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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2000
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
800 Chesapeake Drive
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 562-0200
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
As of January 31, 2001, there were 167,074,846 shares of the registrant's
Common Stock outstanding.
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INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................................. 3
Condensed consolidated balance sheets at December 31, 2000 and
June 30, 2000.................................................... 3
Condensed consolidated statements of operations for the three and
six month periods ended December 31, 2000 and 1999............... 4
Condensed consolidated statements of cash flows for the six month
periods ended December 31, 2000 and 1999......................... 5
Notes to condensed consolidated financial statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 37
Item 2. Changes in Securities and Use of Proceeds--Not Applicable......... 37
Item 3. Defaults Upon Senior Securities--Not Applicable................... 37
Item 4. Submission of Matters to a Vote of Security Holders............... 37
Item 5. Other Information--Not Applicable................................. 38
Item 6. Exhibits and Reports on Form 8-K.................................. 38
SIGNATURE.................................................................. 39
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, June 30,
2000 2000
------------ ----------
ASSETS
------
Current assets:
Cash and cash equivalents........................... $ 154,689 $ 120,585
Short-term investments.............................. 280,540 402,422
Accounts receivable (net of allowances of $3,028 and
$2,177 as of December 31 and June 30, 2000,
respectively)...................................... 114,449 77,385
Prepaid expenses and other current assets........... 13,574 11,499
---------- ----------
Total current assets.............................. 563,252 611,891
Property and equipment, net........................... 68,425 34,824
Restricted cash and investments....................... 20,700 20,700
Deposits and other assets............................. 7,157 5,880
Goodwill and other intangible assets, net............. 1,374,786 1,687,930
---------- ----------
$2,034,320 $2,361,225
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of capital lease obligations and
long-term debt..................................... $ 2,929 $ 3,367
Accounts payable.................................... 10,614 14,176
Accrued liabilities ................................ 84,873 50,124
Deferred revenue.................................... 109,177 97,863
---------- ----------
Total current liabilities......................... 207,593 165,530
Capital lease obligations and long term debt, less
current portion...................................... 1,971 3,319
---------- ----------
Total liabilities................................. 209,564 168,849
---------- ----------
Stockholders' equity:
Common stock........................................ 166 161
Additional paid-in capital.......................... 2,594,537 2,569,416
Deferred stock-based compensation................... (3,986) (7,237)
Notes receivable from stockholders.................. (925) (724)
Accumulated other comprehensive income(loss)........ 289 (561)
Accumulated deficit................................. (765,325) (368,679)
---------- ----------
Total stockholders' equity........................ 1,824,756 2,192,376
---------- ----------
$2,034,320 $2,361,225
========== ==========
See accompanying notes to the condensed consolidated financial statements.
3
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
2000 1999 2000 1999
--------- -------- --------- --------
Revenues:
License........................... $ 79,960 $ 17,347 $ 137,061 $ 29,480
Maintenance and support services.. 13,303 5,773 23,843 10,318
Professional services............. 16,475 5,941 29,646 10,522
--------- -------- --------- --------
Total revenues.................. 109,738 29,061 190,550 50,320
--------- -------- --------- --------
Cost of revenues:
License........................... 6,214 966 11,851 2,054
Maintenance and support services.. 7,070 3,624 13,377 5,861
Professional services............. 9,023 3,349 17,024 6,116
--------- -------- --------- --------
Total cost of revenues.......... 22,307 7,939 42,252 14,031
--------- -------- --------- --------
Gross profit.................... 87,431 21,122 148,298 36,289
--------- -------- --------- --------
Operating expenses:
Research and development.......... 31,440 13,051 58,599 22,781
Sales and marketing............... 33,413 12,820 66,993 23,792
General and administrative........ 12,277 5,441 23,029 9,645
Stock-based compensation.......... 1,562 1,863 6,236 2,263
Amortization of goodwill and other
intangible assets................ 159,731 17,291 318,145 17,291
Merger costs...................... 79,565 -- 79,565 --
Integration costs................. 3,529 -- 3,529 --
--------- -------- --------- --------
Total operating expenses........ 321,517 50,466 556,096 75,772
--------- -------- --------- --------
Operating loss.................. (234,086) (29,344) (407,798) (39,483)
Interest and other income, net...... 7,175 4,838 15,491 7,107
--------- -------- --------- --------
Loss before income taxes........ (226,911) (24,506) (392,307) (32,376)
Income taxes........................ 1,714 892 4,339 990
--------- -------- --------- --------
Net loss........................ $(228,625) $(25,398) $(396,646) $(33,366)
========= ======== ========= ========
Basic and diluted net loss per
share.............................. $ (1.38) $ (0.19) $ (2.42) $ (0.26)
========= ======== ========= ========
Shares used in computing basic and
diluted net loss per share......... 165,088 132,251 163,614 130,644
========= ======== ========= ========
See accompanying notes to the condensed consolidated financial statements.
