consultant costs for personnel engaged in our professional services operations
and related overhead. Cost of professional services revenues increased from
$8.7 million in the fiscal year ended June 30, 1999 to $17.0 million in the
fiscal year ended June 30, 2000 and $37.0 million for the fiscal year ended
June 30, 2001. As a percentage of professional service revenues, cost of
professional services revenues in the fiscal years ended June 30, 2001, 2000
and 1999 represented 62%, 62% and 59%, respectively. The $8.3 million and $20.0
million increase in cost of professional services for fiscal year 1999 compared
to fiscal year 2000 and fiscal year 2000 compared to fiscal year 2001,
respectively, was attributed to increases in personnel and outside consultants
to satisfy the increased demand for professional services to our customers. We
anticipate that the gross profit margin on professional services will decrease
slightly in future operating periods.
Research and Development Expenses
Research and development expenses consist primarily of compensation and related
costs for research and development personnel. Research and development expenses
increased from $28.9 million in the fiscal year ended June 30, 1999 to $59.9
million in the fiscal year ended June 30, 2000 and $135.8 million in the fiscal
year ended June 30, 2001. As a percentage of revenues, research and development
expenses decreased from 48% for the fiscal year ended June 30, 1999 to 41% for
the fiscal year ended June 30, 2000 and 29% for the fiscal year ended June 30,
2001. We anticipate that the cost of research and development expenses will
continue to decrease as a percentage of total revenues in future operating
periods.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of compensation and related
costs for sales and marketing personnel, sales commissions, marketing programs,
travel expenses, public relations, promotional materials and trade show
14
exhibit expenses. Sales and marketing expenses increased from $33.6 million in
the fiscal year ended June 30, 1999 to $68.4 million in the fiscal year ended
June 30, 2000 and $148.8 million in the fiscal year ended June 30, 2001. As a
percentage of revenues, sales and marketing expenses decreased from 56% for the
fiscal year ended June 30, 1999 to 47% for the fiscal year ended June 30, 2000
and 32% for the fiscal year ended June 30, 2001. We expect to continue to
increase our sales and marketing costs in absolute dollars in accordance with
our planned growth. However, sales and marketing expenses are expected to
continue to decrease as a percentage of total revenues.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related
expenses, accounting, legal and administrative expenses, professional service
fees and other general corporate expenses. General and administrative expenses
increased from $12.1 million in the fiscal year ended June 30 1999 to $24.1
million in the fiscal year ended June 30, 2000 and $59.3 million in the fiscal
year ended June 30, 2001. As a percentage of revenues, general and
administrative expenses decreased from 20% for year ended June 30, 1999 to 16%
for the year ended June 30, 2000 and 13% for the year ended June 30, 2001. The
increase in dollars were due primarily to the addition of personnel, additional
expenses in connection with our operation as a public company, additional
provisions for unexpected uncollectible accounts and, to a lesser extent, legal
expenses associated with increased product licensing and patent activity.
General and administrative expenses are expected to continue to increase in
absolute dollars, but will continue to decrease as an overall percentage of
total revenues.
Stock-Based Compensation
Stock-based compensation expense totaled $10.2 million, $10.2 million and $2.2
million for the years ended June 30, 2001, 2000 and 1999, respectively. All
stock-based compensation is being amortized in a manner consistent with
Financial Accounting Board Interpretation No. 28. The increase of $8.0 million
of stock-based compensation expense during the fiscal year ended June 30, 2000
as compared to the fiscal year ended June 30, 1999, resulted primarily from the
amortization of deferred stock-based compensation related to acquisitions
during the year ended June 30, 2000. Stock-based compensation remained
relatively flat during the fiscal year ended June 30, 2001 as compared to the
fiscal year ended June 30, 2000, and consisted of continued amortization of the
deferred stock-based compensation related to acquisitions, as well as
compensation expense recognized on warrants, stock issued to executives, and
stock options granted to employees at exercise prices below the current fair
market value. We expect stock-based compensation to increase during the year
ended June 30, 2002 as compared to June 30, 2001 as a result of continued
acquisitions including Avogadro, which was completed in July 2001, and
restricted stock and stock options granted to employees and executives at
exercise prices below the current fair market value.
Amortization of Goodwill and Intangible Assets
Amortization of goodwill and intangible assets totaled $636.3 million, $216.6
million, and $329,000 for the years ended June 30, 2001, 2000 and 1999,
respectively, and primarily resulted from our acquisitions of Telarc, APiON and
Angelica in October 1999 and the acquisitions of AtMotion in February 2000,
Paragon in March 2000, Onebox in April 2000 and bCandid and MyAble in June
2000. Amortization of goodwill and other intangible assets is computed using
the straight-line basis over a three to five-year period. We expect
amortization of goodwill and other intangible assets will be approximately
$630.0 million for the fiscal year ending June 30, 2002.
In-Process Research and Development
For each of our prior acquisitions, we allocated the purchase price to
developed technology and in-process research and development (IPR&D). This
allocation was based on whether or not technological feasibility had been
achieved
15
and whether there was an alternative future use for the technology. Statement
of Financial Accounting Standards (SFAS) No. 86 sets guidelines for
establishing technological feasibility. Technological feasibility is determined
when a product reaches the "working model" stage, which is generally when a
product is classified as a beta version release. For the previous acquisitions
of Telarc and APiON in October 1999, Paragon in March 2000, Onebox in April
2000, and bCandid in June 2000, we concluded that the purchased IPR&D of $3.2
million, $110,000, $18.1 million, $4.3 million and $2.0 million, respectively,
had not yet reached technological feasibility and had no alternative use.
Therefore, we expensed these costs at the time of the purchase, according to
the provisions of FASB interpretation No. 4, Applicability of SFAS No. 2 to
Business Combinations Accounted for by the Purchase Method. The IPR&D purchased
from Onebox was used in our unified messaging product and reached technological
feasibility in the fiscal year ended June 30, 2001. With the exception of the
Onebox IPR&D, as of June 30, 2001, we were still in the development stage of
all previously written off IPR&D.
Merger and Integration costs
As a result of the merger with Software.com, we recorded merger and integration
costs of approximately $88.9 million during the year ended June 30, 2001.
Merger costs, which totaled approximately $79.8 million, were comprised of
banker's fees of $73.4 million, regulatory fees of $2.2 million, and
professional services of $4.2 million. Integration costs of approximately $9.1
million related to the merger with Software.com included costs associated with
the Company's name change and other consulting fees.
Interest and Other Income, Net
Interest and other income, net increased from $2.8 million in the fiscal year
ended June 30, 1999 to $23.2 million for the fiscal year ended June 30, 1999
and $24.8 million for the fiscal year ended June 30, 2001. The increase
resulted primarily from earnings on increased cash, cash equivalents and
investment balances as a result of our public equity offerings during late
fiscal year 1999 and early fiscal year 2001.
Income Taxes
Income tax expense totaled $2.3 million, $2.0 million and $13.0 million for the
fiscal years ended June 30, 1999, 2000 and 2001, respectively. Income taxes in
all periods presented consisted primarily of foreign withholding and foreign
income taxes.
In light of the Company's recent history of operating losses, the Company has
recorded a valuation allowance for all of its deferred tax assets, except to
the extent of deferred tax liabilities, as it is presently unable to conclude
that it is more likely than not that deferred tax assets in excess of deferred
tax liabilities will be realized.
As of June 30, 2001, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $744.0 million and
$323.0 million, respectively.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of convertible preferred stock, which contributed $66.0 million in
aggregate net proceeds through March 31, 1999; through our initial public
offerings in June 1999, which generated net proceeds of $134.6 million; and
through our secondary public offering in November 1999, which generated net
proceeds of approximately $390.3 million. As of June 30, 2001, we had $348.5
million of cash, cash equivalents and short-term investments.
16
Net cash used for operating activities was $77.3 million, $8.3 million, and
$13.9 million for the years ended June 30, 2001, 2000 and 1999, respectively.
The net cash used during the year ended June 30, 2001 was primarily
attributable to $88.9 million paid in merger and integration costs related to
Software.com, an increase in accounts receivable of approximately $84.6
million, and a decrease in deferred revenue of $10.8 million, offset by an
increase in accrued liabilities of $24.4 million and after consideration of
non-cash depreciation and amortization expenses of $657.2 million.
Net cash provided by (used for) investing activities was $76.2 million,
($448.7) million, and ($45.4) million for the years ended June 30, 2001, 2000
and 1999, respectively. The net cash provided by investing activities during
the year ended June 30, 2001 primarily reflected net maturities from short-term
and long-term investments of $195.2 million, payments related to prior business
combinations of $25.2 million, and purchases of property and equipment of $87.5
million.
Net cash provided by financing activities was $42.7 million, $427.7 million,
and $167.3 million for the years ended June 30, 2001, 2000 and 1999,
respectively. The net cash provided by investing activities during the year
ended June 30, 2001 primarily reflected stock options exercised during the
year. The net cash provided by investing activities during the years ended 2000
and 1999 were primarily the effect of the Company's Initial Public Offering.
As of June 30, 2001, our principal commitments consisted of obligations
outstanding under operating leases and our equipment loans and capitalized
lease obligations. On March 30, 2000, we entered into a lease for approximately
280,000 square feet of office space in Redwood City, California. The lease
commenced upon completion of construction in the fourth quarter of fiscal year
ended June 30, 2001. Lease terms require a base rent of $3.25 per square foot
per month as provided by the lease agreement and will increase by 3.5%
annually. The lease term is for a period of 12 years from the commencement date
of the lease. The agreement required that we provide a letter of credit in the
amount of $16.5 million. As of June 30, 2000, we guaranteed the letter of
credit and pledged approximately $20.7 million, or 125% of the letter of
credit. The restricted cash and investments held in trust under this agreement
are earning approximately 4.7% interest, and the resulting income earned is not
subject to any restrictions. The lease further required that we pay leasehold
improvements which totaled $29.3 million at June 30, 2001. Although we have no
other material commitments for capital expenditures, we expect to increase
capital expenditures and lease commitments consistent with our anticipated
growth in operations, infrastructure and personnel.
We believe that our current cash, cash equivalents and short-term investments,
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least the next 12 months. If cash generated from
operations is insufficient to satisfy our liquidity requirements, we may seek
to sell additional equity or debt securities or to obtain a credit facility. If
additional funds are raised through the issuance of debt securities, these
securities could have rights, preferences and privileges senior to holders of
common stock, and terms of any debt could impose restrictions on our
operations. The sale of additional equity or convertible debt securities could
result in additional dilution to our stockholders, and additional financing may
not be available in amounts or on terms acceptable to us. If additional
financing is necessary and we are unable to obtain the additional financing, we
may be required to reduce the scope of our planned product development and
marketing efforts, which could harm our business, financial condition and
operating results.
Recent Accounting Pronouncements
We adopted Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101), as amended by SAB 101A and 101B on June 30, 2001,
retroactive to July 1, 2000. SAB 101 provides guidance on the recognition,
17
presentation, and disclosure of revenue in financial statements filed with the
Securities and Exchange Commission (SEC). Our adoption of SAB 101 has not had a
material impact on our consolidated financial position or results of
operations.
In late July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141 Business Combinations (SFAS No. 141) and Goodwill and Other Intangible
Assets (SFAS No. 142). SFAS 141 requires that all business combinations be
accounted for using the purchase method of accounting; therefore, the pooling-
of-interests method of accounting is prohibited. SFAS No. 141 also requires
that an intangible asset acquired in a business combination be recognized apart
from goodwill if: (i) the intangible asset arises from contractual or other
legal rights or (ii) the acquired intangible asset is capable of being
separated from the acquired enterprise, as defined in SFAS No. 141. SFAS No.
141 is effective for all business combinations completed by us after June 30,
2001.
For business combinations completed prior to July 1, 2001 and accounted for by
the purchase method, SFAS No. 141 provides that intangible assets that do not
meet the separate identifiable intangible asset criteria prescribed by this
pronouncement (e.g., assembled workforce, among others) be reclassified to
goodwill as of the date of adoption. Conversely, if a portion of the purchase
price had been assigned to an intangible asset that meets the criteria for
recognition apart from goodwill and that intangible asset is classified as part
of goodwill for financial reporting purposes, the carrying amount of that
intangible asset must be reclassified and reported separately from goodwill as
of the date of adoption (July 1, 2002).
SFAS No. 142 requires that goodwill should not be amortized but should be
tested for impairment at the "reporting unit level" (Reporting Unit) at least
annually and more frequently upon the occurrence of certain events, as defined
by SFAS No. 142. A Reporting Unit is the same level as or one level below an
"operating segment," as defined by SFAS No. 131 Disclosures About Segments of
an Enterprise and Related Information. Our identifiable intangible assets are
required to be amortized over their useful life and reviewed for impairment in
accordance with SFAS No. 121 Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of (SFAS No. 121). Goodwill is not
tested for impairment under SFAS No. 121, but instead is tested for impairment
as prescribed in SFAS No. 142.
SFAS No. 142 requires that goodwill be tested for impairment in a two-step
process. First, a company must compare the "estimated fair value" of a
Reporting Unit to its carrying amount, including goodwill, to determine if the
fair value of the Reporting Unit is less than the carrying amount, which would
indicate that goodwill is impaired. If we determine that goodwill is impaired,
we must compare the "implied fair value" of the goodwill to its carrying amount
to determine if there is an impairment loss. The "implied fair value" is
calculated by allocating the fair value of the Reporting Unit to all assets and
liabilities as if the Reporting Unit had been acquired in a business
combination and accounted for under SFAS No. 141.
For goodwill and intangible assets acquired in business combinations completed
prior to July 1, 2001, SFAS No. 142 is effective for us beginning on July 1,
2002. Goodwill and intangible assets acquired in a business combination
completed after June 30, 2001 are required to be accounted for in accordance
with the provisions of SFAS No. 142.
As of June 30, 2001, we currently have recorded net goodwill of $1.1 billion.
Under the current accounting, we expect to have amortization expense of
approximately $630.0 million for the fiscal year ending June 30, 2002.
We are currently evaluating the impact the adoption of these pronouncements may
have on our financial position and results of operations; however, due to these
pronouncements being issued in late July 2001 and due to our
18
expectations that the FASB will issue further guidance with respect to
adoption of both SFAS Nos. 141 and 142, we are currently unable to determine
the impact the adoption of these pronouncements may have on our financial
position or results of operations.
Factors That May Affect Future Results
In addition to the other information in this report, the following factors
should be considered carefully in evaluating our business and prospects.
Because we have a limited operating history, it is difficult to evaluate our
business.
Because we commenced operation in 1994 and commercially released our first
products in 1996, we only have a limited operating history on which you can
base your evaluation of our business.
We may not continue to grow or reach profitability.
We face a number of risks encountered by early stage companies in the wireless
telecommunications and Internet software industries, including:
. our need for communication service providers to launch and maintain
commercial services utilizing our products;
. our substantial dependence on products with only limited market
acceptance to date;
. our need to introduce reliable and robust products that meet the
demanding needs of communication service providers and wireless device
manufacturers;
. our dependence on a limited number of customers;
. our need to expand our marketing, sales, consulting and support
organizations, as well as our distribution channels;
. our ability to anticipate and respond to market competition;
. our dependence upon key personnel;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our operations;
. the announcement or introduction of new or enhanced products or services
by our competitors;
. adverse customer reaction to technical difficulties or "bugs" in our
software;
. the growth rate and performance of wireless networks in general and of
wireless communications in particular;
. the volume of sales by our distribution partners and resellers;
. our pricing policies and those of our competitors; and
. our customers' willingness to incur the costs necessary to buy third-
party hardware and software required to use our software products and
any related price concessions on our product that our customers demand
as a result.
Our business strategy may not be successful, and we may not successfully
address these risks.
We may not achieve or sustain our revenue or profit goals.
Because we expect to continue to incur significant product development, sales
and marketing and administrative expenses, we will need to generate
significant revenues to become profitable and sustain profitability on a
quarterly
19
or annual basis. We may not achieve or sustain our revenue or profit goals, and
our ability to do so depends on a number of factors outside of our control,
including the extent to which:
. there is market acceptance of commercial services utilizing our products;
. our competitors announce and develop, or lower the prices of, competing
products; and
. our strategic partners dedicate resources to selling our products and
services.
As a result, we may not be able to increase revenue or achieve profitability on
a quarterly or annual basis.
Our operating results are subject to significant fluctuations, and our stock
price may decline if we do not meet expectations of investors and analysts.
Our revenues and operating results are difficult to predict and may fluctuate
significantly from period to period due to a number of factors, some of which
are outside of our control. These factors include, but are not limited to:
. delays in market acceptance or implementation by our customers of our
products and services;
. changes in demand by our customers for additional products and services;
. our lengthy sales and implementation cycles;
. our concentrated target market and the potentially substantial effect on
total revenues that may result from the gain or loss of business from
each incremental customer;
. introduction of new products or services by us or our competitors;
. delays in developing and introducing new products and services;
. changes in our pricing policies or those of our competitors or
customers;
. changes in our mix of domestic and international sales;
. risks inherent in international operations;
. changes in our mix of license, professional services and maintenance and
support services revenues;
. changes in accounting standards, including standards relating to revenue
recognition, business combinations and stock-based compensation;
. general political and economic factors, including an economic slowdown
or recession; and
. general industry factors, including a slowdown in the telecom industry,
either temporary or otherwise.
Most of our expenses, such as compensation for current employees and lease
payments for facilities and equipment, are relatively fixed. In addition, our
expense levels are based, in part, on our expectations regarding future
revenues. As a result, any shortfall in revenues relative to our expectations
could cause significant changes in our operating results from period to period.
Due to the foregoing factors, we believe period-to-period comparisons of our
revenue levels and operating results are of limited use. You should not rely on
our period revenues and operating results to predict our future performance.
We may be unable to successfully integrate acquired or merged companies into
our business or achieve the expected benefits of the business combinations.
To date, we have merged with or acquired 13 companies, including Avogadro,
Software.com, AtMobile, Mobility.net, bCandid, MyAble, Velos, Onebox, Paragon,
AtMotion, Angelica, APiON, and Telarc. We may not be able to successfully
assimilate the personnel, operations and customers of these companies, along
with those of their
20
acquired companies, into our business. Additionally, we may fail to achieve the
anticipated synergies from the combined businesses, including product
integration, marketing, product development, distribution and other operations
synergies.
The integration process may further strain our existing financial and
managerial controls and reporting systems and procedures. This may result in
the diversion of management and financial resources from our core business
objectives. In addition, we are relatively inexperienced in managing
significant facilities or operations in geographically distant areas. We may
also fail to retain these companies' key employees.
These companies have specific technology and other capabilities that we may not
be able to successfully integrate with our existing products and services. As a
result, we may incur unexpected integration and product development expenses
which could harm our results of operations. Due to rapidly changing market
conditions, we may find the value of our acquired technologies and related
intangible assets, such as goodwill as recorded in our financial statements, to
be impaired, resulting in charges to operations.
Any future merger or acquisition of companies or technologies may result in
disruptions to our business.
We may merge with or acquire technologies or companies in the future. Entering
into any business combination entails many risks, any of which could materially
harm our business, including:
. diversion of management's attention from other business concerns;
. failure to assimilate the combined companies with pre-existing
businesses;
. potential loss of key employees from either our pre-existing business or
the merged or acquired business;
. dilution of our existing stockholders as a result of issuing equity
securities; and
. assumption of liabilities of the merged or acquired company.
We may not be able to identify future suitable merger or acquisition
candidates, and even if we do identify suitable candidates, we may not be able
to make these transactions on commercially acceptable terms, or at all. If we
do merge with or acquire other companies, we may not be able to realize the
benefits we expected to achieve at the time of entering into the transaction.
In any future merger or acquisition, we will likely face the same risks as
discussed above. Further, we may have to utilize cash reserves, incur debt or
issue equity securities to pay for any future merger or acquisition, the
issuance of which could be dilutive to our existing stockholders.
We may not be successful in making strategic investments.