4
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
December 31,
-------------------
2000 1999
--------- --------
Cash flows from operating activities:
Net loss................................................. $(396,646) $(33,366)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization........................... 326,008 17,873
Amortization of stock-based compensation................ 5,885 2,414
Stock based compensation settled in cash................ (2,548) --
Provision for doubtful accounts......................... 2,254 482
Changes in operating assets and liabilities:
Accounts receivable.................................... (39,318) 1,004
Prepaid expenses and other assets...................... (365) (2,024)
Accounts payable....................................... (3,561) 281
Accrued liabilities.................................... 55,451 8,675
Deferred revenue....................................... 9,976 14,704
--------- --------
Net cash provided by (used for) operating activities.. (42,864) 10,043
--------- --------
Cash flows from investing activities:
Purchases of property and equipment, net................. (42,068) (10,830)
Payments related to prior acquisitions................... (25,014) --
Businesses acquired, net of cash received................ -- (11,734)
Investment in non-marketable equity securities........... (2,086) --
Purchases of short-term investments...................... (230,232) (239,057)
Proceeds from sales and maturities of short-term
investments............................................. 352,926 21,014
--------- --------
Net cash provided by (used for) investing activities.. 53,526 (240,607)
--------- --------
Cash flows from financing activities:
Issuance of common stock................................. 25,042 392,944
Repayment of notes receivable from stockholders.......... 160 --
Proceeds from capital lease obligations and long-term
debt.................................................... -- 4,500
Repayments of capital lease obligations and long-term
debt.................................................... (1,786) (1,352)
--------- --------
Net cash provided by financing activities............. 23,416 396,092
--------- --------
Effect of exchange rate on cash and cash equivalents...... 26 --
--------- --------
Net increase in cash and cash equivalents................. 34,104 165,528
Cash and cash equivalents at beginning of period.......... 120,585 151,690
--------- --------
Cash and cash equivalents at end of period................ $ 154,689 $317,218
========= ========
Supplemental disclosures of cash flow information:
Businesses acquired for common stock..................... $ -- $245,761
========= ========
Deferred stock-based compensation........................ $ 1,674 $ 9,585
========= ========
Commmon stock issued to officers and employees in
exchange for note receivable............................ $ 361 $ --
========= ========
See accompanying notes to the condensed consolidated financial statements.
5
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
NOTE 1--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the Company's financial position as of December 31, 2000, and
the results of its operations for the three and six month periods ended
December 31, 2000 and 1999, and cash flows for the six-month periods ended
December 31, 2000 and 1999. The condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and accompanying notes included in Phone.com's and Software.com's
annual reports on Form 10-K, the pro-forma financial statements on Phone.com's
Form S-4, and Software.com's 8-K, which were filed with the Securities and
Exchange Commission (SEC) on August 31, 2000, March 30, 2000, October 10,
2000, and July 17, 2000, respectively.
On November 17, 2000, the Company merged with Software.com. The merger was
accounted for as a pooling of interests. Accordingly, the financial
information has been restated to reflect the combined financial position and
operations of the Company and Software.com for all dates and periods
presented.
NOTE 2--Revenue Recognition
Effective July 1, 1998, the Company adopted Statement of Position (SOP) 97-
2, Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9. SOP 97-
2, as amended, generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair value of the elements.
Revenue from license fees is recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, no significant
obligations of the Company with regard to implementation remain, the fee is
fixed and determinable, and collectibility is probable. The Company considers
all arrangements with payment terms extending beyond one year not to be fixed
and determinable, and revenue is recognized as payments become due from the
customer.
Revenue recognized from multiple-element arrangements is allocated to
undelivered elements of the arrangement, such as maintenance and support
services and professional services, based on the fair values of the elements
specific to the Company. Revenue from delivered elements is recognized using
the residual method. For arrangements where the Company has committed to
provide the customer with future unspecified products under a subscription
arrangement, license fees are recognized ratably over the contractual term of
the subscription arrangement.
The Company's primary product categories consist of Applications, including
InterMail and UP.Mail products; Infrastructure Software, including UP.Link
Server Suite and related server-based products, UP.Browser and FoneSync; and
Customer Services, including maintenance and support services and professional
services.
The Company licenses Applications and UP.Link Server Suite and related
server-based products 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 UP.Link Server Suite and related server-based products are
either purchased under a perpetual license model or under a monthly or
quarterly time-based license model.
6
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For arrangements under which licenses are purchased under a perpetual
license model and the Company does not have objective evidence of the fair
value of maintenance and support services, license fees are recognized ratably
over the period that maintenance and support services are expected to be
provided, generally 12 to 24 months, commencing at the beginning of the month
delivery and acceptance occur by the communication service provider. For
arrangements under which licenses are purchased under a perpetual license
model and the Company has objective evidence of the fair value of maintenance
and support services, license fees are recognized upon delivery and acceptance
by the communication service provider using the residual method. For
arrangements under which licenses are purchased under a perpetual license
model on an as-deployed basis, license fees are generally recognized quarterly
as subscribers are activated to use the services that are based on the
Company's products. For customers who license the Company's products under a
time-based license model, revenues are recognized ratably over the respective
term of license based on the number of the customer's subscribers using the
services that are based on the Company's products during the respective
license term.
The Company licenses its UP.Browser software to portable communication
device manufacturers through its direct sales force. The Company recognizes
revenues from UP.Browser arrangements ratably over the period during which the
services are performed, generally one year. The Company provides its portable
communication device manufacturer customers with support associated with their
efforts to port its UP.Browser software to their portable devices, software
error corrections, and new releases as they become commercially available.
The Company licenses its FoneSync product to end-user and original equipment
manufacturer (OEM) customers through its direct sales force and indirectly
through its channel distribution partners. FoneSync sold directly to end-user
and OEM customers is recognized upon delivery of the software. FoneSync sold
through channel distribution partners may be subject to agreements allowing
limited rights of return, rebates, and price protection. The Company maintains
an allowance for anticipated returns on products sold through channel
distribution partners. For sales of FoneSync in which the Company provides
implicit maintenance and support services, revenue is recognized ratably over
the estimated life of the software product.
Revenues from Customer Services are recognized over the period in which the
services are performed.
NOTE 3--Comprehensive Loss
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS 130 establishes
standards for the reporting and display of comprehensive net income (loss) and
its components. However, it has no impact on the Company's net loss as
presented in the accompanying consolidated financial statements. The only
items of comprehensive income (loss) that the Company currently reports are
unrealized gains (losses) on "available for sale" marketable securities and
foreign currency translation adjustments.
A summary of comprehensive loss follows:
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
2000 1999 2000 1999
--------- -------- --------- --------
Net loss............................ $(228,625) $(25,398) $(396,646) $(33,366)
Foreign currency translation
adjustments........................ 191 -- 27 --
Unrealized gain on securities....... 527 -- 823 --
--------- -------- --------- --------
Comprehensive loss.................. $(227,907) $(25,398) $(395,796) $(33,366)
========= ======== ========= ========
7
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--Net Loss Per Share
Basic net loss 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. Diluted net loss per share is computed
using the weighted-average number of shares of common stock outstanding and,
when dilutive, potential shares of restricted common stock subject to
repurchase, common stock from options and warrants to purchase common stock,
using the treasury stock method, and from convertible securities on an "as if
converted" basis. The following potential shares of common stock have been
excluded from the computation of diluted net loss per share for all periods
presented because the effect would have been antidilutive (in thousands):
December 31,
-------------
2000 1999
------ ------
Shares issuable under stock options........................ 32,772 25,968
Shares of restricted stock subject to repurchase........... 806 428
Shares issuable pursuant to warrants to purchase common
stock..................................................... 237 293
Shares of convertible preferred stock on an "as if
converted basis".......................................... -- 76,184
The weighted-average exercise price of stock options outstanding was $48.35
and $12.24 as of December 31, 2000 and 1999, respectively. The weighted-
average purchase price of restricted stock subject to repurchase was $0.72 and
$15.00 as of December 31, 2000 and 1999, respectively. The weighted-average
exercise price of outstanding warrants was $2.44 and $2.34 as of December 31,
2000, and 1999, respectively.
NOTE 5--Derivative Instruments and Hedging Activities
As of July 1, 2000, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133, as amended by SFAS No. 137, establishes accounting
and reporting standards for derivative financial instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
For a derivative not designated as a hedging instrument, changes in the fair
value of the derivative are recognized in earnings in the period of change.
The Company does not currently engage in hedging activities. As of December
31, 2000, the Company holds a derivative financial instrument with respect to
its warrant to purchase preferred stock of a private entity. The instrument
has a fair value of $2 million and is classified in deposits and other assets
in the accompanying condensed consolidated balance sheet. Increases or
decreases in the fair value of the warrant will be recorded in the statement
of operations in the period they occur. The fair value of the instrument as of
December 31, 2000 approximates the value as of the date the warrant was
issued. Therefore, the Company has not recognized any gain or loss on the
investment to date.
NOTE 6--Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended by SAB 101A and SAB 101B, which provides guidance on
the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must
be met to recognize revenue and provides guidance for disclosure related to
revenue recognition policies. In June 2000, the SEC issued SAB 101B that
delayed the implementation of SAB 101. The Company must adopt SAB 101 no later
than the fourth quarter of fiscal 2001. The Company expects that the adoption
of SAB 101 will not have a material impact on its consolidated financial
position or results of its operations.
8
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 2000, the Emerging Issues Task Force (EITF) published their
consensus on EITF Issue No. 00-2, Accounting for Web Site Development Costs,
which requires that costs incurred during the development of web site
applications and infrastructure, involving developing software to operate the
web site, including graphics that affect the "look and feel" of the web page
and all costs relating to software used to operate a web site, should be
accounted for under Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. However, if a plan
exists or is being developed to market the software externally, the costs
relating to the software should be accounted for pursuant to FASB Statement
No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed. The Company adopted EITF Issue No. 00-2 on July 1, 2000.
EITF Issue No. 00-2 has not had a material effect on the Company's
consolidated financial position or results of operations.
In March 2000, the FASB issued FIN 44, an interpretation of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. FIN 44 addresses inconsistencies in accounting for stock-based
compensation that arise from implementation of APB Opinion No. 25. The Company
adopted FIN 44 on July 1, 2000. FIN 44 has not had a material effect on the
Company's consolidated financial position or results of operations.
In January 2001, the EITF published their consensus on EITF Issue No. 00-23,
Issues Related to the Accounting for Stock Compensation under APB Opinion No.
25, "Accounting for Stock Issued to Employees," and FASB Interpretation No.
44, "Accounting for Certain Transactions Involving Stock Compensation." EITF
Issue No. 00-23 addresses a number of question and implementation issues
related to accounting for stock options. The Company is currently assessing
the impact of adopting the requirements of EITF Issue No. 00-23.
NOTE 7--Geographic, Segment, and 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 instant messages, electronic mail,
facsimile, voice mail and multimedia messages from PC's, wireline telephones
and mobile devices. Applications include a Personal Information Manager, or
PIM, with an address book, task list and calendar that can be accessed from
mobile devices and the Internet. The Company's Applications also include but
are not limited to InterMail and UP.Mail 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 gateways to
connect mobile devices to the Internet using a variety of protocols. One set
of Infrastructure software provides mobile location and 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. The Company's Infrastructure software includes but is
not limited to UP.Link, UP.Browser, and FoneSync.
9
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Finally, Customer Services are services provided by Openwave to customers to
help them design, install, deploy, manage, maintain and support Openwave
products and the customers' overall Internet implementations.