We have made, and in the future, we may continue to make strategic investments
in other companies. These investments have been made in, and future investments
will likely be made in, immature businesses with unproven track records and
technologies. Such investments have a high degree of risk, with the possibility
that we may lose the total amount of our investments. We may not be able to
identify suitable investment candidates, and, even if we do, we may not be able
to make those investments on acceptable terms, or at all. In addition, even if
we make investments, we may not gain strategic benefits from those investments.
Our sales cycle is long and our stock price could decline if sales are delayed
or cancelled.
Fluctuations in our operating performance are exacerbated by our sales cycle,
which is lengthy, typically between three and twelve months, and unpredictable.
Many factors outside our control add to the lengthy education and
21
customer approval process for our products. We spend a substantial amount of
time educating customers regarding the use and benefits or our products and
they in turn spend a substantial amount of time performing internal reviews and
obtaining capital expenditure approvals before purchasing our products.
Further, the emerging and evolving nature of the market for Internet-based
services via wireless devices may lead prospective customers to postpone their
purchasing decisions. Any delay in sales of our products could cause our
operating results to vary significantly from projected results, which could
cause our stock price to decline.
Our success depends on acceptance of our products and services by communication
service providers and their subscribers.
Our future success depends on our ability to increase revenues from sales of
our infrastructure software, applications and other services to communication
service providers. This dependence is exacerbated by the relatively small
number of communication service providers worldwide whose willingness to
purchase our products is critical to our success. To date, only a limited
number of communication service providers have implemented and deployed
services based on our products. We cannot assure you that communication service
providers will widely deploy or successfully market services based on our
products, or that large numbers of subscribers will use these services.
The market for the delivery of Internet-based services is rapidly evolving, and
we may not be able to adequately address this market.
The market for the delivery of Internet-based services is rapidly evolving and
characterized by an increasing number of market entrants who have introduced or
developed, or are in the process of introducing or developing, products that
facilitate the delivery of Internet-based services through wireless devices. As
a result, the life cycle of our products is difficult to estimate. We may not
be able to develop and introduce new products, services and enhancements that
respond to technological changes or evolving industry standards on a timely
basis, in which case our business would suffer. In addition, we cannot predict
the rate of adoption by wireless subscribers of these services or the price
they will be willing to pay for these services. As a result, it is extremely
difficult to predict the pricing of these services and the future size and
growth rate of this market.
Our communication service provider customers face implementation and support
challenges in introducing Internet-based services via wireless devices, which
may slow their rate of adoption or implementation of the services our products
enable. Historically, communication service providers have been relatively slow
to implement new complex services such as Internet-based services. In addition,
communication service providers may encounter greater customer service demands
to support Internet-based services via wireless devices than they do for their
traditional voice services. We have limited or no control over the pace at
which communication service providers implement these new services. The failure
of communication service providers to introduce and support services utilizing
our products in a timely and effective manner could harm our business.
Until recently, we have relied on sales to a small number of customers, and the
failure to retain these customers or add new customers may harm our business.
To date, a significant portion of our revenues in any particular period has
been attributable to a limited number of customers, comprised primarily of
communication service providers. We believe that we will continue to depend
upon a limited number of customers for a significant portion of our revenues
from each period for the foreseeable future. Any failure by us to capture a
significant share of these customers could materially harm our business.
22
We are exposed to the credit risk of some of our customers and to credit
exposures in weakened markets.
A portion of our sales are derived through customers who tend to have access to
more limited financial resources than others and, therefore, represent
potential sources of increased credit risk. Furthermore, with the consolidation
of the Internet specifically in the area of Internet service providers (ISPs),
future growth in sales attributed to a market of many ISPs may decline.
Although we have programs in place to monitor and mitigate the associated risk,
there can be no assurance that such programs will be effective in reducing our
credit risk. We also continue to monitor increased credit exposures from
weakened financial conditions in certain geographic regions, and the impact
that such conditions may have on the worldwide economy. We have recently
experienced losses due to customers failing to meet their obligations,
primarily as a result of the weakened financial state of the wireless and
telecom industry. Although these losses have not been significant, future
losses, if incurred, could harm our business and have a material adverse effect
on our operating results and financial condition.
If wireless devices are not widely adopted for mobile delivery of Internet-
based services, our business could suffer.
We have focused a significant amount of our efforts on mass-market wireless
devices as the principal means of delivery of Internet-based services using our
products. If wireless devices are not widely adopted for mobile delivery of
Internet-based services, our business would suffer materially. Mobile
individuals currently use many competing products, such as portable computers,
to remotely access the Internet and e-mail. These products generally are
designed for the visual presentation of data, while wireless devices
historically have been limited in this regard. In addition, the development and
proliferation of many types of competing products capable of the mobile
delivery of Internet-based service in a rapidly evolving industry represents a
significant risk to a dominant product emerging. If mobile individuals do not
adopt wireless devices as a means of accessing Internet-based services, our
business would suffer.
If widespread integration of browser technology does not occur in wireless
devices, our business could suffer.
Because our current software offers enhanced features and functionality that
are not currently covered by the specifications promulgated by the WAP Forum,
subscribers currently must use wireless devices enabled with our browser in
order to fully utilize these features and functionality. Additionally, we
expect that future versions of our software and related server-based software
will offer features and functionality that are compatible with the
specifications promulgated by the WAP Forum. Our business could suffer
materially if widespread integration of our browser or WAP-compliant third-
party browser software in wireless devices does not occur. All of our
agreements with wireless device manufacturers are nonexclusive, so they may
choose to embed a browser other than ours in their wireless devices. We may not
succeed in maintaining and developing relationships with wireless device
manufacturers, and any arrangements may be terminated early or not renewed at
expiration. In addition, wireless device manufacturers may not produce products
using our browser in a timely manner and in sufficient quantities, if at all.
The market for our products and services is highly competitive.
The market for our products and services is becoming increasingly competitive.
The widespread adoption of open industry standards such as the WAP
specifications may make it easier for new market entrants and existing
competitors to introduce products that compete with our software products. In
addition, a number of our
23
competitors, including Nokia, have announced or are expected to announce
enhanced features and functionality as proprietary extensions to the WAP
standard. Furthermore, some of our competitors, such as NTT DoCoMo, have
introduced or may introduce services based on proprietary wireless protocols
that are not compliant with the WAP specifications.
We expect that we will compete primarily on the basis of price, time to
market, functionality, quality and breadth of product and service offerings.
Our current and potential competitors include the following:
. wireless equipment manufacturers, such as Ericsson and Nokia;
. Microsoft;
. Wireless Knowledge, a joint venture of Microsoft and Qualcomm, as well
as a similar European joint venture of Microsoft and Ericsson;
. messaging software providers, such as Comverse.
. systems integrators, such as CMG plc, and software companies, such as
Oracle Corporation and iPlanet, a Sun/Netscape alliance, and Critical
Path;
. service providers, such as iPlanet, E-Commerce Solutions and Infospace;
. communication service providers, such as NTT DoCoMo; and
. providers of Internet software applications and content, electronic
messaging applications and personal information management software
solutions.
Microsoft Corporation has announced its intention to introduce products and
services that may compete directly with many of our products. In addition,
Microsoft has announced that it intends to enable its Windows CE operating
system to run on wireless handheld devices, including wireless telephones.
Microsoft has announced its own browser, called Mobile Explorer, for these
devices.
Nokia is marketing a WAP server to corporate customers and content providers.
This WAP server is designed to enable wireless device subscribers to directly
access applications and services provided by these customers, rather than
through gateways provided by communication service providers' WAP servers. If
Nokia's WAP server is widely adopted by corporate customers and content
providers, it could undermine the need for communication service providers to
purchase WAP servers. Many of our existing competitors, as well as potential
competitors, have substantially greater financial, technical, marketing and
distribution resources than we do.
As we enter new markets and introduce new services, we will face additional
competitors.
As we enter the unified messaging market, we will face competition from
established voice mail providers such as Comverse, and Internet-based unified
messaging providers such as Critical Path. In the portal framework market, a
number of companies have introduced products and services relating to mobile
portals that compete with our products and services. These existing and
potential competitors may include telecommunications companies such as Lucent
Technologies, traditional Internet portals such as AOL, InfoSpace, Microsoft
MSN and Yahoo!, Internet infrastructure software companies and several private
mobile Internet portal companies.
In addition to the existing competitors listed above, voice mail solutions
providers are expected to be competitors in the unified messaging market
because of their existing relationships with service providers and ownership
of technologies for the conversion of voice to data. If we are unable to
compete effectively against existing or emerging competitors our business,
financial condition and operating results will suffer.
24
Our software products may contain defects or errors, and shipments of our
software may be delayed.
The software we develop is complex and must meet the stringent technical
requirements of our customers. We must develop our products quickly to keep
pace with the rapidly changing Internet software and telecommunications
markets. Software products and services as complex as ours are likely to
contain undetected errors or defects, especially when first introduced or when
new versions are released. We have in the past experienced delays in releasing
some versions of our products until software problems were corrected. Our
products may not be free from errors or defects after commercial shipments
have begun, which could result in the rejection of our products and damage to
our reputation, as well as lost revenues, diverted development resources and
increased service and warranty costs, any of which could harm our business.
We depend on recruiting and retaining key management and technical personnel
with telecommunications and Internet software experience.
Because of the technical nature of our products and the dynamic market in
which we compete, our performance depends on attracting and retaining key
employees. In particular, our future success depends in part on the continued
services of each of our current executive officers. Competition for qualified
personnel in the telecommunications, Internet software and Internet messaging
industries is significant. We believe that there are only a limited number of
persons with the requisite skills to serve in many key positions, and it is
difficult to hire and retain these persons. Competitors and others have in the
past, and may in the future, attempt to recruit our employees.
We may fail to support our anticipated growth in operations.
To succeed in the implementation of our business strategy, we must rapidly
execute our sales strategy and further develop products and expand service
capabilities, while managing anticipated growth by implementing effective
planning and operating processes. If we fail to manage our growth effectively,
our business could suffer materially. To manage anticipated growth, we must:
. continue to implement and improve our operational, financial and
management information systems;
. hire, train and retain additional qualified personnel;
. continue to expand and upgrade core technologies;
. effectively manage multiple relationships with various communication
service providers, wireless device manufacturers, content providers,
applications developers and other third parties; and
. successfully integrate the businesses of our acquired companies.
Our systems, procedures and controls may not be adequate to support our
operations, and our management may not be able to achieve the rapid execution
necessary to exploit the market for our products and services.
Our success, particularly in international markets, depends in part on our
ability to maintain and expand our distribution channels.
Our success depends in part on our ability to increase sales of our products
and services through value-added resellers and systems integrators and to
expand our indirect distribution channels. If we are unable to maintain the
relationships that we have with our existing distribution partners, increase
revenues derived from sales through our indirect distribution channels, or
increase the number of distribution partners with whom we have relationships,
then we may not be able to increase our revenues or achieve profitability.
25
We expect that many communication service providers in international markets
will require that our products and support services be supplied through value-
added resellers and systems integrators. Thus, we expect that a significant
portion of international sales will be made through value-added resellers and
systems integrators, and the success of our international operations will
depend on our ability to maintain productive relationships with value-added
resellers and systems integrators.
In addition, our agreements with our distribution partners generally do not
restrict the sale by them of products and services that are competitive with
our products and services, and each of our partners generally can cease
marketing our products and services at their option and, in some circumstances,
with little notice and with little or no penalty.
Our business depends on continued growth in use and improvement of the Internet
and customers ability to operate their systems effectively.
The infrastructure, products and services necessary to maintain and expand the
Internet may not be developed, and the Internet may not continue to be a viable
medium for secure and reliable personal and business communication, in which
case our business, financial condition and operating results would be harmed.
Because we are in the business of providing Internet infrastructure software,
our future success depends on the continued expansion of, and reliance of
consumers and businesses on, the Internet for communications and other
services. The Internet may not be able to support an increased number of users
or an increase in the volume of data transmitted over it. As a result, the
performance or reliability of the Internet in response to increased demands
will require timely improvement of the high speed modems and other
communications equipment that form the Internet's infrastructure. The Internet
has already experienced temporary outages and delays as a result of damage to
portions of its infrastructure. The effectiveness of the Internet may also
decline due to delays in the development or adoption of new technical standards
and protocols designed to support increased levels of activity and due to the
transmission of computer viruses.
In addition to problems that may affect the Internet as a whole, our customers
have in the past experienced some interruptions in providing their Internet-
related services, including services related to our software products. We
believe that these interruptions will continue to occur from time to time. Our
revenues depend substantially upon the number of end users who use the services
provided by our customers. Our business may suffer if our customers experience
frequent or long system interruptions that result in the unavailability or
reduced performance of their systems or networks or reduce their ability to
provide services to their end users.
We depend on others to provide content and develop applications for wireless
devices.
In order to increase the value to customers of our product platform and
encourage subscriber demand for Internet-based services via wireless devices,
we must successfully promote the development of Internet-based applications and
content for this market. If content providers and application developers fail
to create sufficient applications and content for Internet-based services via
wireless devices, our business could suffer materially. Our success in
motivating content providers and application developers to create and support
content and applications that subscribers find useful and compelling will
depend, in part, on our ability to develop a customer base of communication
service providers and wireless device manufacturers large enough to justify
significant and continued investments in these endeavors.
26
The market for wireless communications and the delivery of Internet-based
services through wireless technology is rapidly evolving, and we may not be
able to adequately address this market.
The market for wireless communications and the delivery of Internet-based
services through wireless technology is rapidly evolving and is characterized
by an increasing number of market entrants that have introduced or developed,
or are in the process of introducing or developing, products that facilitate
wireless communication and the delivery of Internet-based services through
wireless devices. We intend to devote significant efforts and resources on
developing and marketing infrastructure applications for wireless
communications and the wireless delivery of Internet-based content and
services. In addition, the emerging nature of the market for wireless
communications and Internet-based services via wireless devices may lead
prospective customers to postpone adopting wireless devices or using wireless
technology. As a result, the life cycle of our wireless products is difficult
to estimate. We may not be able to develop and introduce new products, services
and enhancements that respond to technological changes or evolving industry
standards on a timely basis, in which case our business would suffer. In
addition, we cannot predict the rate of adoption by wireless subscribers of
these services or the price they will be willing to pay for these services. As
a result, it is extremely difficult to predict the pricing of these services
and the future size and growth rate of the wireless market.
Our customer service providers face implementation and support challenges in
expanding wireless communications and introducing Internet-based services via
wireless devices, which may slow their rate of adoption or implementation of
the services our wireless messaging products enable. Historically, customer
service providers have been relatively slow to implement new complex services
such as wireless messaging services and wireless delivery of Internet content.
In addition, customer service providers may encounter greater customer service
demands to support Internet-based services via wireless devices than they do
for their traditional Internet services. We have limited or no control over the
pace at which customer service providers implement these new services. The
failure of customer service providers to introduce and support services
utilizing our products in a timely and effective manner could harm our
business.
If we are unable to integrate our products with third-party technology, such as
communication service providers' systems, our business may suffer.
Our products are integrated with communication service providers' systems and
wireless devices. If we are unable to integrate our platform products with
these third-party technologies, our business could suffer materially. For
example, if, as a result of technology enhancements or upgrades of these
systems or devices, we are unable to integrate our products with these systems
or devices, we could be required to redesign our software products. Moreover,
many communication service providers use legacy, or custom-made, systems for
their general network management software. Legacy systems and certain custom-
made systems are typically very difficult to integrate with new server
software. We may not be able to redesign our products or develop redesigned
products that achieve market acceptance.
An interruption in the supply of software that we license from third parties
could cause a decline in product sales.
We license technology that is incorporated into our products from third
parties, such as RSA Data Security, Inc. and other companies. Any significant
interruption in the supply of any licensed software could cause a decline in
product sales, unless and until we are able to replace the functionality
provided by this licensed software. We also depend on
27
these third parties to deliver and support reliable products, enhance their
current products, develop new products on a timely and cost-effective basis,
and respond to emerging industry standards and other technological changes. The
failure of these third parties to meet these criteria could materially harm our
business.
Our intellectual property or proprietary rights could be misappropriated, which
could force us to become involved in expensive and time-consuming litigation.
Our ability to compete and continue to provide technological innovation is
substantially dependent upon internally developed technology. We rely on a
combination of patent, copyright, trade secret and trademark law to protect our
technology, although we believe that other factors such as the technological
and creative skills of our personnel, new product developments, frequent
product and feature enhancements and reliable product support and maintenance
are more essential to maintaining a technology leadership position.
We generally enter into confidentiality and nondisclosure agreements with our
employees, consultants, prospective customers, licensees and corporate
partners. In addition, we control access to and distribution of our software,
documentation and other proprietary information. Except for certain limited
escrow arrangements, we do not provide customers with access to the source code
for our products. Despite our efforts to protect our intellectual property and
proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Effectively policing the
unauthorized use of our products is time-consuming and costly, and there can be
no assurance that the steps taken by us will prevent misappropriation of our
technology, particularly in foreign countries where in many instances the local
laws or legal systems do not offer the same level of protection as in the
United States.
If others claim that our products infringe their intellectual property rights,
we may be forced to seek expensive licenses, reengineer our products, engage in
expensive and time-consuming litigation or stop marketing our products.
We attempt to avoid infringing known proprietary rights of third parties in our
product development efforts. However, we do not regularly conduct comprehensive
patent searches to determine whether the technology used in our products
infringes patents held by third parties. There are many issued patents as well
as patent applications in the electronic messaging field. Because patent
applications in the United States are not publicly disclosed until the patent
is issued, applications may have been filed which relate to our software
products. In addition, our competitors and other companies as well as research
and academic institutions have conducted research for many years in the
electronic messaging field, and this research could lead to the filing of
further patent applications. If we were to discover that our products violated
or potentially violated third-party proprietary rights, we might not be able to
obtain licenses to continue offering those products without substantial
reengineering. Any reengineering effort may not be successful, nor can we be
certain that any licenses would be available on commercially reasonable terms.
Substantial litigation regarding intellectual property rights exists in the
software industry, and we expect that software products may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segments grows and the functionality of software products in different
industry segments overlaps. Any third-party infringement claims could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product and service delays or require us to enter into
royalty or licensing agreements. Any royalty or licensing arrangements, if
required, may not be available on terms acceptable to us, if at all. A
successful claim of infringement against us and our failure or inability to
license the infringed or similar technology could have a material adverse
effect on our business, financial condition and results of operations.
28
On February 2, 2001, a complaint, Leon Stambler v. RSA Security Inc., Verisign
Inc., First Data Corporation, Openwave Systems Inc. and Omnisky Corporation,
Civil Action No. 01-00065, was filed in the U.S. District Court for the
district of Delaware against us and certain other companies. The complaint
alleges that the defendants have infringed claims of one or more patents that
Mr. Stambler asserts have been granted to him. On March 26, 2001, we responded
to the complaint. We denied the allegations that we have infringed any claim
in either of the patents asserted against us. In addition, we asserted
counterclaims against Mr. Stambler seeking a declaratory judgment that the
asserted patents are not infringed by us and that the patents are also invalid
and unenforceable. Although the parties have exchanged some written discovery,
discovery is still in its initial stages and no trial date has been set. Based
on the facts known to date, we believe that we have meritorious defenses and
claims. We are unable to estimate the range of potential loss, if any.
On April 30, 2001, a complaint, Opuswave Networks, Inc. v. Openwave Systems
Inc. and Alain Rossmann, Civil Action No. 01-1681, was filed in the U.S.
District Court for the Northern District of California against us and a former
affiliate. The complaint alleges that the defendents have infringed claims of
a common law trademark that plaintiff asserts it has acquired. On June 5,
2001, we responded to the complaint. We denied allegations that we have
infringed any trademark rights asserted against us. In addition, we asserted
counterclaims against the plaintiff seeking a declaratory judgment that the
asserted trademark rights are not infringed by us. On June 13, 2001, Opuswave
Networks responded to the counterclaims its allegations. Discovery has not
commenced and no trial date has been set. Based on the facts known to date, we
believe that we have meritorious defenses and intend to defend this suit. We
are unable to estimate the range of potential loss, if any.
International sales of products is an important part of our strategy, and this
expansion carries specific risks.
International sales of products and services accounted for 66% of our total
revenues for the year ended June 30, 2001. We expect international sales to
continue to account for a significant portion of our revenues, although the
percentage of our total revenues derived from international sales may vary.
Risks inherent in conducting business internationally include:
. failure by us and/or third parties to develop localized content and
applications that are used with our products;
. fluctuations in currency exchange rates;
. problems caused by the ongoing conversion of various European currencies
into a single currency, the Euro;
. any imposition of currency exchange controls;
. unexpected changes in regulatory requirements applicable to the Internet
or our business;
. difficulties and costs of staffing and managing international
operations;
. differing technology standards;
. export restrictions on encryption and other technologies;
. difficulties in collecting accounts receivable and longer collection
periods;
. seasonable variations in customer buying patterns or electronic
messaging usage;
. political instability, acts of terrorism or war;
. economic downturns;
. potentially adverse tax consequences;
29
. reduced protection for intellectual property rights in certain
countries;
. costs of localizing our products for foreign markets;
. contractual provisions governed by foreign laws; and
. the burden of complying with complex and changing regulatory
requirements.
Any of these factors could harm our international operations and, consequently,
our business, financial condition and operating results.
The security provided by our messaging products could be breached, in which
case our reputation, business, financial condition and operating results could
suffer.
The occurrence or perception of security breaches could harm our business,
financial condition and operating results. A fundamental requirement for online
communications is the secure transmission of confidential information over the
Internet. Third parties may attempt to breach the security provided by our
messaging products, or the security of our customers' internal systems. If they
are successful, they could obtain confidential information about our customers'
end users, including their passwords, financial account information, credit
card numbers or other personal information. Our customers or their end users
may file suits against us for any breach in security. Even if we are not held
liable, a security breach could harm our reputation, and even the perception of
security risks, whether or not valid, could inhibit market acceptance of our
products. Despite our implementation of security measures, our software is
vulnerable to computer viruses, electronic break-ins, intentional overloading
of servers and other sabotage, and similar disruptions, which could lead to
interruptions, delays, or loss of data. We may be required to expend
significant capital and other resources to license encryption or other
technologies to protect against security breaches or to alleviate problems
caused by these breaches. In addition, our customers might decide to stop using
our software if their end users experience security breaches.
Future governmental regulation of the Internet could limit our ability to
conduct our business.
Although there are currently few laws and regulations directly applicable to
the Internet and commercial messaging, a number of laws have been proposed
involving the Internet, including laws addressing user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. Further, the growth and development of the market for
online messaging may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies, including us, that
conduct business online. The adoption of any additional laws or regulations may
impair the growth of the Internet or commercial online services, which would
decrease the demand for our services and could increase our cost of doing
business or otherwise harm our business, financial condition and operating
results. Moreover, the applicability of existing laws governing property
ownership, sales and other taxes, libel and personal privacy to the Internet is
uncertain and may take years to resolve.
Our stock price, like that of many companies in the Internet and
telecommunications software industries, may be volatile.
Our stock price has experienced significant volatility. We expect that the
market price of our common stock also will fluctuate in the future as a result
of variations in our operating results. These fluctuations may be exaggerated
if the trading volume of our common stock is low. In addition, due to the
technology-intensive and emerging nature of our business, the market price of
our common stock may rise and fall in response to:
. announcements or technological or competitive developments;
30
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant customer or order;
. changes in estimates or our financial performance or changes in
recommendations by securities analysts; or
. changes in financial performance of competitors and other companies in
our industry.
Our stock price may be volatile, exposing us to expensive and time-consuming
securities class action litigation.
The stock market in general, and the stock prices of Internet-related
companies in particular, have recently experienced extreme volatility, which
has often been unrelated to the operating performance of any particular
company or companies. If market or industry-based fluctuations continue, our
stock price could decline below current levels regardless of our actual
operating performance. Furthermore, the historical trading volume of our stock
is not indicative of any future trading volume because a substantial portion
of shares were not eligible for sale until recently. Therefore, if a larger
number of shares of our stock are sold in a short period of time, our stock
price will decline. In the past, securities class action litigation has often
been brought against companies following periods of volatility in their stock
prices. We may in the future be the targets of similar litigation. Securities
litigation could result in substantial costs and divert management's time and
resources, which could harm our business, financial condition and operating
results.
Item7A. Quantitative and Qualitative Disclosures About Market Risk
The tables below provide information about the Company's derivative financial
instruments and financial instruments that are subject to market risk. These
include a foreign currency forward contract used to hedge a foreign currency
deposit, which is subject to exchange rate risk, cash equivalents and
available-for-sale short-term investments, which are subject to interest rate
risk.
The Company manages its foreign currency exchange rate risk by entering into
contracts to sell or buy foreign currency at the time a foreign currency
receivable or payable is generated. When the foreign currency asset or
liability is extinguished, the contract is liquidated, and the resulting gain
or loss on the contract mitigates the exchange rate risk of the associated
asset or liability.
The following summarized the Company's foreign currency forward contract,
which matures in 2002, by currency, as of June 30, 2001. (in thousands):
Contract Fair
Amount Value at
(Local Contract June 30,
Currency) Amount 2001 (US$)
----------- -------- ----------
Japanese yen ("YEN") (contract to pay
Yen/receive US$)............................. (YEN)82,100 US$708 $27
Contract amounts are representative of the expected payments to be made under
these instruments through earnings. Derivatives or portions of derivatives
that are not designated as hedging instruments are adjusted to fair value
through earnings and are recognized in the period of change in their fair
value.
We operate internationally and thus are exposed to potentially adverse
movements in foreign currency rate changes. We have entered into foreign
exchange forward contracts to reduce our exposure to foreign currency rate
changes on receivables, payables and intercompany balances denominated in a
non-functional currency. The objective of these contracts is to neutralize the
impact of foreign currency exchange rate movements on our operating results.
These
31
contracts require us to exchange currencies at rates agreed upon at the
inception of the contracts. These contracts reduce the exposure to fluctuations
in exchange rate movements because the gains and losses associated with foreign
currency balances and transactions are generally offset with the gains and
losses of the foreign exchange forward contracts. Because the impact of
movements in currency exchange rates on forward contracts offsets the related
impact on the underlying items being hedged, these financial instruments help
alleviate the risk that might otherwise result from changes in currency
exchange rates. We do not designate our foreign exchange forward contracts as
hedges and, accordingly, we adjust these instruments to fair value through
earnings in the period of change in their fair value.
The following is a chart of the principal amounts of short-term investments,
long-term investments, and restricted investments by expected maturity:
Period ended June 30, 2001 Fair
Expected maturity date Value
--------------------------------- June 30,
2002 2003 2004 2005 2006 Total 2001
-------- ------- -------- -------- ------- -------- --------
Corporate bonds......... $102,349 $21,337 -- -- -- $123,686 $123,700
Commercial paper........ 70,239 -- -- -- -- 70,239 70,253
Certificates of
deposit................ 6,002 -- -- -- -- 6,002 6,000
Federal agencies........ 21,687 -- -- -- -- 21,687 21,733
-------- ------- -------- -------- ------- -------- --------
Total................. $200,277 $21,337 -- -- -- $221,614 $221,686
======== ======= ======== ======== ======= ======== ========
Weighted-average
interest rate...... 4.89% 4.89%
======== ========
Our exposure to market risks for changes in interest rates relates primarily to
corporate debt securities, U.S. Treasury Notes and certificates of deposit. We
place our investments with high credit quality issuers that have a rating by
Moody's of A1 or higher and Standard & Poors of P-1 or higher, and, by policy,
limit the amount of the credit exposure to any one issuer.
Our general policy is to limit the risk of principal loss and ensure the safety
of invested funds by limiting market and credit risk. All highly liquid
investments with a maturity of less than three months at the date of purchase
are considered to be cash equivalents; all investments with maturities of three
months or greater are classified as available-for-sale and considered to be
short-term investments; all investments with maturities of greater than one
year and less than two years are classified as available-for-sale and
considered to be long-term investments. We do not purchase investments with a
maturity date greater than two years from the date of purchase.
Item 8. Financial Statements and Supplementary Data
See Part IV, Item 14 of this report.
Item 9. Changes in Disagreements with Accountants on Accounting and Financial
Disclosure
Not Applicable.
32
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the information regarding Directors and Executive Officers
appearing under the captions "Election of Directors", "Management--Executive
Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement related to the Annual Meeting of Shareholders to be
held on November 30, 2001, which information is incorporated herein by
reference.
Item 11. Executive Compensation
The information appearing under the caption "Compensation of Executive
Officers" in the Company's Proxy Statement related to the Annual Meeting of
Shareholders to be held on November 30, 2001, is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information appearing under the caption "Common Stock Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement related to
the Annual Meeting of Shareholders to be held on November 30, 2001, is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information appearing under the caption "Transactions with Management and
Directors" in the Company's Proxy Statement related to the Annual Meeting of
Shareholders to be held on November 30, 2001, is incorporated herein by
reference.
33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements and Report of KPMG LLP, which are
set forth in the Index to Consolidated Financial Statements at page F-1.
(2) Financial Statement Schedule, which is set forth in the Index to
Consolidated Financial Statements at F-1.
(3) Exhibits.
Exhibit
Number Description
------- -----------
2.1 Agreement to Amend Agreement and Plan of Merger dated as of October 5,
2000, by and among the Company, Silver Merger Sub Inc. and
Software.com, Inc.
2.2 Agreement and Plan of Merger dated as of August 8, 2000, by and among
the Company, Silver Merger Sub Inc. and Software.com, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's current
report on Form 8-K dated August 17, 2000).
2.3 Agreement and Plan of Merger, dated as of February 13, 2000, by and
among the Company, Onyx Acquisition Corp., Onebox.com, Inc. and
Timothy Haley as agent of the former stockholders of Onebox.com, Inc.
(incorporated by reference to Exhibit 2.1 to the Company's current
report on Form 8-K dated May 15, 2000).
2.4 Sale and Purchase Agreement dated February 8, 2000, by and among the
Company, Paragon Software (Holdings) Limited and the several vendors
named therein (incorporated by reference to Exhibit 2.1 to the
Company's current report on Form 8-K dated March 17, 2000).
2.5 Separation Agreement, dated August 1, 2000 by and among the Company,
Phone.com (Newbury) Limited, Colin Calder and The Stanley Trustee
Company Limited (incorporated by reference to Exhibit 2.4 to the
Company's annual report on Form 10-K filed on August 31, 2000).
2.6 Agreement and Plan of Merger and Reorganization, dated as of December
21, 1999, by and among the Company, Mercedes Acquisition Corp.,
AtMotion Inc. and Dixon R. Doll as agent of the former shareholders of
AtMotion Inc. (incorporated by reference to Exhibit 2.1 to the
Company's current report on Form 8-K dated February 24, 2000).
2.7 Agreement dated October 11, 1999, between the Company and each of the
shareholders of APiON (incorporated by reference to Exhibit 2.1 to the
Company's current report on Form 8-K dated November 3, 1999).
2.8 Supplemental Agreement dated October 26, 1999, between the Company and
each of the shareholders of APiON (incorporated by reference to
Exhibit 2.2 to the Company's current report on Form 8-K dated November
3, 1999).
3.1 Certificate of Incorporation of the Company, as amended.
3.2 Amended and Restated Bylaws of the Company.
4.1 Form of the Company's Common Stock Certificate, as amended.
4.2 Rights Agreement dated August 8, 2000, by and between the Company and
U.S. Stock Transfer Corporation, as Rights Agent, including the form
of Certificate of Designation, Preferences and Rights as Exhibit A,
the form of Rights Certificates as Exhibit B, and the Summary of
Rights as Exhibit C (incorporated by reference to Exhibit 1 to the
Company's registration statement on Form 8-A(12)(B) filed on August
17, 2000).
34
Exhibit
Number Description
------- -----------
10.1 Openwave Systems Inc. 2001 Stock Compensation Plan (incorporated by
reference to Exhibit 99.1 to Form S-8 filed on August 9, 2001).
10.2 Openwave Systems Inc. 1996 Stock Plan (incorporated by reference to
Exhibit 10.2 of the Company's quarterly report on Form 10-Q filed on
May 15, 2001).
10.3 Openwave Systems Inc. 1995 Stock Plan (incorporated by reference to
Exhibit 10.1 of the Company's quarterly report on Form 10-Q filed on
May 15, 2001).
10.4 Software.com, Inc. 1999 Employee Stock Purchase Plan and form of
subscription agreement (incorporated by reference to Exhibit 10.2 of
the Company's quarterly report on Form 10-Q/A filed on February 15,
2001).
10.5 Openwave Systems Inc. 1999 Employee Stock Purchase Plan and form of
subscription agreement.
10.6 1999 Directors' Stock Option Plan and form of stock option
agreement.
10.7* Fourth Amended and Restated Investor Rights Agreement dated March
12, 1999.
10.8* Voting Agreement dated January 23, 1998 and amendment thereto.
10.9 Lease Agreement dated February 4, 2000 for offices at 1400 Seaport
Boulevard in Pacific Shores Complex, Redwood City, California, by
and between the Company and Pacific Shores Center LLC. (incorporated
by reference to Exhibit 10.19 to the Company's quarterly report on
Form 10-Q filed on May 15, 2000).
10.10 First Amendment to Lease Agreement dated June 17, 1999 for offices
at 800 Chesapeake Drive, Redwood City, California, by and between
the Company and Seaport Centre Associates, LLC. (incorporated by
reference to Exhibit 10.18 of Registrant's annual report on Form 10-
K filed on August 31, 2000).
10.11 Lease Agreement dated January 21, 2000 for offices at 101 Saginaw
and 595 Penobscot, Redwood City, California, by and between the
Company and Metropolitan Life Insurance Company (incorporated by
reference to Exhibit 10.18 of Registant's annual report on Form 10-K
filed on August 31, 2000).
10.12 Lease Agreement dated March 10, 1998 for offices at 800 Chesapeake
Drive, Redwood City, California, by and between the Company and
Seaport Centre Associates, LLC (incorporated by reference to Exhibit
10.8 of Registrant's Annual Report on Form 10-K filed on August 31,
2000).
10.13*+ OEM Master License Agreement dated December 2, 1996 by and between
the Company and RSA Data Security.
10.14*+ Software License and Support Agreement dated May 1, 1996 by and
between the Company and AT&T Wireless Services, Inc.
10.15*+ Client License Agreement dated January 1, 1999 by and between the
Company and Matsushita Communication Industrial Co., Ltd.
10.16 Form of Indemnity Agreement for Officers and Directors.
10.17* Form of Change of Control Severance Agreement between the Company
and the Company's Named Executive Officers.
10.18 Employment Agreement dated September 18, 2000 by and between the
Company and Donald Listwin.
10.19 Form of Restricted Stock Agreement by and between the Company and
Donald Listwin (incorporated by reference to Exhibit 10.2 of the
Company's quarterly report on Form 10-Q/A filed on February 15,
2001).
10.20 Form of Phone.com Stock Option Agreement for Donald Listwin
(incorporated by reference to Exhibit 10.4 of the Company's
quarterly report on Form 10-Q/A filed on February 15, 2001).
35
Exhibit
Number Description
------- -----------
10.21 Form of Software.com Stock Option Agreement for John MacFarlane
(incorporated by reference to Exhibit 10.3 of the Company's quarterly
report on Form 10-Q/A filed on February 15, 2001).
10.22 Letter Amendment to Employment Agreement dated July 26, 2001 by and
between the Company and Michael Mulica.
10.23 Letter Amendment to Employment Agreement dated July 24, 2000 by and
between the Company and Michael Mulica (incorporated by reference to
Exhibit 10.20 to the Company's annual report on Form 10-K filed on
August 31, 2000).
10.24 Employment Agreement dated October 4, 1999 by and between the Company
and Michael Mulica (incorporated by reference to Exhibit 10.19 to the
Company's annual report on Form 10-K filed on August 31, 2000).
10.25 Offer Letter dated December 19, 2000 by and between the Company and
Allen Snyder.
10.26 Offer Letter dated August 25, 2001 by and between the Company and
Kevin Kennedy.
10.27 Promissory Note dated August 6, 2001 by and between the Company and
Michael Mulica.
10.28 Promissory note dated August 20, 2001 by and between the Company and
Alan Black.
10.29 Promissory note dated September 27, 2001 by and between the Company
and Kevin Kennedy.
10.30* Incentive Compensation Plan for Maurice Jeffery dated January 27,
1999.
10.31* Incentive Compensation Plan for Malcolm Bird dated January 27, 1999.
10.32* Letter Agreement dated August 18, 1997 with Malcolm Bird.
21 Subsidiaries of the Company.
23.1 Report on Financial Statement Schedule and Consent of Independent
Auditors.
23.2 Report on Financial Statement Schedule and Consent of Independent
Auditors.
24.1 Power of Attorney (see page 37).
- --------
* Incorporated herein by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (Commission File No. 333-75219).
+ Confidential treatment has been granted by the Securities and Exchange
Commission with respect to certain information in these exhibits.
(b) Reports on Form 8-K
1. On June 11, the Company filed a current report on Form 8-K to report that
Alain Rossman had resigned his position as Chairman of the Board of
Directors and a member of the Board of Directors and that Donald Liswin had
been elected Chairman of the Board of Directors.
2. On July 2, 2001, the Company filed a current report on Form 8-K to provide
certain financial information required in connection with its acquisition of
Avogadro, Inc.
3. On July 16, 2001, the Company filed a current report on Form 8-K to report
that it had consummated its acquistion of Avogadro, Inc.
4. On August 2, 2001, the Company filed a current report on Form 8-K to report
that it had offered its employees the ability to exchange options for new
options under a stock option exchange program.
5. On September 12, 2001, the Company filed a current report on Form 8-K to
report that it had extended the stock option exchange program offered to
employees until September 17, 2001.
6. On September 17, 2001, the Company filed a current report on Form 8-K to
report a stock repurchase program.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: September 28, 2001
Openwave Systems Inc.
/s/ Alan Black
By:__________________________________
Alan Black
Senior Vice President, Corporate
Affairs
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Donald Listwin and Alan Black, jointly and
severally, his or her attorneys-in-fact, each with the power of substitution,
for him or her in any and all capacities, to sign any amendments to this Report
on Form 10-K, and to file the same, with exhibits thereto and other documents
in connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his or her
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
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Donald Listwin Chairman, President and September 28, 2001
____________________________________ Chief Executive Officer
Donald Listwin (Principal Executive
Officer)
/s/ Alan Black Senior Vice President, September 28, 2001
____________________________________ Corporate Affairs, and
Alan Black Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ John MacFarlane Chief Technology Officer and September 28, 2001
____________________________________ Director
John MacFarlane
/s/ Roger Evans Director September 28, 2001
____________________________________
Roger Evans
/s/ Bernard Puckett Director September 28, 2001
____________________________________
Bernard Puckett
/s/ Andrew Verhalen Director September 28, 2001
____________________________________
Andrew Verhalen
37
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SCHEDULE
Page
----
Report of KPMG LLP, independent auditors................................. F-2
Report of Ernst & Young LLP independent auditors'........................ F-3
Consolidated Balance Sheets as of June 30, 2001 and 2000................. F-4
Consolidated Statements of Operations for the years ended June 30, 2001,
2000 and 1999........................................................... F-5
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
for the years ended June 30, 1999, 2000 and 2001........................ F-6
Consolidated Statements of Cash Flows for the years ended June 30, 2001,
2000 and 1999........................................................... F-9
Notes to Consolidated Financial Statements............................... F-11
Schedule II--Valuation and Qualifying Accounts........................... S-1
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Openwave Systems Inc.
We have audited the accompanying consolidated balance sheets of Openwave
Systems Inc. (formerly Phone.com, Inc.) and subsidiaries (the Company), as of
June 30, 2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and comprehensive loss, and cash flows for each of the
years in the three-year period ended June 30, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the consolidated financial
statements of Software.com, Inc., for the year ended June 30, 1999, which
statements reflect total revenues constituting 78% of the related consolidated
totals for the year ended June 30, 1999. As discussed in Note 1, the Company
merged with Software.com, Inc. in a business combination that was accounted for
as a pooling-of-interests. Those separate financial statements prior to these
restatement for the pooling-of-interests transaction with the Company were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to amounts included for Software.com, Inc. for
the year ended June 30, 1999, is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, based on our audits and the report of the other auditors, the
consolidated financial statements referred to in the first paragraph present
fairly, in all material respects, the financial position of Openwave Systems
Inc. and subsidiaries, as of June 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Mountain View, California
July 23, 2001, except as to Note 11, which is
as of September 25, 2001
F-2
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders of Software.com, Inc.