The disaggregated information reviewed on a product category basis by the
CEO is as follows (in thousands):
Three Months
Ended December Six Months Ended
31, December 31,
---------------- ----------------
2000 1999 2000 1999
-------- ------- -------- -------
Revenues:
Applications................................ $ 35,495 $ 9,973 $ 66,339 $17,065
Infrastructure software..................... 43,363 6,544 68,311 11,514
Customer services........................... 30,880 12,544 55,900 21,741
-------- ------- -------- -------
Total revenues............................ $109,738 $29,061 $190,550 $50,320
======== ======= ======== =======
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):
Three Months
Ended December Six Months Ended
31, December 31,
---------------- ----------------
2000 1999 2000 1999
-------- ------- -------- -------
Revenues:
Americas................................... $ 48,096 $12,187 $ 83,645 $21,817
Europe, Middle East, Africa................ 32,804 7,667 56,048 13,459
Asia Pacific............................... 28,838 9,207 50,857 15,044
-------- ------- -------- -------
Total revenues........................... $109,738 $29,061 $190,550 $50,320
======== ======= ======== =======
Information regarding the Company's revenues in different countries is as
follows (in thousands):
Three Months
Ended December Six Months Ended
31, December 31,
---------------- ----------------
2000 1999 2000 1999
-------- ------- -------- -------
Revenues:
United States............................... $ 40,086 $10,414 $ 69,453 $19,752
Japan....................................... 22,387 6,242 37,321 10,611
United Kingdom.............................. 14,188 1,472 24,381 1,980
Other foreign countries..................... 33,077 10,933 59,395 17,977
-------- ------- -------- -------
Total revenues............................ $109,738 $29,061 $190,550 $50,320
======== ======= ======== =======
10
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant customer information is as follows:
% of Total Revenue
------------------------------
Three Months Six Months % of Total
Ended Ended Accounts
December 31, December 31, Receivable
-------------- -------------- December 31,
2000 1999 2000 1999 2000
------ ------ ------ ------ ------------
Customer A...................... 15 13 14 14 2
Customer B...................... 12 2 12 2 15
Note 8--Business Combinations
(a) Poolings of Interests
Software.com, Inc.
On November 17, 2000, the Company merged with Software.com, Inc.
(Software.com) in a transaction that was accounted for as a pooling-of-
interests. Software.com was incorporated in October 1994. 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 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 phones. The Company registered 94,506,060
shares of its common stock in exchange for all of the issued and outstanding
common stock of Software.com including 12,520,161 shares reserved for issuance
in connection with the assumption of Software.com's outstanding employee
benefit plans, options, and employee stock purchase plans. In connection with
the merger, the Company and Software.com expect to incur one-time expenses of
approximately $88 million.
Prior to the combination, Software.com's fiscal year ended December 31. In
recording the pooling-of-interests combination, Software.com's financial
statements for the twelve months ended June 30, 2000, were combined with the
Company's financial statements for the year-ended June 30, 2000 and
Software.com's financial statements for the years ended December 31, 1999 and
1998, were combined with the Company's financial statements for the years
ended June 30, 1999 and 1998. As of the merger date, Software.com changed its
fiscal year-end to June 30 to conform to the Company's fiscal year-end.
Software.com's unaudited results of operations for the six months ended
December 31, 1999 included revenues of $26,687,000, expenses of $29,662,000
and net loss of $2,975,000. 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 years ended June 30, 2000 and 1999.
Adjustments to conform Software.com's method of accounting for stock-based
compensation with that of the Company increased (decreased) net loss for the
three months ended December 31, 2000 and 1999, and the six months ended
December 31, 2000 and 1999, by approximately $(52,000), $60,000, $(75,000),
and $188,000, respectively. Intercompany revenues and costs of revenues
totaling $1,243,000 and $459,000, respectively, and intercompany revenues and
costs of revenues totaling $4,549,000 and $1,624,000 respectively, have been
eliminated in the condensed consolidated statements of operations for the
three months ended December 31, 2000 and the six months ended December 31,
2000, respectively. There were no intercompany transactions in the other
periods presented. In addition, related balance sheet amounts have been
eliminated as of June 30, 2000 and December 31, 2000.
AtMobile.com, Inc.
On April 11, 2000, Software.com completed its merger with AtMobile.com, Inc.
(AtMobile). AtMobile, formerly Global Mobility Systems, was incorporated on
August 16, 1996. AtMobile develops mass market
11
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The AtMobile 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 AtMobile for all dates
and periods presented. There were no significant conforming adjustments or
intercompany eliminations required in the AtMobile merger.
Mobility.Net, Inc.
In April 1999, Software.com completed its merger with Mobility.Net, Inc.
(Mobility.Net), which offers products for Web messaging using a Java-based
technology platform that complement 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 AtMobile for all dates
and periods presented. There were no significant conforming adjustments or
intercompany eliminations required in the Mobility.Net merger.
Separate Operating Results
Separate operating results of the combined entities for the three and six
months ended December 31, 2000 and 1999, are shown below (in thousands). The
results of Mobility.Net were not significant, and have been included in the
operating results of Software.com.
Three Months Ended Six Months Ended
December 31, December 31,
------------------- -------------------
2000 1999 2000 1999
--------- -------- --------- --------
Revenues:
Openwave............................ $ 72,185 $ 12,782 $ 118,658 $ 21,329
Software.com........................ 37,553 15,513 71,892 27,520
AtMobile............................ -- 766 -- 1,471
--------- -------- --------- --------
Combined.......................... $ 109,738 $ 29,061 $ 190,550 $ 50,320
========= ======== ========= ========
Net loss:
Openwave............................ $(196,880) $(20,003) $(361,928) $(24,941)
Software.com........................ (31,745) (3,982) (34,718) (5,872)
AtMobile............................ -- (1,413) -- (2,553)
--------- -------- --------- --------
Combined.......................... $(228,625) $(25,398) $(396,646) $(33,366)
========= ======== ========= ========
(b) Purchase Acquisitions
bCandid Corporation
In June 2000, Software.com completed its acquisition of bCandid Corporation
(bCandid), a provider of carrier-class discussion server infrastructure
software to service providers worldwide. In connection with the
12
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquisition of bCandid, Software.com issued approximately 1,074,000 shares of
Software.com common stock with a value of $68.7 million in exchange for all of
the issued and outstanding capital stock of bCandid, as well as the assumption
of all outstanding warrants and options to purchase shares of bCandid. The
acquisition was accounted for as a purchase and, accordingly, the operating
results of bCandid have been included in the Company's consolidated financial
statements results from the acquisition date. The excess of the purchase price
over the fair value of tangible net liabilities assumed amounted to
approximately $69.2 million, with $59.2 million attributable to goodwill, $6.7
million attributable to developed technology, $600,000 attributable to
customer relationships, $400,000 attributable to assembled workforce, $300,000
attributable to non-compete agreements and $2.0 million attributable to in-
process research and development. These 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.