We have audited Software.com, Inc. the supplemental consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the year ended
December 31, 1999 (not separately presented herein). The supplemental
consolidated statements of operations, shareholders' equity (deficit) and cash
flows give retroactive effect to the merger of Software.com, Inc. and
AtMobile.com, Inc. (AtMobile) on April 11, 2000, which has been accounted for
using the pooling-of-interests method as described in the notes to the
supplemental consolidated financial statements. Our audit also included in the
1999 Software.com, Inc. financial statement schedule (note separately presented
herein).These supplemental financial statements and schedule are the
responsibility of the management of Software.com, Inc. Our responsibility is to
express an opinion on these supplemental financial statements and schedule
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the supplemental financial statements of Software.com, Inc.
referred to above present fairly, in all material respects, the consolidated
results of its operations and its cash flows for the year ended December 31,
1999, after giving retroactive effect to the merger of AtMobile, as described
in the notes to the supplemental consolidated financial statements, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related supplemental financial statement schedule,
when considered in relation to the basic supplemental financial statements
taken as a whole presents fairly in all material respects the information set
forth therein.
/s/ Ernst & Young LLP
Woodland Hills, California
July 12, 2000
F-3
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
June 30,
-----------------------
2001 2000
----------- ----------
ASSETS
------
Current assets:
Cash and cash equivalents........................... $ 161,987 $ 120,585
Short-term investments.............................. 186,506 402,422
Accounts receivable, net............................ 153,701 77,385
Prepaid and other current assets.................... 14,364 11,499
----------- ----------
Total current assets.............................. 516,558 611,891
Property and equipment, net........................... 98,582 34,824
Long-term and restricted cash and investments......... 41,873 20,700
Deposits and other assets............................. 11,774 5,880
Goodwill and other intangible assets, net............. 1,056,928 1,687,930
----------- ----------
$ 1,725,715 $2,361,225
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portions of capital lease obligations and
long-term debt..................................... $ 1,776 $ 3,367
Accounts payable.................................... 20,600 14,176
Accrued liabilities................................. 54,370 50,124
Deferred revenue.................................... 90,262 97,863
----------- ----------
Total current liabilities......................... 167,008 165,530
Capital lease obligations and long-term debt, less
current portion...................................... 754 3,319
----------- ----------
Total liabilities................................. 167,762 168,849
----------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value; 1,000,000 and
491,575 shares authorized as of June 30, 2001 and
2000, respectively; 170,073 and 161,269 issued and
outstanding as of June 30, 2001 and 2000,
respectively....................................... 170 161
Additional paid-in capital.......................... 2,623,466 2,569,416
Deferred stock-based compensation................... (6,079) (7,237)
Accumulated other comprehensive loss................ (247) (561)
Notes receivable from stockholders.................. (684) (724)
Accumulated deficit................................. (1,058,673) (368,679)
----------- ----------
Total stockholders' equity........................ 1,557,953 2,192,376
----------- ----------
$ 1,725,715 $2,361,225
=========== ==========
See accompanying notes to consolidated financial statements.
F-4
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years ended June 30,
-------------------------------
2001 2000 1999
---------- --------- --------
Revenues:
License..................................... $ 344,990 $ 93,126 $ 32,076
Maintenance and support services............ 60,264 25,835 13,507
Professional services....................... 60,004 27,447 14,800
---------- --------- --------
Total revenues............................ 465,258 146,408 60,383
---------- --------- --------
Cost of revenues:
License..................................... 21,945 6,742 3,046
Maintenance and support services............ 28,875 14,889 5,797
Professional services....................... 36,950 16,971 8,685
---------- --------- --------
Total cost of revenues.................... 87,770 38,602 17,528
---------- --------- --------
Gross profit.............................. 377,488 107,806 42,855
---------- --------- --------
Operating expenses:
Research and development.................... 135,768 59,889 28,934
Sales and marketing......................... 148,811 68,421 33,597
General and administrative.................. 59,320 24,061 12,099
Stock-based compensation.................... 10,223 10,184 2,236
Amortization of goodwill and other
intangible assets.......................... 636,282 216,614 329
In-process research and development......... -- 27,700 3,210
Merger, acquisition and integration-related
costs...................................... 88,850 10,395 --
---------- --------- --------
Total operating expenses.................. 1,079,254 417,264 80,405
---------- --------- --------
Operating loss............................ (701,766) (309,458) (37,550)
Interest and other, net....................... 24,760 23,220 2,829
---------- --------- --------
Loss before income taxes.................. (677,006) (286,238) (34,721)
Income taxes.................................. (12,988) (2,019) (2,316)
---------- --------- --------
Net loss.................................. (689,994) (288,257) (37,037)
Accretion on redeemable convertible preferred
stock........................................ -- -- (403)
---------- --------- --------
Net loss attributable to common
stockholders............................. $ (689,994) $(288,257) $(37,440)
========== ========= ========
Basic and diluted net loss per share
attributable to common stockholders.......... $ (4.17) $ (2.06) $ (0.52)
========== ========= ========
Shares used in computing basic and diluted net
loss per share attributable to common
stockholders................................. 165,426 139,921 71,514
========== ========= ========
See accompanying notes to consolidated financial statements.
F-5
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Year ended June 30, 1999
(In thousands)
Convertible
preferred Accumulated Notes
stock Common stock Additional Deferred other receivable
--------------- --------------- paid-in stock-based Treasury comprehensive from Accumulated
Shares Amount Shares Amount capital compensation stock income (loss) stockholders deficit
------- ------ ------- ------ ---------- ------------ -------- ------------- ------------ -----------
Balances as of
June 30, 1998.... 38,755 $ 39 59,201 $ 59 $ 69,901 $(3,054) $ -- $ -- $ (197) $(51,424)
Repurchase of
common stock..... -- -- (266) -- -- -- (124) -- 124 --
Issuance of
common stock .... -- -- 3,103 3 14,700 -- 124 -- (422) --
Issuance of
convertible
preferred stock,
net of issuance
costs............ 9,656 9 -- -- 34,395 -- -- -- -- --
Issuance of
warrants......... -- -- -- -- 94 -- -- -- -- --
Conversion of
convertible
preferred stock
into common stock
in connection
with initial
public
offerings........ (45,109) (45) 45,109 45 -- -- -- -- -- --
Issuance of
common stock in
initial public
offerings, net of
offering costs of
$8,774........... -- -- 17,253 18 134,558 -- -- -- -- --
Conversion of
redeemable
convertible
preferred stock.. -- -- 5,437 5 13,835 -- -- -- -- --
Accretion of
redeemable
convertible
preferred stock
redemption
premium.......... -- -- -- -- -- -- -- -- -- (403)
Exercise of
warrants......... -- -- 1,213 1 (1) -- -- -- -- --
Capital
contribution..... -- -- -- -- 12 -- -- -- -- --
Repayment of
notes receivable
from
stockholders..... -- -- -- -- -- -- -- -- 11 --
Deferred
compensation
related to stock
option grants.... -- -- -- -- 1,313 (1,313) -- -- -- --
Amortization of
deferred stock-
based
compensation..... -- -- -- -- -- 2,111 -- -- -- --
Nonemployee
stock-based
compensation..... -- -- -- -- 125 -- -- -- -- --
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- -- -- (37,037)
Unrealized loss
on marketable
securities...... -- -- -- -- -- -- -- (6) -- --
Total
comprehensive
loss............
------- ---- ------- ---- -------- ------- ----- ----- ------ --------
Balances as of
June 30, 1999.... 3,302 $ 3 131,050 $131 $268,932 $(2,256) $ -- $ (6) $ (484) $(88,864)
Total
stockholders' Comprehensive
equity loss
------------- -------------
Balances as of
June 30, 1998.... $ 15,324
Repurchase of
common stock..... --
Issuance of
common stock .... 14,405
Issuance of
convertible
preferred stock,
net of issuance
costs............ 34,404
Issuance of
warrants......... 94
Conversion of
convertible
preferred stock
into common stock
in connection
with initial
public
offerings........ --
Issuance of
common stock in
initial public
offerings, net of
offering costs of
$8,774........... 134,576
Conversion of
redeemable
convertible
preferred stock.. 13,840
Accretion of
redeemable
convertible
preferred stock
redemption
premium.......... (403)
Exercise of
warrants......... --
Capital
contribution..... 12
Repayment of
notes receivable
from
stockholders..... 11
Deferred
compensation
related to stock
option grants.... --
Amortization of
deferred stock-
based
compensation..... 2,111
Nonemployee
stock-based
compensation..... 125
Comprehensive
loss:
Net loss........ (37,037) $(37,037)
Unrealized loss
on marketable
securities...... (6) (6)
-------------
Total
comprehensive
loss............ $(37,043)
------------- =============
Balances as of
June 30, 1999.... $177,456
See accompanying notes to consolidated financial statements.
F-6
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS--
(CONTINUED)
Year ended June 30, 2000
(In thousands)
Convertible
preferred Accumulated Notes
stock Common stock Additional Deferred other receivable
-------------- --------------- paid-in stock-based Treasury comprehensive from Accumulated
Shares Amount Shares Amount capital compensation stock income (loss) stockholders deficit
------ ------ ------- ------ ---------- ------------ -------- ------------- ------------ -----------
Issuance of common
stock in secondary
public offering,
net of offering
costs of $20,345.. -- $ -- 3,041 $ 3 $ 390,258 $ -- $ -- $ -- $ -- $ --
Issuance of common
stock and
assumption of
stock options and
notes receivable
from stockholders
in acquisitions... -- -- 15,549 16 1,870,043 -- -- -- (475) --
Deferred stock
compensation
related to
acquisitions...... -- -- 26 -- 7,982 (7,982) -- -- -- --
Issuance of
preferred stock... 2,319 2 -- -- 21,173 -- -- -- -- --
Conversion of
preferred stock
into common stock
................... (4,435) (4) 4,435 4 -- -- -- -- -- --
Issuance of
warrants.......... -- -- -- -- 94 -- -- -- -- --
Exercise of
warrants.......... -- -- 1,271 1 2 -- -- -- -- --
Repayment of notes
receivable from
stockholders...... -- -- -- -- -- -- -- -- 235 --
Issuance of common
stock............. -- -- 8,172 8 20,139 -- -- -- -- --
Deferred
compensation
related to stock
option grants..... -- -- -- -- 2,823 (2,823) -- -- -- --
Amortization of
deferred stock-
based
compensation...... -- -- -- -- -- 6,413 -- -- -- --
Non-employee stock
based
compensation...... -- -- 3 -- 3,771 -- -- -- -- --
Comprehensive
loss:
Net loss......... -- -- -- -- -- -- -- -- -- (288,257)
Foreign currency
translation
adjustments...... -- -- -- -- -- -- -- (172) -- --
Unrealized loss
on marketable
securities....... -- -- -- -- -- -- -- (383) -- --
Impact of
conforming year
end of
Software.com..... (1,186) (1) (2,278) (2) (15,801) (589) -- -- -- 8,442
Total
comprehensive
loss............
------ ----- ------- ---- ---------- ------- ----- ----- ----- ---------
Balances as of
June 30, 2000..... -- $ -- 161,269 $161 $2,569,416 $(7,237) $ -- $(561) $(724) $(368,679)
Total
stockholders' Comprehensive
equity loss
------------- -------------
Issuance of common
stock in secondary
public offering,
net of offering
costs of $20,345.. $ 390,261
Issuance of common
stock and
assumption of
stock options and
notes receivable
from stockholders
in acquisitions... 1,869,584
Deferred stock
compensation
related to
acquisitions...... --
Issuance of
preferred stock... 21,175
Conversion of
preferred stock
into common stock
................... --
Issuance of
warrants.......... 94
Exercise of
warrants.......... 3
Repayment of notes
receivable from
stockholders...... 235
Issuance of common
stock............. 20,147
Deferred
compensation
related to stock
option grants..... --
Amortization of
deferred stock-
based
compensation...... 6,413
Non-employee stock
based
compensation...... 3,771
Comprehensive
loss:
Net loss......... (288,257) $(288,257)
Foreign currency
translation
adjustments...... (172) (172)
Unrealized loss
on marketable
securities....... (383) (383)
Impact of
conforming year
end of
Software.com..... (7,951) 8,442
-------------
Total
comprehensive
loss............ $(280,370)
------------- =============
Balances as of
June 30, 2000..... $2,192,376
See accompanying notes to consolidated financial statements.
F-7
OPENWAVE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS--
(CONTINUED)
Year ended June 30, 2001
(In thousands)
Convertible
preferred Accumulated Notes
stock Common stock Additional Deferred other receivable
------------- -------------- paid-in stock-based Treasury comprehensive from Accumulated
Shares Amount Shares Amount capital compensation stock loss stockholders deficit
------ ------ ------- ------ ---------- ------------ -------- ------------- ------------ -----------
Issuance of
common stock and
assumption of
stock option..... -- $ -- 8,604 $ 9 $ 46,785 $ -- $ -- $ -- $(367) $ --
Repayment of note
receivable from
stockholders..... -- -- -- -- -- -- -- -- 407 --
Non employee
stock-based
compensation..... -- -- -- -- 1,983 -- -- -- -- --
Stock-based
compensation
related to
issuance of stock
and stock option
grants........... -- -- 200 -- 7,830 (5,408) -- -- -- --
Amortization of
stock-based
compensation..... -- -- -- -- -- 6,566 -- -- -- --
Acquisition
consideration
settled in cash.. -- -- -- -- (2,548) -- -- -- -- --
Comprehensive
loss:
Net loss......... -- -- -- -- -- -- -- (689,994)
Foreign currency
translation
adjustments...... -- -- -- -- -- -- -- (151) -- --
Unrealized gain
on marketable
securities....... -- -- -- -- -- -- -- 465 -- --
Total
comprehensive
loss............ -- -- -- -- -- -- -- -- -- --
--- ---- ------- ---- ---------- ------- ----- ----- ----- -----------
Balances as of
June 30, 2001..... -- $ -- 170,073 $170 $2,623,466 $(6,079) $ -- $(247) $(684) $(1,058,673)
=== ==== ======= ==== ========== ======= ===== ===== ===== ===========
Total
stockholders' Comprehensive
equity loss
------------- -------------
Issuance of
common stock and
assumption of
stock option..... $ 46,427
Repayment of note
receivable from
stockholders..... 407
Non employee
stock-based
compensation..... 1,983
Stock-based
compensation
related to
issuance of stock
and stock option
grants........... 2,422
Amortization of
stock-based
compensation..... 6,566
Acquisition
consideration
settled in cash.. (2,548)
Comprehensive
loss:
Net loss......... (689,994) $(689,994)
Foreign currency
translation
adjustments...... (151) (151)
Unrealized gain
on marketable
securities....... 465 465
-------------
Total
comprehensive
loss............ -- $ 689,680)
------------- =============
Balances as of
June 30, 2001..... $1,557,953
=============
See accompanying notes to consolidated financial statements.
F-8
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended June 30,
------------------------------
2001 2000 1999
--------- --------- --------
Cash flows from operating activities:
Net loss..................................... $(689,994) $(288,257) $(37,037)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization.............. 657,161 225,425 3,922
Amortization of deferred stock-based
compensation.............................. 6,566 6,413 2,111
Employee stock-based compensation.......... 2,422 -- --
Nonemployee stock-based compensation....... 1,983 3,771 125
Acquisition consideration settled in cash.. (2,548) -- --
Loss on sale of assets..................... 2,195 10 10
Accrued interest on convertible notes...... -- 26 --
Write-down of non-marketable securities.... 1,000 -- --
Provision for doubtful accounts............ 8,279 1,907 790
In-process research and development........ -- 27,700 3,210
Changes in operating assets and
liabilities:
Accounts receivable...................... (84,595) (41,832) (32,219)
Prepaid expenses and other assets........ 237 (6,354) (2,148)
Accounts payable......................... 6,424 (2,423) 3,309
Accrued liabilities...................... 24,357 11,535 7,578
Deferred revenue......................... (10,795) 53,824 36,483
--------- --------- --------
Net cash used for operating
activities............................ (77,308) (8,255) (13,866)
--------- --------- --------
Cash flows from investing activities:
Purchases of property and equipment, net..... (87,488) (28,374) (5,839)
Restricted cash and investments.............. -- (20,700) --
Investment in non-marketable equity
securities.................................. (6,326) -- --
Purchases of short-term investments.......... (416,469) (622,538) (84,877)
Proceeds from maturities of short-term
investments................................. 633,014 255,988 47,129
Acquisitions, net of cash acquired........... (25,211) (32,694) (1,601)
Purchases of long-term investments........... (21,337) -- --
Other assets................................. -- (386) (190)
--------- --------- --------
Net cash provided by (used for)
investing activities.................. 76,183 (448,704) (45,378)
--------- --------- --------
Cash flows from financing activities:
Net proceeds from issuance of convertible
preferred stock............................. -- 15,783 29,979
Net proceeds from issuance of common stock... 46,427 410,411 138,981
Repayment of notes receivable from
stockholders................................ 407 235 11
Repayments of note payable to bank, net...... -- (546) (7,554)
Proceeds from long-term debt................. -- 5,000 7,613
Repayments of capital lease obligations and
long-term debt.............................. (4,156) (3,189) (1,747)
--------- --------- --------
Net cash provided by financing
activities............................ 42,678 427,694 167,283
--------- --------- --------
See accompanying notes to supplemental consolidated financial statements.
F-9
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(In thousands)
Years ended June 30,
------------------------------
2001 2000 1999
-------- ---------- --------
Effect of exchange rate on cash and cash
equivalents.................................... $ (151) $ (172) $ --
-------- ---------- --------
Effect of conforming fiscal year ends........... -- 23,044 --
-------- ---------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 41,402 (6,393) 108,039
Cash and cash equivalents at beginning of year.. 120,585 126,978 18,939
-------- ---------- --------
Cash and cash equivalents at end of year........ $161,987 $ 120,585 $126,978
======== ========== ========
Supplemental disclosures of cash flow
information:
Cash paid for income taxes.................... $ 10,770 $ 2,019 $ 2,316
======== ========== ========
Cash paid for interest........................ $ 993 $ 1,033 $ 985
======== ========== ========
Noncash investing and financing activities:
Common stock issued to officers and employees
for notes receivable......................... $ 367 $ 475 $ 422
======== ========== ========
Repurchase of common stock in settlement of
notes receivable from stockholders........... $ -- $ -- $ 124
======== ========== ========
Deferred stock-based compensation............. $ 5,408 $ 10,805 $ 1,313
======== ========== ========
Conversion of convertible preferred stock into
common stock................................. $ -- $ 4 $ 45
======== ========== ========
Conversion of notes payable and accrued
interest into preferred stock................ $ -- $ 5,392 $ 4,426
======== ========== ========
Warrants issued in connection with borrowing
agreements................................... $ -- $ 94 $ 94
======== ========== ========
Deferred purchase price liabilities........... $ -- $ 20,788 $ --
======== ========== ========
Common stock issued and options assumed in
acquisitions................................. $ -- $1,870,059 $ 10,000
======== ========== ========
Accretion of redeemable convertible preferred
stock........................................ $ -- $ -- $ 403
======== ========== ========
Warrants received for revenue deferred........ $ 2,324 $ -- $ --
======== ========== ========
See accompanying notes to supplemental consolidated financial statements.
F-10
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001, 2000, and 1999
(1) Organization and Significant Accounting Policies
(a) Organization and Basis of Consolidation
Openwave Systems Inc., (formerly Phone.com, Inc.) (the Company), was
incorporated in Delaware in 1994 to develop and market software that enables
the delivery of Internet-based services to mass-market wireless telephones.
On November 17, 2000, a subsidiary of the Company merged with and into
Software.com, Inc. (Software.com). The Company concurrently changed its name to
Openwave Systems Inc. This merger was accounted for as a pooling-of-interests.
Accordingly, the financial information presented reflects the combined
financial positions and operations of the Company and Software.com for all
dates and periods presented (see Note 2).
In April 2000, Software.com merged with and into AtMobile, Inc. (AtMobile). In
April 1999, a subsidiary of Software.com merged with and into Mobility.Net,
Inc. (Mobility.Net). These mergers were accounted for as pooling-of-interests.
Accordingly, the financial information presented reflects the combined
financial positions and operations of the Company, Software.com, AtMobile, and
Mobility.Net for all dates and periods presented (see Note 2).
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(b) Revenue Recognition
The Company's primary revenue categories consist of applications, including
email and unified messaging products; infrastructure software, including Mobile
Access Gateway and Mobile Browser; and customer services, including maintenance
and support services and professional services. The Company licenses and
provides new version coverage for applications and infrastructure products
primarily to communication service providers through its direct sales force and
indirectly through its channel partners. The Company's license agreements for
such products do not provide for a right of return. Applications and
infrastructure products are licensed either under a perpetual license model or
under a monthly or quarterly time-based license model.
Cost of license revenues consist primarily of third-party license and support
fees. Cost of maintenance and support services revenues consist of compensation
and related overhead costs for personnel engaged in training and support
services to wireless device manufacturers. Cost of professional services
revenues consist of compensation and independent consultant costs for personnel
engaged in the professional services operations and related overhead costs.
The Company recognizes revenue in accordance with Statement of Position 97-2,
Software Revenue Recognition (SOP 97-2), as amended by SOP 98-9, and generally
recognizes revenue when all of the following criteria are met as set forth in
paragraph 8 of SOP 97-2: (1) Persuasive evidence of an arrangement exists, (2)
delivery has occurred, (3) the vendor's fee is fixed or determinable and (4)
collectibility is probable. The Company defines each of the four criteria above
as follows:
Persuasive evidence of an arrangement exists. It is the Company's customary
practice to have a written contract, which is signed by both the customer
and the Company, or a purchase order from those customers that have
previously negotiated a standard license arrangement, prior to recognizing
revenue on an arrangement.
F-11
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Delivery has occurred. The Company's software may be either physically or
electronically delivered to its customer. Delivery is deemed to have
occurred upon the earlier of notification by customer of acceptance or
commercial launch of the software product by the customer. If undelivered
products or services exist in an arrangement that are essential to the
functionality of the delivered product, delivery is not considered to have
occurred.
The vendor's fee is fixed or determinable. The fee the Company's
communication service provider customers pay for its products is negotiated
at the outset of an arrangement, and is generally based on the specific
volume of customer activations. The Company's license fees are not a
function of variable-pricing mechanisms such as the expected number of
users in an arrangement. The Company's customary payment terms are such
that a minimum of 80% of the arrangement fee is due within one year or
less. Arrangements with payment terms extending beyond the customary
payment terms are considered not to be fixed or determinable. Revenue from
such arrangements is recognized at the lesser of the aggregate of amounts
due and payable or the amount of the arrangement fee that would have been
recognized if the fees had been fixed or determinable.
Collectibility is Probable. Collectibility is assessed on a customer-by-
customer basis. The Company typically sells to customers for which there is
a history of successful collection. New customers are subjected to a credit
review process, which evaluates the customers' financial positions and
ultimately their ability to pay. If it is determined from the outset of an
arrangement that collectibility is not probable based upon the Company's
credit review process, revenue is recognized on a cash-collected basis.
The Company allocates revenue on software arrangements involving multiple
elements to each element based on the relative fair values of the elements. The
Company's determination of fair value of each element in multiple-element
arrangements is based on vendor-specific objective evidence (VSOE). The Company
limits its assessment of VSOE for each element to the price charged when the
same element is sold separately. The Company has analyzed all of the elements
included in its multiple-element arrangements and determined that it has
sufficient VSOE to allocate revenue to the new version coverage, maintenance
and support services and professional services components of its perpetual
license products. Accordingly, assuming all other revenue recognition criteria
are met, revenue from perpetual licenses is recognized upon delivery using the
residual method in accordance with SOP 98-9, and revenue from new version
coverage, maintenance and support services is recognized ratably over their
respective terms, usually one year new version coverage is included in license
revenues. The Company recognizes revenue from time-based licenses over the term
of the license period.
Certain of the Company's licenses include unspecified additional products.
Revenue from contracts with unspecified additional products is recognized
ratably over the contract term. The Company recognizes revenue from licenses
that include unspecified additional software products and sold with extended
payment terms that are not considered to be fixed and determinable in an amount
that is the lesser of amounts due and payable or the ratable portion of the
entire fee.
For arrangements under which licenses are purchased under a perpetual license
model and maintenance and support fees are due on an as-deployed basis, but
fees are not considered fixed and determinable, license fees are recognized
quarterly as incremental subscribers are activated to use the services that are
based on the Company's products. For similar arrangements under which fees are
considered fixed and determinable, the Company recognizes the residual license
amount after deferral of the fair value of maintenance and support for the
expected deployment period.
F-12
The Company licenses its Mobile Browser software to wireless device
manufacturers through its direct sales force. The Company recognizes revenues
from Mobile Browser arrangements ratably over the period during which the
services are performed, generally one year. The Company provides its wireless
device manufacturer customers with support associated with their efforts to
port its Mobile Browser software to their wireless devices, to correct software
errors and to make available new releases.
The Company provides integration services relating to the deployment of
products. The Company's professional services generally are not essential to
the functionality of the software. The Company's software products are fully
functional upon delivery and implementation and do not require any significant
modification or alteration. Customers typically purchase these professional
services to facilitate the adoption of the Company's technology and dedicate
personnel to participate in the services being performed, but they may also
decide to use their own resources or appoint other professional service
organizations to provide these services. Software products are billed
separately and independently from professional services, which are generally
billed on a time-and-materials or milestone-achieved basis. The Company
generally recognizes revenue from professional services as the services are
performed.
(c) Cash, Cash Equivalents and Investments
Cash and cash equivalents consist of cash and highly liquid investments with
remaining maturities of less than 90 days at the date of purchase with an
investment rating by Moody's of A1 or higher and Standard & Poors of P-1 or
higher. The Company is exposed to credit risk in the event of default by the
financial institutions or the issuers of these investments to the extent of the
amounts recorded on the balance sheet in excess of amounts that are insured by
the FDIC.
The Company classifies its investments in debt and marketable equity securities
as available-for-sale. Available-for-sale securities are carried at fair value
with unrealized gains and losses recorded in accumulated other comprehensive
income (loss) until realized. The Company uses the specific-identification
method in determining cost in calculating realized gains and losses. The
Company invests in short-term and long-term investments with an investment
rating by Moody's of A1 or higher and Standard & Poors of P-1 or higher and a
maturity of no greater than two years. Short-term investments have maturities
of less than one year but longer than 90 days. Investments with remaining
maturities greater than one year and less than two years, are classified as
long-term investments. The objective of the Company's policy is to protect the
value of its fixed income investment portfolio while minimizing principal risk.
(d) Financial Instruments and Concentration of Credit Risk
The carrying value of financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable, and accounts payable,
approximates fair value due to the short-term nature of these financial
instruments. Financial instruments that subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents and trade
accounts receivable. The carrying values of debt outstanding as of June 30,
2001 and 2000 approximate their fair values. The fair value of available for
sale debt securities are based on quoted market prices at the reporting date
for those or similar investments.
F-13
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company sells its products and services principally to leading
communication service providers and prominent wireless device manufacturers.
Credit risk is concentrated in North America, Europe and Japan. The Company
performs ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. The Company maintains
allowances for estimated credit losses based on management's assessment of the
likelihood of collection.
(e) Account Receivable, net
Accounts receivable is recorded net of allowance for doubtful accounts totaling
$10.5 million and $2.2 million as of June 30, 2001 and 2000, respectively.
(f) 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 twelve
years. Leasehold improvements are amortized over the shorter of the estimated
useful lives of the assets or the lease term.
(g) Capitalized License Fees
The Company routinely enters into software license agreements which allow the
Company to integrate third-party software into its products up to a specified
number of users. These licenses are amortized to cost of goods sold as the
third-party software products are sold up to a maximum period of 36 months,
which is generally considered to be the maximum useful life of the software
purchased.
(h) Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of any asset to future net cash flows
expected to be generated by the asset. 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 the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(i) Goodwill
The Company records goodwill when consideration paid in a purchase acquisition
exceeds the fair value of net tangible assets and identified intangible assets
acquired. The Company regularly performs reviews to determine if the carrying
value of goodwill is impaired. The purpose for the review is to identify any
facts or circumstances, either internal or external, which indicate that the
carrying value of the goodwill cannot be recovered. No such impairment has been
indicated to date. If, in the future, management determines the existence of
impairment indicators, the Company would use undiscounted cash flows to
initially determine whether impairment should be recognized. If necessary, the
Company would perform a subsequent calculation to measure the amount of the
impairment loss based on the excess of the carrying value over the fair value
of the impaired goodwill. The fair value
F-14
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
would be calculated using the present value of estimated expected future cash
flows. The cash flow calculation would be based on management's best estimates,
using appropriate assumptions and projections at the time.
(j) Research and Development
Research and development costs are expensed as incurred until technological
feasibility has been established. To date, the Company's software has been
available for general release concurrent with or immediately following the
establishment of technological feasibility and, accordingly, no development
costs have been capitalized.
(k) Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure 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 those estimates.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be recovered.
(m) Accounting for Stock-Based Compensation
The Company uses the intrinsic-value method to account for all of its employee
stock-based compensation plans. Expense associated with stock-based
compensation is being amortized on an accelerated basis over the vesting period
of the individual award consistent with the method described in Financial
Accounting Standards Board (FASB) Interpretation No. 28 (FIN 28).
The Company accounts for stock options and warrants issued to non-employees in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation and Emerging Issues
Task Force (EITF) Issue No. 96-18 Accounting for Equity Instruments that are
issued to other than employees for acquiring or in conjunction with selling
goods or services. The Company uses the Black-Scholes Option Pricing model to
value options and warrants granted to non-employees.
(n) Foreign Currency Transactions
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated at year end exchange rates, and
statements of operations are translated at the monthly average rates during the
year. Exchange gains or losses arising from translation of such foreign entity
financial statements are included as a component of accumulated other
comprehensive income (loss).
F-15
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For foreign operations with the U.S. dollar as the functional currency,
monetary assets and liabilities are remeasured at the year end exchange rates
as appropriate and non-monetary assets and liabilities are remeasured at
historical exchange rates. Statements of operations are remeasured at the
monthly average rates during the year. Foreign currency transaction gains and
losses are included in other income (expense), net, and to date, have not been
material.
(o) Comprehensive Income (Loss)
Comprehensive income (loss) includes net loss, unrealized gains (losses) on
marketable securities, and foreign currency translation adjustments. Tax
effects of other comprehensive income (loss) have not been material.
Comprehensive income (loss) is comprised of:
June 30,
----------------------
2001 2000
----------- ---------
Accumulated deficit.............................. $(1,058,673) $(368,679)
Accumulated foreign currency translation
adjustment...................................... (323) (172)
Accumulated unrealized gain (loss) on marketable
securities...................................... 76 (389)
----------- ---------
$(1,058,920) $(369,240)
=========== =========
(p) Net Loss Attributable to Common Stockholders Per Share
Basic and diluted net loss attributable to common stockholders per share is
computed using the weighted-average number of outstanding shares of common
stock excluding shares of restricted stock subject to repurchase summarized
below. The following potential shares of common stock have been excluded from
the computation of diluted net loss attributable to common stockholders per
share for all periods presented because the effect would have been antidilutive
(in thousands):
June 30,
--------------------
2001 2000 1999
------ ------ ------
Shares issuable under stock options...................... 35,386 28,503 24,649
Shares of restricted stock subject to repurchase......... 270 766 706
Shares issuable pursuant to warrants to purchase
common stock............................................ 237 242 355
Shares of convertible preferred stock on "as if
converted" basis........................................ -- -- 3,302
The weighted-average exercise price of stock options outstanding was $42.10,
$28.89 and $4.11, as of June 30, 2001, 2000 and 1999, respectively. The
weighted-average purchase price of restricted stock was $0.36, $0.48 and $0.30,
as of June 30, 2001, 2000 and 1999, respectively. The weighted-average exercise
price of warrants was $2.38, $2.69 and $2.26, as of June 30, 2001, 2000 and
1999, respectively. In June 1999, all outstanding shares of the Company's
convertible preferred stock were automatically converted into common stock upon
completion of the Company's initial public offering (IPO) (see Note 5(a)). Also
in June 1999, all outstanding shares of Software.com's convertible preferred
stock were automatically converted into Software.com common stock upon
completion of Software.com's IPO (see Note 5(a)). In April 2000, all
outstanding shares of AtMobile convertible preferred stock were converted into
Software.com common stock upon completion of the merger of Software.com and
AtMobile (see Note 2).
F-16
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(q) Derivative Instruments and Hedging Activities
On July 1, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133 (SFAS No. 133), Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138. The cumulative
transition adjustment upon adoption was insignificant. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities and requires that all derivatives be recognized as either assets or
liabilities at fair value. If certain conditions are met, a derivative may be
specifically designated and accounted for as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a
net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. If the derivative is designated as a hedging instrument, depending
on the nature of the exposure being hedged, changes in fair value will either
be offset against the change in fair value of the hedged asset, liability, or
firm commitment through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. Derivatives or portions of
derivatives that are not designated as hedging instruments are adjusted to fair
value through earnings and are recognized in the period of change in their fair
value.
The Company operates internationally and thus is exposed to potentially adverse
movements in foreign currency rate changes. The Company has entered into
foreign exchange forward contracts to reduce its exposure to foreign currency
rate changes on receivables, payables and intercompany balances denominated in
a non-functional currency. The objective of these contracts is to neutralize
the impact of foreign currency exchange rate movements on the Company's
operating results. These contracts require the Company to exchange currencies
at rates agreed upon at the inception of the contracts. These contracts reduce
the exposure to fluctuations in exchange rate movements because the gains and
losses associated with foreign currency balances and transactions are generally
offset with the gains and losses of the foreign exchange forward contracts.
Because the impact of movements in currency exchange rates on forward contracts
offsets the related impact on the underlying items being hedged, these
financial instruments help alleviate the risk that might otherwise result from
changes in currency exchange rates. The Company adjusts these instruments to
fair value through earnings in the period of change in their fair value. The
Company does not hold or issue financial instruments for speculative or trading
purposes. The Company does not believe that ongoing application of SFAS No. 133
will significantly alter the Company's hedging strategies. However, its
application may increase the volatility of other income and expense and other
comprehensive income.
(r) Recent Accounting Pronouncements
The Company adopted Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements. (SAB 101) as amended by SAB 101A and 101B was adopted, on
June 30, 2001 retroactive to July 1, 2000, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed the Securities and Exchange Commission (SEC). The adoption of SAB 101 did
not have a material impact on its consolidated financial position or results of
operations. SAB 101 outlines the basic criteria that must be met to recognize
revenues and provides guidance for disclosure related to revenue recognition
policies.
In late July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141 Business Combinations (SFAS No. 141) and SFAS No. 142 Goodwill and
Other Intangible Assets (SFAS No. 142). SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting;
therefore, the pooling-of-
F-17
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
interests method of accounting is prohibited. SFAS No. 141 also requires that
an intangible asset acquired in a business combination be recognized apart from
goodwill if: (i) the intangible asset arises from contractual or other legal
rights or (ii) the acquired intangible asset is capable of being separated from
the acquired enterprise, as defined in SFAS No. 141. SFAS No. 141 is effective
for all business combinations completed after June 30, 2001.
For business combinations completed prior to July 1, 2001 and accounted for by
the purchase method, SFAS No. 141 provides that intangible assets that do not
meet the separate identifiable intangible asset criteria prescribed by this
pronouncement (e.g., assembled workforce, among others) be reclassified to
goodwill as of the date of adoption. Conversely, if a portion of the purchase
price had been assigned to an intangible asset that meets the criteria for
recognition apart from goodwill and that intangible asset is classified as part
of goodwill for financial reporting purposes, the carrying amount of that
intangible asset must be reclassified and reported separately from goodwill as
of the date of adoption (July 1, 2002).
SFAS No. 142 requires that goodwill should not be amortized but should be
tested for impairment at the "reporting unit level" (Reporting Unit) at least
annually and more frequently upon the occurrence of certain events, as defined
by SFAS No. 142. A Reporting Unit is the same level as or one level below an
"operating segment," as defined by SFAS No. 131 Disclosures About Segments of
an Enterprise and Related Information. The Company's identifiable intangible
assets are required to be amortized over their useful life and reviewed for
impairment in accordance with SFAS No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS No. 121).
Goodwill is not tested for impairment under SFAS No. 121, but instead is tested
for impairment as prescribed in SFAS No. 142.
SFAS No. 142 requires that goodwill be tested for impairment in a two-step
process. First, a company must compare the "estimated fair value" of a
Reporting Unit to its carrying amount, including goodwill, to determine if the
fair value of the Reporting Unit is less than the carrying amount, which would
indicate that goodwill is impaired. If the Company determines that goodwill is
impaired, the Company must compare the "implied fair value" of the goodwill to
its carrying amount to determine if there is an impairment loss. The "implied
fair value" is calculated by allocating the fair value of the Reporting Unit to
all assets and liabilities as if the Reporting Unit had been acquired in a
business combination and accounted for under SFAS No. 141.
For goodwill and intangible assets acquired in business combinations completed
prior to July 1, 2001, SFAS No. 142 is effective for the Company beginning on
July 1, 2002. Goodwill and intangible assets acquired in a business combination
completed after June 30, 2001 are required to be accounted for in accordance
with the provisions of SFAS No. 142.
As of June 30, 2001, the Company currently has recorded net goodwill of $1.1
billion. Under the current accounting, the Company is expected to have
amortization expense of approximately $630 million in the next fiscal year.
The Company is currently evaluating the impact the adoption of these
pronouncements may have on its financial position and results of operations;
however, due to these pronouncements being issued in late July 2001 and due to
the Company's expectations that the FASB will issue further guidance with
respect to adoption of both SFAS Nos. 141 and 142, the Company is currently
unable to determine the impact the adoption of these pronouncements may have on
its financial position or results of operations.
F-18
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Business Combinations
(a) Poolings of Interests
Software.com
On November 17, 2000, the Company merged with Software.com in a transaction
that was accounted for as a pooling-of-interests. Accordingly, the financial
information presented reflects the combined financial position and operations
of the Company and Software.com for all dates and periods presented.
Software.com was incorporated in October 1994. Software.com is an application
service provider for wireless carriers and Internet content providers in search
of a technology gateway that links and integrates Web-based content, commerce
and applications with current and future generations of wireless devices. The
Company issued 94,506,060 shares of its common stock in exchange for all of the
issued and outstanding common stock of Software.com. The Company also reserved
12,520,161 shares for issuance in connection with the assumption of
Software.com's outstanding options, and employee stock purchase plans. In
connection with the merger, the Company and Software.com have incurred
approximately $88.9 million in merger and integration expenses during the year
ended June 30, 2001.
Prior to the combination, Software.com's fiscal year ended on December 31. As
of the merger date, Software.com changed its fiscal year to June 30 to conform
to the Company's fiscal year end. In recording the pooling-of-interests
combination, Software.com's financial statements for the twelve months ended
December 31, 1999 were combined with the Company's financial statement for the
twelve months ended June 30, 1999. Software.com's financial statements for the
twelve months ended June 30, 2000 were combined with the Company's financial
statements for the twelve months ended June 30, 2000. Software.com's unaudited
results of operations for the six months ended December 31, 1999 included
revenues of $29.0 million, expenses of $37.2 million and net loss of
$8.2 million. An adjustment has been made to stockholders' equity as of
June 30, 2000, to eliminate the effect of including Software.com's unaudited
results of operations for the six months ended December 31, 1999, in both the
year ended June 30, 1999 and 2000.