MyAble, Inc.
On June 14, 2000, the Company acquired all of the outstanding common stock
of MyAble Inc. (MyAble), a company based in Palo Alto, California, in exchange
for 193,873 shares of its common stock. The Company also assumed all of the
outstanding options of MyAble. MyAble is a provider of hosted personalization
services for wireline and wireless web technologies. Total consideration
aggregated approximately $18.4 million. The acquisition was accounted for as a
purchase with MyAble's results of operations included from the date of
acquisition. Approximately $18.4 million was allocated to goodwill, which is
being amortized on a straight-line basis over a period of three years.
Velos 2 S.r.l.
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, in exchange for 8,134
shares of its common stock valued at approximately $579,000 plus a cash
payment and direct acquisition costs totaling approximately $350,000. The
acquisition was accounted for as a purchase with Velos' results of operations
included from the date of acquisition. Approximately $929,000 was allocated to
goodwill, which is being amortized on a straight-line basis over a period of
three years. In addition, the Company issued an additional 9,866 shares of
common stock contingent on future employment which resulted in deferred stock-
based compensation in the amount of approximately $1.2 million, which is being
amortized on an accelerated basis over the vesting period of 36 months,
consistent with the method described in FIN 28.
Onebox, Inc.
On April 14, 2000, the Company acquired all of the outstanding common and
preferred stock of Onebox, Inc. (Onebox) a company based in San Mateo,
California, in exchange for 6,207,865 shares of its common stock. The Company
also assumed all of the outstanding options of Onebox. Onebox is a
communications application service provider offering users unified e-mail,
voice mail, facsimile, and wireless-enabled communication applications. Total
consideration aggregated approximately $814.7 million, including estimated
transaction costs of approximately $16.8 million. The acquisition was
accounted for as a purchase with Onebox's results of operations included from
the date of acquisition. The excess of the purchase price over the fair value
of tangible net assets acquired amounted to approximately $814.0 million, with
$789.7 million attributable to goodwill, $590,000 attributable to assembled
workforce, $14.7 million attributable to developed technology, $4.8 million
attributable to non-compete agreements and $4.3 million attributable to in-
process research and development. These 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.
13
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Paragon Software (Holdings) Limited
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, in exchange for 3,051,016 shares
of its common stock. The Company also assumed all of the outstanding options
of Paragon. Paragon is a provider of synchronization technology allowing PC-
based personal information to be easily transferred to mobile devices. Total
consideration aggregated approximately $453.7 million in common stock of the
Company in addition to a cash payment of $3.6 million. An additional $17.0
million will be paid within one year, payable in approximately 143,000 common
shares of the Company's common stock at the election of the shareholder or in
cash with the consent of the Company as well as additional cash payments of
approximately $3.9 million to be allocated certain employees of Paragon. On
August 11, 2000, the Company made the cash payment of $17.0 million to a
former shareholder of Paragon. There were also transaction costs in connection
with the purchase of approximately $11.6 million. The acquisition was
accounted for as a purchase with Paragon's results of operations included from
the date of acquisition. The excess of the purchase price over the fair value
of tangible net assets acquired amounted to approximately $483.7 million, with
$455.1 million attributable to goodwill, $980,000 attributable to assembled
workforce, $7.2 million attributable to developed technology, $2.3 million
attributable to non-compete agreements and $18.1 million attributable to in-
process research and development. These 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.
Cash or common stock paid to former Paragon shareholders and employees at
the closing of the acquisition was included in the purchase price. Cash or
common stock payable to former Paragon shareholders and employees in the
future will be accounted for as an increase in goodwill and will be amortized
over the remaining useful life of the goodwill.
AtMotion, Inc.
On February 8, 2000, the Company acquired all of the outstanding common and
redeemable convertible preferred stock of AtMotion, Inc. (AtMotion) in
exchange for 2,280,287 shares of its common stock. The Company also assumed
all of the outstanding options and warrants of AtMotion. AtMotion is a
provider of Voice Portal technology. Total consideration given aggregated
approximately $287.2 million. The acquisition was accounted for as a purchase
with AtMotion's results of operations included from the acquisition date. The
excess of the purchase price over the fair value of tangible net assets
acquired amounted to approximately $286.1 million, with $242.9 million
attributable to goodwill, $655,000 attributable to assembled workforce and
$42.5 million attributable to developed technology. These assets are being
amortized on a straight-line basis over a period of three years. At the time
of the acquisition, 12.1% of the shares issued by the Company were placed in
escrow with most of the escrow shares to remain in escrow for a period of at
least one year from the date of the acquisition to be released upon the
occurrence of certain events.
Angelica Wireless ApS
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. Total
consideration paid, including direct acquisition costs, was approximately $2.0
million. In addition, the Company also agreed to issue approximately 16,000
shares of its stock to employees of Angelica with an aggregate value of
approximately $1.7 million, subject to certain forfeiture conditions dependent
on continued employment. The Company accounted for the acquisition as a
purchase with Angelica's results of operations included from the acquisition
date. Approximately $2.0 million was allocated to goodwill, which is being
amortized on a straight-line basis over a period of three years. In addition,
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 36 months, consistent with the method described in FIN 28.