Adjustments to conform Software.com's method of accounting for the amortization
of stock-based compensation from the straight-line method to the method
described in FIN 28 with that of the Company increased net loss for the years
ended June 30, 2000 and 1999, by approximately $340,000 and $556,000,
respectively. Intercompany revenues and costs of revenues totaling $921,000 and
$354,000, respectively, have been eliminated in the consolidated financial
statements for the year ended June 30, 2000. There were no intercompany
transactions in the other periods presented. In addition, intercompany balances
of accounts receivable, prepaid expenses and other current assets, deposits and
other assets, and accounts payable have been eliminated as of June 30, 2000 and
1999.
AtMobile
On April 11, 2000, Software.com completed its merger with AtMobile, (formerly
Global Mobility Systems) in a transaction accounted for as a pooling-of-
interests. Accordingly, the financial information presented reflects the
combined financial position and operations of the Company and AtMobile for all
dates and periods presented. AtMobile was incorporated on August 16, 1996.
AtMobile develops mass market Internet service applications that integrate both
current and future generations of digital wireless phones with the Internet.
Software.com issued 6,039,375 shares of its common stock in exchange for all of
the issued and outstanding common stock of AtMobile as well as in exchange for
all outstanding options and warrants to purchase AtMobile common stock. There
were no conforming adjustments or intercompany eliminations required in the
AtMobile merger.
F-19
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mobility.Net
In April 1999, Software.com completed its merger with Mobility.Net, a company
that offered products for Web messaging using a Java-based technology platform
that complemented Software.com's product offerings. Software.com issued
2,543,000 shares of its common stock in exchange for all of the outstanding
shares of Mobility.Net. The Mobility.Net merger was accounted for as a pooling-
of-interests. Accordingly, the financial information presented reflects the
combined financial position and operations of the Company and Mobility.Net for
all dates and periods presented. There were no conforming adjustments or
intercompany eliminations required in the Mobility.Net merger.
Separate Operating Results
Separate operating results of the combined entities prior to their date of
combination for the years ended June 30, 2001, 2000 and 1999, are shown below
(in thousands). The operating results of Mobility.net were not significant, and
have been included in the operating results of Software.com.
Years ended June 30,
------------------------------
2001 2000 1999
--------- --------- --------
Revenues:
Openwave...................................... $ 393,366 $ 68,727 $ 13,442
Software.com.................................. 71,892 75,803 44,638
AtMobile...................................... -- 1,878 2,303
--------- --------- --------
Combined.................................... $ 465,258 $ 146,408 $ 60,383
========= ========= ========
Net loss:
Openwave...................................... $(655,276) $(264,788) $(20,763)
Software.com.................................. (34,718) (18,278) (11,492)
AtMobile...................................... -- (5,191) (5,185)
--------- --------- --------
Combined.................................... $(689,994) $(288,257) $(37,440)
========= ========= ========
(b) Purchase Acquisitions
The Company has completed the following business combinations, which were
accounted for as purchase acquisitions. The operating results of each acquired
entity have been included in the consolidated statements of operations since
the respective acquisition date.
In June 2000, Software.com completed its acquisition of bCandid Corporation
(bCandid), a company based in Massachusetts. bCandid is a provider of carrier-
class discussion server infrastructure software to service providers worldwide.
The acquired intangible assets are being amortized on a straight-line basis
over a period of two to four years, except for the amount recorded for in-
process research and development, which was expensed on the acquisition date.
On June 14, 2000, the Company acquired all of the outstanding common stock of
MyAble, a company based in Palo Alto, California. MyAble is a provider of
hosted personalization services for wireline and wireless web technologies. The
acquired intangible assets are being amortized on a straight-line basis over a
period of three years.
F-20
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On May 4, 2000, the Company acquired all of the outstanding common stock of
Velos 2 S.r.l. (Velos), a company based in Milan, Italy. The acquired
intangible assets are being amortized on a straight-line basis over a period of
three years.
On April 14, 2000, the Company acquired all of the outstanding common and
preferred stock of Onebox.com, Inc. (Onebox), a company based in San Mateo,
California. Onebox is a communications application service provider offering
users unified e-mail, voicemail, facsimile, and wireless-enabled communication
applications. The acquired intangible assets are being amortized on a straight-
line basis over a period of three years, except for the amount recorded for in-
process research and development, which was expensed on the acquisition date.
On March 4, 2000, the Company acquired all of the outstanding common and
convertible preferred stock of Paragon Software (Holdings) Limited (Paragon), a
company incorporated in England and Wales. Paragon is a provider of
synchronization technology allowing PC-based personal information to be easily
transferred to mobile devices. The acquired intangible assets are being
amortized on a straight-line basis over a period of three years, except for the
in-process research and development, which was expensed on the acquisition
date.
On February 8, 2000, the Company acquired all of the outstanding common and
redeemable convertible preferred stock of AtMotion, Inc. (AtMotion), a company
based in Redwood City, California. AtMotion is a provider of Voice Portal
technology. The acquired intangible assets are being amortized on a straight-
line basis over a period of three years.
On October 27, 1999, the Company acquired substantially all of the assets of
Angelica Wireless ApS (Angelica), including all software technology,
intellectual property and certain customer agreements, and excluding the
assumption of liabilities. Angelica is a developer of WAP software products
complementary to the Company's MyPhone application suite software and is based
in Copenhagen, Denmark. Goodwill is being amortized on a straight-line basis
over a period of three years. The Company recorded deferred stock-based
compensation in the amount of $1.7 million, which is being amortized on an
accelerated basis over the vesting period of three years, consistent with the
method described in FIN 28.
On October 26, 1999, the Company completed its acquisition of APiON Telecom
Limited (APiON), a company based in Belfast, Northern Ireland. In addition, the
Company also agreed to issue cash and common stock with an aggregate value of
up to approximately $14.1 million to the then current and former employees of
APiON. APiON is a provider of WAP software products to GSM network operators in
Europe and had expertise in GSM Intelligent Networks, wireless data and WAP
technology. Former employees of APiON received consideration totaling
approximately $2.2 million in cash upon the closing of the acquisition and an
additional $2.6 million at the one-year anniversary of the acquisition, with
the remaining $1.7 million payable in cash or common stock of the Company on
the second anniversary of the closing of the acquisition of APiON subject to
forfeiture upon the occurrence of certain events. Current employees of APiON
received approximately $2.5 million in cash upon the closing of the acquisition
with the remaining $5.1 million payable in cash or common stock of the Company
on each of the first two anniversaries of the closing of the acquisition of
APiON contingent upon continued employment. The first payment to current and
former employees of APiON was made in cash on the first anniversary of the
closing of the acquisition. Should the Company elect to issue common stock for
future payments to current and former employees of APiON, the actual number of
shares to be issued will depend upon the fair value of the common stock on the
distribution date.
F-21
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common stock issued to former shareholders and cash paid to current and former
employees of APiON at the closing of the acquisition was included in the
purchase price. Cash or common stock paid or to be paid to former employees of
APiON will be recorded as additional goodwill and will be amortized over the
remaining useful life of the goodwill. Common stock potentially issuable in the
future to current employees of APiON has been recorded as deferred stock-based
compensation.
The acquired intangible assets are being amortized on a straight-line basis
over a period of three years with the exception of the in-process research and
development, which was expensed on the acquisition date. In connection with the
acquisition, the Company recorded deferred stock-based compensation in the
amount of approximately $5.1 million, which is being amortized on an
accelerated basis over the vesting period of two years, consistent with the
method described in FIN 28.
On October 20, 1999, Software.com acquired all of the outstanding stock of
Telarc, Inc. (Telarc), a New York based corporation, which provides carrier-
scale Short Messaging Service (SMS) technologies that complement Software.com's
product offerings. The acquired intangible assets are being amortized on a
straight-line basis over their estimated economic useful lives of three to five
years, except for the amount recorded for in-process research and development,
which was expensed on the acquisition date.
In addition, in conjunction with the acquisition of Telarc, Software.com
entered into an employment agreement with an executive of Telarc under which
the executive will receive a total of $3.5 million in cash in 10 equal
quarterly installments beginning March 2000.
For each acquisition, the Company or Software.com determined the allocation
between developed and in-process research and development. This allocation was
based on whether technological feasibility has been achieved and whether there
is an alternative future use for the technology. SFAS No. 86 sets guidelines
for establishing technological feasibility. Technological feasibility is
determined when a product reaches the "working model" stage, which is generally
when a product is classified as a beta version release. As of the respective
dates of the acquisitions of bCandid, Onebox, Paragon, APiON, and Telarc
discussed above, the Company concluded that the purchased in-process research
and development had no alternative future use and expensed it according to the
provisions of FASB Interpretation No. 4, Applicability of SFAS No. 2 to
Business Combinations Accounted for by the Purchase Method.
The total purchase price of each purchase acquisition was allocated as follows
(in thousands):
Allocated Purchase Price Components
-----------------------------------------------------------------------------------------
Net Tangible
Deferred Assets
Purchase In-Process Developed Noncompete Other Stock Based (Liabilities)
Price Goodwill R&D Technology Agreements Intangibles Compensation Acquired
-------- -------- ---------- ---------- ---------- ----------- ------------ -------------
bCandid................. $ 68,700 $ 59,200 $ 2,000 $ 6,700 $ 300 $1,000 $ -- $ (500)
MyAble.................. 18,400 18,400 -- -- -- -- -- --
Velos................... 2,000 800 -- -- -- -- 1,200 --
Onebox.................. 815,000 792,000 4,300 14,700 4,800 600 -- (1,400)
Paragon................. 472,800 454,400 18,100 7,200 2,300 1,000 -- (10,200)
AtMotion................ 286,700 243,300 -- 42,500 -- 700 -- 200
Angelica................ 3,700 2,000 -- -- -- -- 1,700 --
APiON................... 257,100 247,700 100 200 -- 1,700 5,100 2,300
Telarc.................. 11,600 2,300 3,200 5,700 -- 100 -- 300
F-22
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For each acquisition accounted for as a purchase, the Company paid the
following (in thousands):
Purchase Price
-----------------------------------------------
Assumption of
Common Stock Stock Options
--------------- --------------
Shares Amount Shares Amount Cash Total
------ -------- ------- ------ ------- --------
bCandid......................... 1,074 $ 68,700 -- $ -- $ -- $ 68,700
MyAble.......................... 194 16,400 23,112 1,900 100 18,400
Velos........................... 18 1,750 -- -- 250 2,000
Onebox.......................... 6,208 766,591 261,549 31,200 17,209 815,000
Paragon......................... 3,051 401,700 397,672 52,000 19,100 472,800
AtMotion........................ 2,280 277,200 67,825 8,000 1,500 286,700
Angelica........................ 16 1,700 -- -- 2,000 3,700
APiON........................... 2,393 240,900 -- -- 16,200 257,100
Telarc.......................... 341 10,000 -- -- 1,600 11,600
The options assumed in the above acquisitions were valued using the Black-
Scholes option pricing model with the following weighted average assumptions:
expected life of 1.1 years; 0% dividend yield; 80% volatility and risk free
interest rate of 6.0%.
The following table shows unaudited pro forma revenue, net loss and basic and
diluted net loss per share of the Company, including the results of bCandid,
MyAble, Velos, Onebox, Paragon, AtMotion, Angelica, APiON, and Telarc as if
each company had been acquired as of July 1, 1998 (in thousands, except per
share data):
Years ended June
30,
--------------------
2000 1999
--------- ---------
Revenue.................................................. $ 153,086 $ 67,214
========= =========
Net loss................................................. $(767,330) $(720,731)
========= =========
Basic and diluted net loss per share..................... $ (5.07) $ (8.70)
========= =========
Shares used in pro forma per share computation........... 151,211 82,804
========= =========
In computing the pro forma net loss, the charges taken for in-process research
and development have been excluded from the calculations. The pro forma results
are not necessarily indicative of what would have occurred if the acquisitions
had been in effect for the periods presented. In addition, they are not
intended to be a projection of future results and do not reflect any synergies
that might be achieved from combined operations.
(3) Balance Sheet Components
(a) Cash, Cash Equivalents, and Short-Term Investments
The following summarizes the Company's cash, cash equivalents, and short-term
investments (in thousands):
June 30,
------------------
2001 2000
-------- --------
Cash and cash equivalents:
Cash................................................... $ 66,330 $ 11,415
Money market funds..................................... 70,626 56,966
Commercial paper....................................... 31,724 70,898
Less restricted cash equivalents....................... (6,693) (18,694)
-------- --------
$161,987 $120,585
======== ========
F-23
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
-----------------------------------------
Gross Gross Estimated
unrealized unrealized fair
Cost gains losses value
-------- ---------- ---------- ---------
Short term investments
Corporate bonds.................. $102,349 $ 197 $ (15) $102,527
Commercial paper................. 70,239 16 (2) 70,253
Certificates of deposit.......... 6,002 -- (2) 6,000
U.S. Treasury securities and
obligations of U.S.
government agencies............. 21,687 46 -- 21,733
Less restricted investments...... (14,007) -- -- (14,007)
-------- ----- ----- --------
$186,270 $ 259 $ (19) $186,506
======== ===== ===== ========
June 30, 2000
-----------------------------------------
Gross Gross Estimated
unrealized unrealized fair
Cost gains losses value
-------- ---------- ---------- ---------
Short term investments
Corporate bonds.................. $126,917 $ -- $(251) $126,666
Commercial paper................. 157,579 20 (57) 157,542
Certificate of deposit........... 72,826 22 -- 72,848
U.S. Treasury securities and
obligations of U.S.
government agencies............. 47,492 -- (97) 47,395
Less restricted investments...... (2,006) -- (23) (2,029)
-------- ----- ----- --------
$402,808 $ 42 $(428) $402,422
======== ===== ===== ========
(b) Long-term investments and restricted cash and investments
The following summarizes the Company's long-term investments and restricted
cash and investments:
June 30, 2001
---------------------------------------
Gross Gross Estimated
unrealized unrealized fair
Cost gains losses value
------- ---------- ---------- ---------
Unrestricted corporate bonds
(matures in year ended
June 30, 2003)..................... $21,337 $ -- $(164) $21,173
Restricted cash and investments..... 20,700 -- -- 20,700
------- ----- ----- -------
$42,037 $ -- $(164) $41,873
======= ===== ===== =======
June 30, 2000
---------------------------------------
Gross Gross Estimated
unrealized unrealized fair
Cost gains losses value
------- ---------- ---------- ---------
Restricted cash and investments..... $20,700 $ -- $ -- $20,700
======= ===== ===== =======
F-24
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c) Property and Equipment
Property and equipment consisted of the following (in thousands):
June 30,
----------------
2001 2000
-------- -------
Computer equipment and software............................... $ 75,696 $39,286
Furniture and equipment....................................... 17,603 7,320
Leasehold improvements........................................ 40,866 3,955
-------- -------
134,165 50,561
Less accumulated depreciation and amortization................ 35,583 15,737
-------- -------
$ 98,582 $34,824
======== =======
Equipment acquired under capital leases aggregated $1.2 million and $4.0
million as of June 30, 2001 and 2000, respectively. Accumulated amortization on
the equipment acquired under capital leases aggregated $766,000 and
$1.1 million as of June 30, 2001 and 2000, respectively.
(d) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consisted of the following (in thousands):
June 30,
---------------------
2001 2000
---------- ----------
Goodwill................................................. $1,820,360 $1,815,080
Developed and core technology............................ 77,052 77,052
Noncompete agreements.................................... 7,400 7,400
Assembled workforce...................................... 4,480 4,480
Customer relationships................................... 600 600
---------- ----------
1,909,892 1,904,612
Less accumulated amortization............................ 852,964 216,682
---------- ----------
$1,056,928 $1,687,930
========== ==========
Goodwill and the cost of identified intangible assets are amortized on a
straight line basis over 3 to 5 years.
(e) Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
June 30,
---------------
2001 2000
------- -------
Accrued salaries, benefits and commissions..................... $26,302 $10,605
Acquisition-related liabilities................................ 677 20,788
Other accrued liabilities...................................... 27,391 18,731
------- -------
$54,370 $50,124
======= =======
F-25
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Debt
As of June 30, 2001 and 2000, the Company had promissory notes assumed in
connection with the acquisitions, in the amounts of approximately $1,065,000
and 1,426,000, respectively. The notes are secured by Senior Loan and Security
Agreements and bear interest at a rate between 10% and 17% per annum. The
principal amounts due on the notes for the years-ended June 30, 2002 and 2003
will be $511,000 and $554,000, respectively.
In January 2000, AtMobile issued convertible promissory notes for bridge
financing aggregating $500,000. On February 18, 2000, these promissory notes
were converted into 30,048 shares of AtMobile Series D preferred stock (see
Note 5).
(5) Stockholders' Equity
(a) Initial Public Offerings
On June 11, 1999, the Company completed an IPO of 9,200,000 shares of its
common stock at a price of $8.00 per share and received net proceeds of
approximately $66.8 million. At the IPO date, all 40,348,000 outstanding shares
of the Company's convertible preferred stock were automatically converted into
common stock on a one-for-one basis.
On June 29, 1999, Software.com completed an IPO of 8,052,500 shares of its
common stock at a price of $9.31 per share and received net proceeds of
approximately $67.8 million. At the IPO date, all 10,198,000 outstanding shares
of Software.com convertible preferred stock were automatically converted into
Software.com common stock on a one-for-one basis.
Prior to the conversion of all outstanding Software.com convertible preferred
stock into Software.com common stock upon completion of Software.com's IPO, the
Series A Software.com preferred stock redemption price included a redemption
premium of 10% per year compounded annually. Accordingly, the initial fair
value of the Software.com Series A preferred stock was increased by periodic
accretions, using the interest method, so that the carrying amount would equal
the mandatory redemption amount at the redemption date. For the year ended June
30, 1999, such periodic accretions totaled $403,000, and are reflected as
charges against accumulated deficit for each year.
(b) Secondary Offering
On November 16, 1999, the Company completed a secondary offering of 3,041,500
shares of its common stock at a price of $135.00 per share and received net
proceeds of approximately $390.3 million.
(c) Stock Splits
On June 7, 1999, the Company effected a two-for-three reverse stock split of
its convertible preferred stock and common stock. The accompanying consolidated
financial statements have been retroactively restated to give effect to this
reverse stock split.
On October 29, 1999, the Company effected a two-for-one stock split of its
common stock. The accompanying consolidated financial statements have been
retroactively restated to give effect to this stock split.
F-26
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(d) Stockholder Rights Agreement
On August 8, 2000, the Company has entered into a rights agreement that
entitles each holder of the Company common stock to purchase one one-thousandth
of a share of Series A Junior Participating Preferred Stock at a price of $500
per one one-thousandth of a share, subject to adjustment. Ten business days
after a person or group of affiliated or associated persons acquires beneficial
ownership of 15% or more of the outstanding shares of the Company common stock,
other than as a result of repurchases of stock by the Company or certain
inadvertent actions by institutional or certain other stockholders, and except
pursuant to an offer for all outstanding shares of the Company common stock
which the independent directors of the Company determine to be fair and in the
best interests of the Company, each holder of a right to purchase one
one-thousandth of a share of Series A Junior Participating Preferred Stock will
thereafter have the right to receive, upon exercise of the right, shares of the
Company common stock having a value equal to two times the exercise price of
the right.
At any time until the tenth business day after a person or group of affiliated
or associated persons acquires beneficial ownership of 15% or more of the
outstanding shares of the Company common stock, the Company may redeem the
rights in whole, but not in part, at a price of $0.001 per right. This rights
agreement will terminate on August 18, 2008, unless such date is extended or
the rights are redeemed by the Company prior to such date.
This rights agreement may have certain anti-takeover effects. The rights will
cause substantial dilution to a person or group that attempts to acquire the
Company in a manner which causes the rights to become discount rights unless
the offer is conditional upon a substantial number of rights being acquired.
(e) AtMobile Convertible Preferred Stock
In connection with Software.com's merger with AtMobile in April 2000 (see Note
2(a)), all shares of convertible preferred stock previously issued by AtMobile
were converted into common shares of Software.com upon closing of the
transaction. The following table summarizes the historical issuances of
AtMobile convertible preferred stock. Each share of AtMobile preferred stock
was convertible into one share of AtMobile common stock.