14
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
APiON Telecom Limited
On October 26, 1999, the Company completed its acquisition of APiON Telecom
Limited (APiON), a company based in Belfast, Northern Ireland, in exchange for
2,393,026 shares of its common stock. 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 was a
provider of WAP software products to GSM communication service providers 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 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 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. The total purchase price for the transaction including
direct acquisition costs was approximately $246.8 million.
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 an increase in 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 Company accounted for the acquisition of APiON as a purchase with
APiON's results of operations included from the acquisition date. The excess
of the purchase price over the fair value of tangible net assets acquired
amounted to approximately $244.5 million, with $242.5 million attributable to
goodwill, $1.7 million attributable to assembled workforce, $170,000
attributable to developed technology and $110,000 attributable to in-process
research and development. These 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 24 months,
consistent with the method described in FIN 28.
Telarc, Inc.
On October 20, 1999, Software.com acquired all of the outstanding stock of
Telarc, Inc. (Telarc), which currently provides carrier-scale Short Messaging
Service (SMS) technologies that complement Software.com's product offerings in
exchange for 341,000 shares of the Software.com's common stock with a value of
$10.0 million and $1.5 million in cash. Total consideration aggregated
approximately $11.6 million, including direct acquisition costs of $101,000.
The acquisition of Telarc was accounted for as a purchase and, accordingly,
the acquired assets and liabilities were recorded at their estimated fair
values at the date of acquisition. Telarc's operating results have been
included in Software.com's consolidated financial statements results from the
acquisition date of October 20, 1999. The excess of the purchase price over
the fair value of tangible net assets acquired amounted to approximately $11.3
million, with $2.3 million attributable to goodwill, $5.7 million attributable
to developed technology, and $125,000 attributable to assembled workforce and
other intangibles, and $3.2 million attributable to in-process research and
development. These 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.
15
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 or not 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, MyAble, Velos, Onebox,
Paragon, AtMotion, 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 following table shows unaudited pro forma revenue, net loss and basic
and diluted net loss per share of the Company, including the results of
operations of bCandid, MyAble, Velos, Onebox, Paragon, AtMotion, APiON, and
Telarc as if each company had been acquired on July 1, 1999 (in thousands,
except per share data):
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Revenues.......................... $ 109,738 $ 29,991 $ 190,550 $ 53,612
========= ========= ========= =========
Net loss attributable to common
stockholders..................... $(228,625) $(176,447) $(396,646) $(411,246)
========= ========= ========= =========
Basic and diluted net loss per
share............................ $ (1.38) $ (1.12) $ (2.42) $ (2.62)
========= ========= ========= =========
Shares used in pro forma per share
computation...................... 165,088 157,701 163,614 156,933
========= ========= ========= =========
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.
Note 9--Litigation
In April 2000, we filed a lawsuit against Geoworks Corporation in the U.S.
District Court in San Francisco, California, alleging, and seeking a court
order declaring, that U.S. Patent No. 5,327,529, assigned to Geoworks, is not
infringed by us and that the patent is also invalid and unenforceable. We took
this action in response to Geoworks' attempt to require industry participants
to obtain licenses under the Geoworks patent. On June 15, 2000, Geoworks filed
an answer to our complaint and asserted a counterclaim against us alleging
that we infringed the patent and seeking various forms of relief. On September
8, 2000, Geoworks filed a complaint with the International Trade Commission
requesting that the commission commence an investigation based on the
importation of WAP-compatible devices by us and others, seeking to have the
commission prohibit the importation of these WAP-compatible devices based on
Geoworks' allegation that they infringe U.S. Patent No. 5,327,529. On December
29, 2000, we settled this litigation with Geoworks and signed a royalty-free
patent cross-license agreement. Under the agreement, we received a world-wide
license to Geoworks' Flexible User Interface patent, which covers a method
that enables one software application to run on a variety of devices,
including mobile phones. We also received a world-wide license to a second
patent from Geoworks' patent portfolio to be selected by us over the next 18
months. In exchange, Geoworks received a license to our method and system
patent for combining narrowband and restricted narrowband channels for pushing
rich content. The patent enables companies to send notifications via
narrowband channels such as short-messaging services, better known as SMS, and
enables recipients to pull the associated rich content through a broader
channel, such as circuit-switched or packet-switched data. Geoworks also
received a license to a second patent from our patent portfolio to be selected
by Geoworks over the next 18 months.
16
OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The Company has
not yet responded to the complaint. 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.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Forward-Looking Statements
In addition to historical information, this Quarterly 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 the Company's 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 following
discussion, and, in particular, the risks discussed below under the subheading
"Risk Factors." The Company undertakes 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 other documents
the Company files from time to time with the U.S. Securities and Exchange
Commission ("SEC") including, but not limited to, Phone.com's and
Software.com's respective Quarterly Reports on Form 10-Q for the quarter ended
September 30, 2000, Phone.com's and Software.com's most recently filed Annual
Reports on Form 10-K, and Phone.com's registration statement on Form S-4 as
filed October 10, 2000, and any subsequently filed reports. All documents also
are available through the SEC's Electronic Data Gathering Analysis and
Retrieval system (EDGAR) at www.sec.gov.
Software.com merger
On November 17, 2000, the Company merged with Software.com. The 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 Software.com for all dates and periods presented.
Overview
We were incorporated in 1994 and, from inception until 1996, our operations
consisted primarily of various start-up activities, including the development
of technologies central to our business, recruiting personnel and raising
capital. During 1994 and 1995, we developed the technology behind our open
internet-based communication infrastructure software and applications.
We co-founded the Wireless Application Protocol (WAP) Forum in 1997 to
provide a worldwide standard for the delivery of Internet-based services over
mass-market wireless telephones. In February 1998, the WAP Forum published
technical specifications for application development and product
interoperability based substantially on our technology and on Internet
standards. Leading communication service providers, telecommunications device
and equipment manufacturers and software companies worldwide have sanctioned
the specifications promulgated by the WAP Forum. In addition to the standard-
setting process developed by the WAP Forum, we are also currently involved in
development of a standard model for over-the-air provisioning and management
of wireless devices for future standards in the mobile web. We anticipate that
the standards developed through these initiatives will continue to increase
the acceptance of Internet-based services over wireless telephones.
As of November 17, 2000, we have separated our current and future product
offerings into three distinct product categories: Applications, Infrastructure
Software and Customer Services.
Our current applications and applications under development are a set of
software communications applications that enable end users to exchange instant
messages, electronic mail, facsimile, voice mail and multimedia messages from
PC's, wireline telephones and mobile devices. In addition, Applications
include a Personal Information Manager, or PIM, with address book, task lists
and calendar that can be accessed from mobile devices and the internet. Our
Applications include but are not limited to InterMail and UP.Mail products.
18
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 gateways to
connect mobile devices to the Internet using a variety of protocols. One set
of Infrastructure software provides mobile location and 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. The Company's Infrastructure Software includes but is
not limited to UP.Link, UP.Browser, and FoneSync.
Customer Services are services provided to customers to help them design,
install, deploy, manage, maintain and support our products and the customers
overall Internet implementations.
We generate revenues from licenses, maintenance and support, and
professional services. We receive license revenues associated with our
Applications and Infrastructure software. Our Customer Services generate both
maintenance and support revenues and professional service revenues.
Our future success depends on our ability to increase revenues from sales of
products and services to new and existing communication service providers. If
the markets for our Internet-based software fails to develop or develops more
slowly than expected, then our business may be materially and adversely
affected. In addition, because there is a relatively small number of
communication service providers worldwide, any failure to sell our products to
a communication service provider successfully could result in a shortfall in
revenues that may not be readily offset by other revenue sources.
We expect that our gross profit on revenues derived from sales through
indirect channel partners will be less than the gross profit on revenues from
direct sales. Our success, in particular in international markets, depends in
part on our ability to increase sales of our products and services through
value-added resellers and to expand our indirect distribution channels. In
addition, our agreements with our distribution partners generally do not
restrict the sale of products that are competitive with our products and
services, and each of our partners can cease marketing our products and
services at their option.
International sales of products and services, excluding Latin America,
accounted for 56% and 58% of our total revenues for the three months ended
December 31, 2000 and 1999, respectively. 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 our international business activities include:
. failure by us and/or third parties to develop localized content and
applications that are used with our products;
. costs of localizing our products for foreign markets;
. difficulties in staffing and managing foreign operations;
. longer accounts receivable collection time;
. political and economic instability;
. fluctuations in foreign currency exchange rates;
. reduced protection of intellectual property rights in some foreign
countries;
. contractual provisions governed by foreign laws;
. export restrictions on encryption and other technologies;
. potentially adverse tax consequences; and
. the burden of complying with complex and changing regulatory
requirements.
19
The Company had approximately $109 million and $98 million of deferred
revenue as of December 31 and June 30, 2000, respectively. The increase of
approximately 10% was a result of increased billings. The balance at December
31, 2000, was comprised of approximately $36 million in prepaid fees from
Applications, $53 million in fees from Infrastructure software and $20 million
in fees from Customer Services. Despite the increase in deferred revenue, the
Company expects that deferred revenue will decline over time, as
communications service providers launch commercial services based on its
products. Deferred revenue will generally be recognized over the next 12 to 30
months.
Since early 1997, we have invested substantially in research and
development, marketing, domestic and international sales channels,
professional services and our general and administrative infrastructure. These
investments have significantly increased our operating expenses, contributing
to net losses in each fiscal quarter since our inception. Our limited
operating history makes it difficult to forecast future operating results.
Although our revenues have grown in recent quarters, our revenues may not
increase at a rate sufficient to achieve and maintain profitability, if at
all. We anticipate that our operating expenses will increase substantially in
absolute dollars for the foreseeable future as we expand our product
development, sales and marketing, professional services and administrative
staff. Even if we were to achieve profitability in any period, we may not
sustain or increase profitability on a quarterly or annual basis. Also, due to
rapidly changing market conditions we continue to evaluate our long-term
strategy with respect to marketing and integration of our acquired technology.
We may find the value of our acquired technologies and other intangible
assets, such as goodwill recorded in our financial statements, to be impaired,
which could result in a future charge to operations.
20
RESULTS OF OPERATIONS
License Revenues
License revenues increased from $17.3 million for the three months ended
December 31, 1999 to $80.0 million for the three months ended December 31,
2000, and increased from $29.5 million for the six months ended December 31,
1999 to $137.1 million for the six months ended December 31, 2000. The
increase in license revenues was primarily due to the recognition of revenues
associated with the increased licensing of our products to AT&T Wireless
Services, Sprint and Nextel in the United States, KDDI in Japan, Shinsegi
Telecom in Korea and British Telecom in Europe. In total we are now
recognizing license revenues from approximately 81 communication service
providers in North America, Europe, Asia and other parts of the world.
Maintenance and Support Services Revenues
Maintenance and Support Services revenues increased from $5.8 million for
the three months ended December 31, 1999 to $13.3 million for the three months
ended December 31, 2000, and increased from $10.3 million for the six months
ended December 31, 1999 to $23.8 million for the six months ended December 31,
2000. The increase in maintenance and support services revenues reflects an
increase in services provided to wireless device manufacturers and increased
installation and support fees from communication service providers.