Conversion
of notes
payable and
Aggregate Net accrued
Date Issued Series shares proceeds interest
- ----------- ------ --------- ----------- -----------
September 1997......................... A 1,182,117 $ 5,145,000 $ --
June 1999.............................. B 932,835 -- 4,076,000
August and November 1999............... C 1,073,060 3,295,000 --
August 1999............................ C 113,123 -- 350,000
February 2000.......................... D 1,132,707 12,504,000 5,026,000
--------- ----------- ----------
4,433,842 $20,944,000 $9,452,000
========= =========== ==========
During June 1999, in connection with the issuance of the Series B AtMobile
preferred stock, the board of directors of AtMobile declared a 2.19769223-to-1
stock split on the Series A AtMobile preferred stock. The effect of the split
was to increase the number of authorized, issued and outstanding shares of
Series A AtMobile preferred stock. The number of shares issued and outstanding
has been retroactively adjusted to reflect these changes.
F-27
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(f) Non-employee Equity Transactions
The Company has issued the following warrants to purchase its common stock:
Fiscal Fair
Year Number Exercise Value
of of Price per Assump-
Grant Shares Share Date Exercisable Fair Value Purpose tions Recorded as
- ------ ------- --------- ---------------------------- ---------- -------------------- ------- --------------------------
1999 122,308 $ 0.11 On milestones from Jun. 1999 $2,500,000 Nonemployee services B Operating expense
2000 32,806 $ 4.37 July 1999 $ 94,000 Debt financing A Debt issuance costs
2000 10,694 $16.64 Feb. 2000 $ 178,000 Equity financing A Additional paid in capital
2000 20,076 $ 0.43 On milestones from Nov. 1999 $ 604,000 Nonemployee services B Operating expense
2001 5,000 $34.75 January 2001 $ 140,119 Nonemployee services C Operating expense
2001 5,000 $18.25 April 2001 $ 73,883 Nonemployee services C Operating expense
The fair value of the warrants was calculated using the Black-Scholes option
pricing model and the following assumptions:
Risk Dividend Contractual
Free Rate Yield Volatility Life
--------- -------- ---------- ------------
A................................. 6% -- 60% 1 to 7 years
B................................. 6% -- 80% 10 years
C................................. 6% -- 110% 5 years
(g) Stock Plans
The Company is authorized to issue up to 54,449,477 shares of common stock in
connection with its 1995 plan (formerly the Software.com, Inc. 1995 Stock Plan)
and its 1996 plan (formerly the Phone.com, Inc. 1996 Stock Plan) (collectively
the 1995 and 1996 Stock Plans) to directors, employees and consultants. The
1995 and 1996 Stock Plans provide for the issuance of stock purchase rights,
incentive stock options, or nonstatutory stock options.
Under the 1995 and 1996 Stock Plans, the exercise price for incentive stock
options is at least 100% of the fair market value of the Company's stock on the
date of grant for employees owning less than 10% of the voting power of all
classes of stock, and at least 110% of the fair market value on the date of
grant for employees owning more than 10% of the voting power of all classes of
stock. For nonstatutory options granted under the 1995 and 1996 Stock Plans,
the exercise price is determined by the Board of Directors except that in the
case of a nonstatutory option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price shall be no less than 100% of the fair market value of the stock on the
date of grant.
Under the 1995 and 1996 Stock Plans, options generally expire ten years from
the date of grant; however, the term of incentive stock options may be limited
to five years if the optionee owns stock representing more than 10% of the
voting power of all classes of stock. Vesting periods are determined by the
Board of Directors and generally provide for shares to vest over a period of
four years at 25% per year. As of June 30, 2001, there were a total of 798,131
shares available for grant under the 1995 and 1996 Stock plans.
In March 1999, the Company adopted the Openwave Systems Inc. 1999 Directors'
Stock Option Plan (the Directors' Stock Plan) which provides for the grant of
nonstatutory stock options to non-employee directors. Under the Directors'
Stock Plan, a total of 1,200,000 shares of the Company's common stock have been
reserved for issuance. Each non-employee director who becomes a member of the
Board of Directors will initially be granted an
F-28
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
option to purchase 66,666 shares of the Company's common stock and thereafter
an option to purchase an additional 5,000 shares of the Company's common stock
on the first Board of Directors meeting date of each calendar quarter. Options
granted under the Directors' Stock Plan vest immediately upon grant. The
exercise price of options granted under the Directors' Stock Plan is equal to
the fair market value of the Company's common stock on the date of grant. Under
the Directors' Stock Plan, options have a term of five years. As of June 30,
2001 there were 1,160,000 shares available for grant under the Directors' Stock
Plan.
In June 2001, the Company adopted the Openwave Systems Inc. 2001 Stock
Compensation Plan (the 2001 Stock Plan). The 2001 Stock Plan provides for the
issuance of nonstatutory stock options and stock purchase rights to directors,
employees and consultants of the Company. The 2001 Stock Plan serves as the
successor to certain plans of the Company and plans acquired by the Company
including the Phone.com, Inc. 2000 Non-Executive Stock Option Plan, the
Phone.com, Inc. 1995 Stock Plan, the Software.com, Inc. 2000 Nonstatutory Stock
Option Plan, the Arabesque Communications, Inc, 1998 Stock Plan, the MyAble,
Inc. 1999 Stock Plan, the Onebox.com, Inc. 1999 Stock Plan, the AtMobile.com,
Inc. Amended and Restated 1997 Stock Option Plan, the bCandid Corporation
1999 Equity Incentive Plan, and the Mobility Net Corporation 1999 Stock Option
Plan (the Predecessor Plans). No further grants will be made under the
Predecessor Plans, however, each outstanding option granted under a Predecessor
Plan shall continue to be governed by the terms and conditions of the
Predecessor Plan under which it was granted.
A total of 6,228,135 shares of common stock have been reserved for issuance
under the 2001 Stock Plan comprised of the sum of 4,500,000 newly reserved
shares and the aggregate number of shares available for issuance under the
Predecessor Plans.
Under the 2001 Stock Plan, the exercise price for nonstatutory options is
determined by the Plan Administrator and may be above or below the fair market
value of the Company's common stock on the date of grant. Options issued under
the 2001 Stock Plan generally expire ten years from the date of grant. Vesting
periods are determined by the Plan Administrator and generally provide for
shares to vest over a period of four years at 25% per year. As of June 30,
2001, there were 6,228,135 shares available for grant under the 2001 Stock
Plan.
The following table summaries the number of common shares available for
issuance under the plans stated above as of June 30, 2001:
1995 and 1996 Stock Plans...................................... 798,131
Directors' Stock Plan.......................................... 1,160,000
2001 Stock Plan................................................ 6,228,135
---------
8,186,266
=========
Stock Purchase Rights
Certain outstanding stock purchase rights are subject to a restricted stock
purchase agreement whereby the Company has the right to repurchase the stock
upon the voluntary or involuntary termination of the purchaser's employment
with the Company at the purchaser's exercise price. The Company's repurchase
right lapses at a rate determined by the stock plan administrator but at a
minimum rate of 20% per year. Through June 30, 2001, the Company has issued
3,103,844 shares under restricted stock purchase agreements, of which 908,334
shares have
F-29
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
been repurchased and 269,708 shares remain subject to repurchase at a weighted-
average purchase price of $0.34 per share. Certain of these restricted shares
were issued to officers of the Company for full recourse promissory notes with
interest rates ranging from 5.49% to 6.48%. All such promissory notes were
issued prior to December 31, 2000.
The Company also has certain outstanding stock purchase rights in connection
with the early exercise of stock options prior to vesting. Through June 30,
2001, the Company has issued 1,398,592 shares in connection with the exercise
of unvested stock options, of which 42,608 shares have been repurchased and
307,504 shares remain subject to repurchase at a weighted-average purchase
price of $1.42 per share.
Employee Stock Purchase Plans
In March 1999, the Company adopted the 1999 Openwave Systems Inc. Employee
Stock Purchase Plan, formerly the Phone.com Purchase Plan (the Openwave
Purchase Plan). A total of 1,200,000 shares of common stock were initially
reserved for issuance under the Openwave Purchase Plan. The Openwave Purchase
Plan provides for an automatic annual increase on the first day of the Company
fiscal years beginning in 2000 through 2004 equal to the lesser of 1,000,000
shares or 1% of the Company's outstanding common stock on the last day of the
immediately preceding fiscal year.
The Openwave Purchase Plan is intended to qualify under Section 423 of the
Internal Revenue Code and contains four six-month purchase periods within
twenty-four month offering periods. Eligible employees may purchase common
stock through payroll deductions of up to 20% of compensation. The price of
common stock purchased under the Openwave Purchase Plan is the lower of 85% of
the fair market value of the Company's common stock at the beginning of the
offering period and the end of each purchase period.
For the year ended June 30, 2001, employees purchased 779,425 shares of common
stock at an average price of $13.72 per share under the Openwave Purchase Plan.
As of June 30, 2001, 1,778,963 shares remained available for future issuance
under the Openwave Purchase Plan.
In May 1999, Software.com adopted the 1999 Software.com, Inc. Employee Stock
Purchase Plan (the Software Purchase Plan) intended to qualify under Section
423 of the Internal Revenue Code. A total of 1,610,500 shares of common stock
were reserved for issuance under the Software Purchase Plan. Per the terms of
the merger agreement with Phone.com, the last purchase under the Software
Purchase Plan concluded on April 30, 2001 after which the Software Purchase
Plan was suspended. The Software Purchase Plan contained four six-month
purchase periods within twenty-four month offering periods. Under the Software
Purchase Plan, eligible employees were permitted to purchase common stock of
the Company through payroll deductions of up to 20% of compensation at a price
equal to the lower of 85% of the fair market value of the Company's
common stock at the beginning of the offering period and the end of each
purchase period.
For the year ended June 30, 2001, employees purchased 553,003 shares of common
stock at an average price of $11.44 per share under the Software Purchase Plan.
As of June 30, 2001, no shares remained available for future issuance under the
Software Purchase Plan.
F-30
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(i) Stock-Based Compensation
The Company uses the intrinsic-value method in accounting for its employee
stock-based compensation plans. With respect to the stock options granted and
restricted stock sold from October 1997 to June 1999, the Company recorded
deferred stock-based compensation of approximately $4.7 million for the
difference, if any, at the grant or issuance date between the exercise price of
each stock option granted or purchase price of each restricted share sold and
the fair value of the underlying common stock. This amount is being amortized
on an accelerated basis over the vesting period, generally four to five years,
consistent with the method described in FIN 28. During the year ended June 30,
2000, the Company recorded additional deferred stock-based compensation of
approximately $8.0 million in conjunction with its acquisitions of APiON,
Angelica, Telarc, and Velos (see Note 2(b)). During the years ended June 30,
2000, and 2001, the Company also recorded deferred stock-based compensation in
the amount of $2.8 million and $7.8 million, respectively, for stock issued to
employees at below fair market value at the time of the grant, which is being
amortized over the vesting period of 48 months and 42 months, respectively,
consistent with the method described in FIN 28.
During the year ended June 30, 2001, the CEO cancelled his option to purchase
6,000,000 shares of the Company's common stock. In exchange for the cancelled
options, the Compensation Committee of the Board granted to the CEO a right to
the future grant of an option to purchase 5,800,000 shares of the Company's
common stock (the "Future Grant"), provided that he continues as an employee of
the Company through and including the grant date of the Future Grant.
The Future Grant will be made on a date that falls between six and seven months
from the April 12 cancellation date and will have an exercise price set at the
then fair market value of the common stock. The new options will have the same
vesting schedule and vesting commencement date as the cancelled options. The
Company expects that there will be no accounting charges to the Company as a
result of the Future Grant to the CEO.
On April 12, 2001, the Compensation Committee of the Board granted to the CEO
200,000 restricted shares of the Company's Common Stock. The restricted shares
will vest as to 29,166 shares on May 12, 2001, and the remaining 170,834 shares
in equal monthly installments through October 12, 2004. On the date of grant
the Company recorded stock-based compensation expense of approximately $800,000
and deferred compensation related to the restricted stock grants of $4.6
million.
During the year ended June 30, 2001, an employee of the Company rescinded the
exercise of an option to purchase 114,000 shares of the Company's common stock.
The effect of the rescission was not material.
F-31
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Had compensation costs been determined in accordance with SFAS No. 123
Accounting for Stock-Based Compensation, for all of the Company's stock-based
compensation plans, net loss attributable to common stockholders and basic and
diluted net loss per share attributable to common stockholders would have been
as follows (in thousands, except per share data):
Years ended June 30,
--------------------------------
2001 2000 1999
----------- --------- --------
Net loss attributable to common
stockholders:
As reported............................... $ (689,994) $(288,257) $(37,440)
Pro forma................................. $(1,142,126) $(397,732) $(45,193)
Basic and diluted net loss per share
attributable to common stockholders:
As reported............................... $ (4.17) $ (2.06) $ (0.52)
Pro forma................................. $ (6.90) $ (2.85) $ (0.63)
The fair value of each option was estimated on the date of grant using the
minimum value method prior to the IPO and the Black-Scholes option pricing
model after the IPO, with no expected dividends and the following weighted-
average assumptions:
Openwave
Option Plan
Years ended
June 30,
----------------
2001 2000 1999
---- ---- ----
Expected Life (years)......................................... 3.50 3.59 3.36
Risk-Free interest rate....................................... 5.27% 6.32% 5.41%
Volatility.................................................... 110% 103% 53%
Under SFAS 123, the weighted average fair value of stock options granted were:
Openwave Option
Plan
Years ended June
30,
-------------------
2001 2000 1999
------ ------ -----
Weighted average fair value................................ $42.13 $52.37 $4.71
The fair value of purchase rights granted under the Openwave Purchase Plan and
the Software.com Purchase Plan was estimated on the date of grants using the
Black-Scholes option-pricing model with no expected dividends and the following
weighted-average assumptions.
Openwave Software.com
Purchase Plan Purchase Plan
Years ended Years ended
June 30, June 30,
-------------- --------------
2001 2000 2001 2000
------ ------ ------ ------
Expected Life (years)........................... six-months to six-months
two year to two year
Risk-Free interest rate......................... 3.82% 5.53% 5.99% 5.99%
Volatility...................................... 110% 110% 110% 90%
F-32
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under SFAS 123, the weighted average fair values of purchase rights granted
were:
Openwave Software.com
Purchase Plan Purchase Plan
Years ended Years ended
June 30, June 30,
------------- -------------
2001 2000 2001 2000
------ ------ ------ ------
Weighted average fair value......................... $21.31 $27.88 $25.09 $34.73
A summary of the status of the Company's options under its stock option plans
is as follows (in thousands, except per share data):
Years ended June 30,
-----------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ --------- ------ --------- ------ ---------
Outstanding at beginning
of year................. 28,503 $28.89 24,649 $ 4.11 18,072 $1.46
Granted.................. 23,921 57.55 10,297 73.15 10,459 7.75
Assumed under purchase
acquisitions............ -- -- 883 7.40 -- --
Cancelled................ (9,544) 71.30 (618) 41.38 (1,445) 1.77
Exercised................ (7,494) 3.98 (6,708) 1.79 (2,437) 1.48
------ ------ ------
Outstanding at end of
year.................... 35,386 $42.10 28,503 $28.89 24,649 $4.11
====== ====== ======
Options exercisable at
end of year............. 7,627 $36.21 5,841 $ 4.30 2,018 $0.79
====== ====== ======
Weighted-average exercise
prices equal to fair
value at date of grant.. 23,699 $42.13 10,297 $52.38 9,499 $4.70
Weighted-average exercise
prices less than fair
value at date of grant.. 222 $ 8.23 -- $ -- 960 $1.48
F-33
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of June 30, 2001, the range of exercise prices and weighted-average
remaining contractual life of outstanding options were as follows (number of
options in thousands):
Weighted-
average Weighted- Weighted-
remaining average Number average
Exercise Number contractual exercise of shares exercise
price outstanding life (years) price exercisable price
-------- ----------- ------------ --------- ----------- ---------
$ 0.01--0.43 800 7.32 $ 0.26 571 $ 0.22
0.60--1.31 1,382 7.05 1.17 390 1.18
1.69--2.57 2,899 7.62 2.23 1,371 2.25
3.42--5.59 1,736 7.17 4.03 463 4.22
6.00--8.83 2,728 8.02 7.56 653 7.35
12.58--19.95 369 8.62 16.26 79 17.44
22.05--34.75 3,247 9.17 30.09 325 29.08
35.00 7,354 9.52 35.00 737 35.00
35.29--46.26 2,826 8.67 42.85 698 42.56
48.75--72.11 4,218 8.86 57.57 707 57.84
73.41--77.50 2,142 8.94 75.46 558 75.12
79.30--85.94 2,197 9.08 83.94 331 83.66
87.81--105.75 1,775 8.98 95.29 204 101.62
110.00--120.50 1,066 8.61 113.14 308 113.39
136.00--163.13 647 8.51 143.50 232 143.09
------ ---- ------ ----- ------
35,386 8.66 $42.10 7,627 $36.21
====== ==== ====== ===== ======
(6) Leases
In March 2000, the Company entered into a lease for approximately 280,000
square feet of office space in Redwood City, California. Lease terms require a
base rent of $3.25 per square foot per month as provided by the lease agreement
and will increase by 3.5% annually on the anniversary of the initial month of
the commencement of the lease. The lease is for a period of 12 years from the
commencement date of the lease. The agreement required that the Company provide
a letter of credit in the amount of $16.5 million. As of June 30, 2000, the
Company guaranteed the letter of credit and pledged approximately $20.7
million, or 125% of the letter of credit, of cash equivalents and investments
to be held in trust as security for the letter of credit. The restricted cash
and investments held in trust under this agreement earned approximately 4.7%
interest and the resulting income earned is not subject to any restrictions.
The lease further required that the Company pay leasehold improvements which
totaled $29.3 million as of June 30, 2001.
The Company also has numerous facility operating leases in other locations in
the United States as well as other locations throughout the world. The Company
also has various capital lease agreements.
F-34
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Annual minimum commitments for the noncancelable operating and capital leases
as of June 30, 2001, net of sublease payments, are as follows (in thousands):
Year ending Capital Operating
June 30, leases leases
----------- ------- ---------
2002................................................. $1,326 $ 22,001
2003................................................. 541 21,810
2004................................................. -- 21,521
2005................................................. -- 18,911
2006................................................. -- 16,715
Thereafter........................................... -- 89,165
------ --------
Total minimum lease and principal payments........... 1,867 $190,123
========
Amount representing imputed interest................. 402
------
Present value of future lease payments............... 1,465
Current portion of capital lease obligations......... 1,265
------
Noncurrent portion of capital lease obligations...... $ 200
======
Future minimum lease payments under the operating leases have been reduced for
the sublease rental income of approximately $3,144,000, $2,755,000, $1,591,000,
and $1,512,000 for the years ending June 30, 2002, 2003, 2004, 2005,
respectively. Rent expense for the years ended June 30, 2001, 2000, and 1999,
was approximately $19.1 million, $9.1 million, and $3.6 million, respectively,
net of sublease income of $1.1 million, $827,000, and $1.5 million, for the
years ended June 30, 2001, 2000, and 1999, respectively.
(7) Income Taxes
The components of the Company's total income (loss) before provision for income
taxes are as follows:
Year Ended June 30,
------------------------------
2001 2000 1999
--------- --------- --------
(in thousands)
United States of America........................ $(804,651) $(304,597) $(42,632)
Foreign......................................... 127,645 18,359 7,911
--------- --------- --------
$(677,006) $(286,238) $(34,721)
========= ========= ========
The provision for income taxes are primarily comprised of current foreign tax.
F-35
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following reconciles the expected corporate federal income tax expense
(computed by multiplying the Company's loss before income taxes by the
statutory income tax rate of 34%) to the Company's income tax expense (in
thousands):
Year Ended June 30,
-----------------------------
2001 2000 1999
--------- -------- --------
Federal tax at statutory rate................... $(230,182) $(97,321) $(11,616)
Net operating losses not benefited.............. 49,125 11,397 8,902
Foreign tax rate differential................... 7,413 1,962 2,414
Goodwill amortization........................... 154,488 69,924 --
In process research and development............. -- 9,418 1,551
Merger, integration, and acquisition costs...... 30,302 3,301 --
Other........................................... 1,842 3,338 1,065
--------- -------- --------
Total tax expense............................. $ 12,988 $ 2,019 $ 2,316
========= ======== ========
The tax effect of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities are as follows (in
thousands):
June 30,
---------------------
2001 2000
---------- ----------
Deferred tax assets:
Net operating loss carryforwards....................... $ 276,918 $ 135,444
Accruals and reserves not deductible for tax purposes.. 14,502 13,456
Property and equipment................................. 752 462
Start-up expenditures capitalized for tax purposes..... -- 129
Deferred stock-based compensation...................... 1,221 1,424
Research and development credit and other credits
carryforwards......................................... 20,110 9,819
Intangibles related to acquisitions.................... 128,602 --
---------- ----------
Total deferred tax assets............................ 442,105 160,734
Less: valuation allowance................................ (431,880) (130,767)
---------- ----------
Net deferred tax assets.............................. 10,225 29,967
Deferred tax liabilities:
Intangibles related to acquisitions.................... (10,225) (29,967)
---------- ----------
Total deferred tax liabilities....................... (10,225) (29,967)
---------- ----------
Net deferred tax assets (liabilities)................ $ -- $ --
========== ==========
The Company's deferred tax liabilities resulted from its acquisitions during
the year ended June 30, 2000, due to a difference in the financial statement
basis and tax basis of net assets acquired.
In light of the Company's recent history of operating losses, the Company has
recorded a valuation allowance for all of its deferred tax assets, except to
the extent of deferred tax liabilities, as it is presently unable to conclude
that it is more likely than not that deferred tax assets in excess of deferred
tax liabilities will be realized.
F-36
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Approximately $196.7 million of the valuation allowance for deferred tax assets
relating to net operating loss carryforwards is attributable to employee stock
option deductions, the benefit from which will be allocated to additional paid-
in capital rather than current earnings when and if subsequently realized. The
benefit from approximately $7.6 million of the total $19.4 million valuation
allowance for deferred tax assets related to research and development credit
carryforwards will be allocated to additional paid-in capital rather than
current earnings when and if subsequently realized.
As of June 30, 2001, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $744 million and $323
million, respectively. In addition, the Company has federal and California
research and development credit carryforwards of approximately $12.4 million
and $10.7 million, respectively. The federal net operating loss carryforwards
and research and development credit carryforwards will expire from 2011 through
2021. The California net operating loss carryforwards will expire from 2004
through 2011.
The Tax Reform Act of 1986 imposes substantial restrictions on the utilization
of net operating losses and tax credits in the event of an "ownership change"
as defined. Some of the U.S. federal and California net operating loss
carryforwards are subject to limitation as a result of these restrictions. The
ownership change restrictions are not expected to impair the Company's ability
to utilize the affected carryforward items. If there should be a subsequent
ownership change, as defined, of the Company, its ability to utilize its
carryforwards could be reduced.
(8) Geographic, Segment, Significant Customer Information
The Company's chief operating decision maker is considered to be the Company's
Chief Executive Officer (CEO). The CEO reviews financial information presented
on a consolidated basis accompanied by disaggregated information about revenues
by geographic region and by product for purposes of making operating decisions
and assessing financial performance.
Prior to its merger with Software.com, the Company organized its operations
based on a single operating segment: software that enables the delivery of
Internet-based services to mass-market wireless telephones and related
services. As a result of the merger with Software.com, the Company revised the
operating segment to provide a structure that would facilitate the effective
management of the combined business. The Company continues to operate in one
distinct operating segment: the development and delivery of applications,
infrastructure software, and customer services for communication service
providers.
The Company also reorganized its product categories to reflect the new product
categories that were present subsequent to the merger. The disaggregated
information reviewed on a product category basis by the CEO includes:
Applications, Infrastructure Software, and Customer Services.
Applications enable end users to exchange electronic mail, facsimile, voice
mail and multimedia messages from PC's, wireline telephones and mobile devices.
The Company's applications also include, but are not limited to, e-mail and
unified messaging products.
Infrastructure software contains the foundation software required to enable
Internet connectivity to mobile devices and to build a rich set of applications
for mobile users. Infrastructure software includes, but is not limited to,
Mobile Access Gateway and Mobile Browser. One set of infrastructure software
provides mobile location and
F-37
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
presence information and a directory that serves as a standards-based
repository of information about users and devices in the network. In addition,
another set of infrastructure software for mobile devices and PC's enables
Internet connectivity, Web browsing and synchronization of information among
networks, mobile devices and PC's, using a variety of protocols.
Finally, Customer Services are services provided by the Company to customers to
help them design, install, deploy, manage, maintain and support its products
and overall Internet implementations.
The disaggregated information reviewed on a product basis by the CEO is as
follows (in thousands):
Years ended June 30,
-------------------------
2001 2000 1999
-------- -------- -------
Revenue:
Applications....................................... $139,459 $ 51,759 $27,006
Infrastructure software............................ 205,548 41,710 5,278
Customer services.................................. 120,251 52,939 28,099
-------- -------- -------
$465,258 $146,408 $60,383
======== ======== =======
The Company markets its products primarily from its operations in the United
States. International sales are primarily to customers in Asia Pacific and
Europe. Information regarding the Company's revenues in different geographic
regions is as follows (in thousands):
Years ended June 30,
-------------------------
2001 2000 1999
-------- -------- -------
Americas............................................. $186,217 $ 59,906 $29,317
Europe, Middle East, Africa.......................... 139,904 39,713 18,649
Asia Pacific......................................... 139,137 46,789 12,417
-------- -------- -------
$465,258 $146,408 $60,383
======== ======== =======
Information regarding the Company's revenues in different countries is as
follows (in thousands):
Years ended June 30,
-------------------------
2001 2000 1999
-------- -------- -------
United States........................................ $155,901 $ 54,949 $26,771
Japan................................................ 102,193 27,098 6,703
United Kingdom....................................... 80,415 9,857 2,966
Other foreign countries.............................. 126,749 54,504 23,943
-------- -------- -------
$465,258 $146,408 $60,383
======== ======== =======
The Company's long lived assets residing in countries other than in the United
States are insignificant and thus have not been disclosed.
F-38
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant customer information is as follows:
% of Total Revenue % of Total
Years ended June 30, Accounts
---------------------- Receivables
2001 2000 1999 June 30, 2001
------ ------ ------ -------------
Customer:
A.......................................... 2% 5% 21% 1%
B.......................................... 14% -- -- 17%
C.......................................... 15% -- -- 1%
(9) Related Party Transactions
For the years ended June 30, 2001, 2000, and 1999, revenues from companies
affiliated with AT&T Corporation, which is considered a related party due to
its involvement with AT&T Ventures, a stockholder, totaled approximately $9.0
million, $4.1 million, and $4.3 million, respectively. As of June 30, 2001 and
2000, accounts receivable from such company totaled approximately $1.8 million.
(10) Litigation
On February 2, 2001, a complaint, Leon Stambler v. RSA Security Inc., Verisign
Inc., First Data Corporation, Openwave Systems Inc. and Omnisky Corporation,
Civil Action No. 01-0065, was filed in the U.S. District Court for the district
of Delaware against the Company and certain other companies. The complaint
alleges that the defendants have infringed claims of one or more patents that
Mr. Stambler asserts have been granted to him. On March 26, 2001, the Company
responded to the complaint. The Company denied the allegations that the Company
has infringed any claim in either of the patents asserted against the Company.
In addition, the Company asserted counterclaims against Mr. Stambler seeking a
declaratory judgment that the asserted patents are not infringed by the Company
and that the patents are also invalid and unenforceable. Although the parties
have exchanged some written discovery, discovery is still in its initial stages
and no trial date has been set. Based on the facts known to date, the Company
believes that it has meritorious defenses and claims. The Company is unable to
estimate the range of potential loss, if any.
On April 30, 2001, a complaint, Opuswave Networks, Inc. v. Openwave Systems
Inc. and Alain Rossmann, Civil Action No. 01-1681, was filed in the U.S.
District Court for the Northern District of California against the Company and
a former affiliate of the Company. The complaint alleges that the defendants
have infringed claims of a common law trademark that plaintiff asserts it has
acquired. On June 5, 2001, the Company responded to the complaint. The Company
denied the allegations that the Company has infringed any trademark rights
asserted against the Company. In addition, the Company asserted counter-claims
against the plaintiff seeking a declaratory judgment that the asserted
trademark rights are not infringed by the Company. On June 13, 2001, Opuswave
Networks responded to the counter-claims denying its allegations. Discovery has
not commenced and no trial date has been set. Based on the facts known to date,
the Company believes that it has meritorious defenses and intends to defend
this suit. The Company is unable to estimate the range of potential loss, if
any.
F-39
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(11) Subsequent Event
a) Tender Offer
On August 2, 2001, the Company announced a voluntary stock option exchange
program for its employees, except for the Company's Chief Executive Officer and
employees located in Australia. Members of the Company's Board of Directors and
consultants holding options also were ineligible to participate. Under the
program, Company employees had the opportunity to surrender previously granted
outstanding stock options in exchange for an equal or lesser number of
replacement options to be granted at a future date. Options to acquire a total
of 35,832,309 shares of the Company's common stock with exercise prices ranging
from $163.13 to $0.01 were eligible to be exchanged under the program. The
Offer was open until 5:00 p.m., Pacific Daylight Time, on September 17, 2001.
As a result of the stock option exchange program, the Company is obliged to
grant replacement options to acquire approximately 16.7 million shares of the
Company's common stock. The exercise price of the replacement options will be
equal to the fair market value of the Company's common stock on the future date
of grant, which will be an unspecified date falling between March 18, 2002, and
April 18, 2002. The program required a participant electing to exchange any
options to also exchange any other options granted to him or her during the six
months before or after September 17, 2001. The stock option exchange program
was designed to comply with Financial Accounting Standards Board Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation, and
is not expected to result in any additional compensation charges or variable
award accounting.
b) Acquisition
On July 13, 2001, the Company consummated an agreement to acquire Avogadro,
Inc. (Avogadro), a telecommunications infrastructure software developer. In
connection with the acquisition, the Company issued approximately 2,700,000
shares of the Company's common stock in exchange for all of the outstanding
common stock and preferred stock of Avogadro, and the assumption of options and
warrants.
c) Openwave Stock Repurchase Program
The Company announced that its Board of Directors has authorized a stock
repurchase program of up to 5 million shares. Any purchases under the Company
stock repurchase program may be made in the open market, in privately
negotiated transactions, or through the use of derivative securities. As of
September 24, 2001 the Company has 4.9 million shares still available for
repurchase under the current plan. The Company has repurchased 100,000 shares
at a weighed average price of $13.00 on the open market. The Company has also
sold 3.5 million put warrants that entitle the holder of each warrant to sell
to the company, by cash, physical delivery or net share settlement at the
Company's election, one share of common stock at a specified price. The total
obligation of the put warrants is $44.3 million. The cumulative net proceeds of
the sale of 3.5 million put warrants total $10.5 million.
d) Executive Staff Changes and Additional Compensation
In August 2001 Kevin Kennedy, former senior vice president of Cisco Systems,
joined the Company as Chief Operating Officer (COO).
Since June 30, 2001, in association with the addition of the COO and additional
compensation to other named executives, the Compensation Committee of the Board
granted 210,000 restricted shares of the Company's common stock. The restricted
shares will vest through July 2003. On the date of grants the Company recorded
stock-based compensation of approximately $300,000 and deferred stock-based
compensation of $2.8 million.
F-40
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Quarterly Financial Information (unaudited)
The following is a summary of the Company's unaudited quarterly financial
information for the most recent two fiscal years.
The Company has restated its consolidated statements of operations to reflect
the November 17, 2000 merger with Software.com. The Company restated its
consolidated financial statements for such periods to reflect that the merger
was accounted for as a pooling-of-interests. The Company's restated quarterly
consolidated financial position and statements of operations as of and for each
of the quarterly periods in the year ended June 30, 2000, and the quarters
ended December 31, and September 30, 2000 are as follows (in thousands, except
per share amounts):
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2001 2001 2000 2000 2000 2000 1999 1999
----------- ---------- ---------- ---------- ---------- ---------- --------- ---------
(unaudited)
ASSETS
------
Current assets
Cash and cash
equivalents........... $ 161,987 $ 166,064 $ 154,689 $ 142,277 $ 120,585 $ 183,993 $ 324,151 $ 79,391
Short-term
investments........... 186,506 194,314 280,540 362,874 402,422 403,433 254,291 110,589
Accounts receivable,
net................... 153,701 117,654 114,449 103,240 77,385 62,111 34,618 24,800
Prepaid expenses and
other current
assets................ 14,364 11,928 13,574 21,194 11,499 6,590 4,677 2,692
----------- ---------- ---------- ---------- ---------- ---------- --------- --------
Total current
assets.............. 516,558 489,960 563,252 629,585 611,891 656,127 617,737 217,472
Property and equipment,
net.................... 98,582 91,421 68,425 40,336 34,824 25,449 14,974 10,826
Long-term and restricted
cash and investments... 41,873 20,700 20,700 20,700 20,700 -- -- --
Deposits and other
assets................. 11,774 11,760 7,157 3,989 5,880 3,897 2,380 1,930
Goodwill and other
intangible assets,
net.................... 1,056,928 1,215,697 1,374,786 1,529,590 1,687,930 941,750 239,900 --
----------- ---------- ---------- ---------- ---------- ---------- --------- --------
$ 1,725,715 $1,829,538 $2,034,320 $2,224,200 $2,361,225 $1,627,223 $ 874,991 $230,228
=========== ========== ========== ========== ========== ========== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Current liabilities
Current portion of
capital lease
obligations and long-
term debt............. $ 1,776 $ 2,808 $ 2,929 $ 3,221 $ 3,367 $ 2,184 $ 1,607 $ 424
Accounts payable....... 20,600 7,306 10,614 10,045 14,176 9,446 6,470 8,491
Accrued liabilities.... 54,370 53,831 84,873 43,432 50,124 60,832 22,815 11,967
Deferred revenue....... 90,262 81,981 109,177 122,805 97,863 78,355 57,069 44,962
----------- ---------- ---------- ---------- ---------- ---------- --------- --------
Total current
liabilities......... 167,008 145,926 207,593 179,503 165,530 150,817 87,961 65,844
Capital lease
obligations and long-
term debt, less current
portion................ 754 1,330 1,971 2,639 3,319 2,742 6,028 387
----------- ---------- ---------- ---------- ---------- ---------- --------- --------
Total liabilities.... 167,762 147,256 209,564 182,142 168,849 153,559 93,989 66,231
----------- ---------- ---------- ---------- ---------- ---------- --------- --------
Commitments and
contingencies
Stockholders' equity
Common stock........... 170 167 166 165 161 147 137 128
Additional paid-in
capital............... 2,623,466 2,602,286 2,594,537 2,585,229 2,569,416 1,673,948 905,476 255,229
Deferred stock-based
compensation.......... (6,079) (2,810) (3,986) (5,196) (7,237) (8,066) (10,140) (2,293)
Treasury stock......... -- -- -- -- -- (196) (196) (196)
Accumulated other
comprehensive income
(loss)................ (247) (740) 289 (429) (561) (32) (6) --
Notes receivable from
stockholders.......... (684) (139) (925) (1,011) (724) (837) (484) (484)
Accumulated deficit.... (1,058,673) (916,482) (765,325) (536,700) (368,679) (191,300) (113,785) (88,387)
----------- ---------- ---------- ---------- ---------- ---------- --------- --------
Total stockholders'
equity.............. 1,557,953 1,682,282 1,824,756 2,042,058 2,192,376 1,473,664 781,002 163,997
----------- ---------- ---------- ---------- ---------- ---------- --------- --------
$ 1,725,715 $1,829,538 $2,034,320 $2,224,200 $2,361,225 $1,627,223 $ 874,991 $230,228
=========== ========== ========== ========== ========== ========== ========= ========
F-41
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Quarters ended
-------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2001 2001 2000 2000 2000 2000 1999 1999
--------- --------- --------- --------- --------- --------- -------- ---------
(unaudited)
Revenues
License................ $ 109,909 $ 98,021 $ 79,960 $ 57,100 $ 38,376 $ 25,270 $ 17,347 $12,133
Maintenance and
support services...... 20,530 15,891 13,303 10,540 8,568 6,947 5,773 4,547
Professional
services.............. 14,238 16,119 16,475 13,172 10,364 6,563 5,941 4,579
--------- --------- --------- --------- --------- -------- -------- -------
Total revenues....... 144,677 130,031 $ 109,738 $ 80,812 $ 57,308 $ 38,780 $ 29,061 $21,259
--------- --------- --------- --------- --------- -------- -------- -------
Cost of revenues
License................ 5,758 4,334 6,214 5,639 3,490 1,198 966 1,088
Maintenance and
support services...... 8,077 7,421 7,070 6,307 5,233 3,804 3,624 2,228
Professional
services.............. 8,830 11,097 9,023 8,000 6,660 4,197 3,349 2,765
--------- --------- --------- --------- --------- -------- -------- -------
Total cost of
revenues............ 22,665 22,852 22,307 19,946 15,383 9,199 7,939 6,081
--------- --------- --------- --------- --------- -------- -------- -------
Gross profit............ 122,012 107,179 87,431 60,866 41,925 29,581 21,122 15,178
--------- --------- --------- --------- --------- -------- -------- -------
Operating expenses
Research and
development........... 39,540 37,628 31,440 27,160 20,072 17,036 13,051 9,730
Sales and marketing.... 44,049 37,769 33,413 33,580 24,889 19,740 12,820 10,972
General and
administrative........ 19,649 16,645 12,277 10,749 8,182 6,234 5,443 4,202
Stock-based
compensation.......... 2,582 1,405 1,562 4,674 3,632 4,282 1,863 407
Amortization of
goodwill and other
intangible assets..... 158,828 159,309 159,731 158,414 152,923 49,720 13,971 --
In-process research
and development....... -- -- -- -- 6,300 18,080 3,320 --
Merger, acquisition,
and integration-
related costs......... -- 5,756 83,094 -- 10,268 127 -- --
--------- --------- --------- --------- --------- -------- -------- -------
Total operating
expenses............ 264,648 258,512 321,517 234,577 226,266 115,219 50,468 25,311
--------- --------- --------- --------- --------- -------- -------- -------
Operating loss....... (142,636) (151,333) (234,086) (173,711) (184,341) (85,638) (29,346) (10,133)
Interest and other
income, net............ 5,424 3,848 7,175 8,313 7,788 8,327 4,840 2,265
--------- --------- --------- --------- --------- -------- -------- -------
Loss before income
taxes............... (137,212) (147,485) (226,911) (165,398) (176,553) (77,311) (24,506) (7,868)
Income taxes............ (4,979) (3,672) (1,714) (2,623) (825) (204) (892) (98)
--------- --------- --------- --------- --------- -------- -------- -------
Net loss ............ $(142,191) $(151,157) $(228,625) $(168,021) $(177,378) $(77,515) $(25,398) $(7,966)
========= ========= ========= ========= ========= ======== ======== =======
Basic and diluted net
loss per share
attributable to common
stockholders........... $ (0.84) $ (0.91) $ (1.38) $ (1.04) $ (1.13) $ (0.56) $ (0.19) $ (0.06)
========= ========= ========= ========= ========= ======== ======== =======
Shares used in computing
basic and diluted net
loss per share
attributable to common
stockholders........... 168,833 166,943 165,088 162,026 156,971 139,215 132,251 128,444
========= ========= ========= ========= ========= ======== ======== =======
F-42
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Balance at
beginning of year Additions Deductions end of year
----------------- --------- ---------- -----------
Allowance for doubtful
accounts:
Year ended June 30,
1999.................... $ 481 $ 790 $ 247 $ 1,024
Year ended June 30,
2000.................... $1,024 $ 1,425 $ 272 $ 2,177
Year ended June 30,
2001.................... $2,177 $19,597 $11,318 $10,456
S-1