Professional Services Revenues
Professional Services revenues increased from $5.9 million for the three
months ended December 31, 1999 to $16.5 million for the three months ended
December 31, 2000, and increased from $10.5 million for the six months ended
December 31, 1999 to $29.6 million for the six months ended December 31, 2000.
The increase in professional services revenue was primarily due to the
increased number of communication service providers who have licensed our
technology and engaged us to perform integration services relating to their
commercial launches of our technology.
Cost of License Revenues
Cost of license revenues consists primarily of third-party license and
support fees. Cost of licenses revenues increased from $1.0 million for the
three months ended December 31, 1999 to $6.2 million for the three months
ended December 31, 2000, and increased from $2.1 million for the six months
ended December 31, 1999 to $11.9 million for the six months ended December 31,
2000. As a percentage of license revenues, cost of license revenues for the
three months ended December 31, 1999 and 2000 was 5.6% and 7.8%, respectively,
and 7.0% and 8.6% for the six months ended December 31, 1999 and 2000,
respectively. The increase as a percentage of license revenues was
attributable primarily to the acquisition of Onebox and the inclusion of its
costs associated with the operation of its data center in cost of license
revenues. We expect that cost of license revenues will continue to vary as a
percentage of license revenues from period to period.
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 the delivery of
installation, training and support services to communication service
providers, and engineering and support services to wireless device
manufacturers. Cost of maintenance and support services revenues increased
from $3.6 million for the three months ended December 31, 1999 to $7.1 million
for the three months ended December 31, 2000, and increased from $5.9 million
for the six months ended December 31, 1999 to $13.4 million for the six months
ended December 31, 2000. As a percentage of maintenance and support revenues,
cost of maintenance and support services revenues for the three months ended
December 31, 1999 and 2000 was 62.8% and 53.1%, respectively, and 56.8% and
56.1% for the six months ended December 31, 1999 and 2000, respectively. The
gross margin increased 9.7% for the three months ended
21
December 31, 2000 as compared to 1999 as a result of an increase in revenues
offset with costs whose makeup has a large amount of relatively fixed costs.
We anticipate that the cost of maintenance and support services revenues will
increase in dollars in future operating periods associated with the increase
in revenues.
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 $3.3 million for the three months ended December 31,
1999 to $9.0 million for the three months ended December 31, 2000, and
increased from $6.1 million for the six months ended December 31, 1999 to
$17.0 million for the six months ended December 31, 2000. As a percentage of
professional services revenues, cost of professional services revenues
remained relatively flat for the three months ended December 31, 1999 and 2000
at 56.4% and 54.8%, respectively, and 58.1% and 57.4% for the six months ended
December 31, 1999 and 2000, respectively.
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 $13.1 million for the three months ended December 31,
1999 to $31.4 million for the three months ended December 31, 2000, and
increased from $22.8 million for the six months ended December 31, 1999 to
$58.6 million for the six months ended December 31, 2000. As a percentage of
revenues, research and development expenses decreased from 44.9% to 28.7% for
the three months ended December 31, 1999 and 2000, respectively, and from
45.3% to 30.8% for the six months ended December 31, 1999 and 2000,
respectively. We will continue to increase our product development efforts due
to many of our initiatives, including unified messaging. However, as a
percentage of overall revenues, research and development expenses will
continue to decrease since revenue growth is expected to outgrow future
increases in research and development expenses.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of compensation and related
costs for sales and marketing personnel, sales commissions, marketing
programs, public relations, promotional materials, travel expenses and trade
show exhibit expenses. Sales and marketing expenses increased from $12.8
million for the three months ended December 31, 1999 to $33.4 million for the
three months ended December 31, 2000, and increased from $23.8 million for the
six months ended December 31, 1999 to $67.0 million for the six months ended
December 31, 2000. As a percentage of revenues, sales and marketing expenses
decreased from 44.1% to 30.4% for the three months ended December 31, 1999 and
2000, respectively, and from 47.3% to 35.2% for the six months ended December
31, 1999 and 2000, respectively. We will continue to increase our sales and
marketing costs as we grow our operations and add additional personnel.
However, as a percentage of overall revenues, sales and marketing expenses are
expected to continue to decrease since revenue growth is expected to outgrow
future increases in sales and marketing expenses.
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 $5.4 million for the three months ended December 31,
1999 to $12.3 million for the three months ended December 31, 2000, and
increased from $9.6 million for the six months ended December 31, 1999 to
$23.0 million for the six months ended December 31, 2000. As a percentage of
revenues, general and administrative expenses decreased for the three months
ended December 31, 1999 and 2000 from 18.7% to 11.2%, respectively, and from
19.2% to 12.1% for the six months ended December 31, 1999 and 2000,
respectively. The increase in dollars were due primarily to the addition of
personnel performing general and administrative functions, additional expenses
in connection with our operation as a public company and, to a
22
lesser extent, legal expenses associated with increased product licensing and
patent activity. As a percentage of overall revenues, general and
administrative expenses are expected to continue to decrease since revenue
growth is expected to outgrow future increases in general and administrative
expenses.
Stock-Based Compensation
Stock-based compensation expense totaled $1.6 million and $1.9 million for
the three months ended December 31, 2000 and 1999, respectively, and $6.2
million and $2.3 million for the six months ended December 31, 2000 and 1999,
respectively. All stock-based compensation is being amortized in a manner
consistent with Financial Accounting Standards Board Interpretation No. 28.
The increase in amortization for the six months ended December 31, 2000, was
due to $1.7 million in compensation recognized on a grant issued to an
employee at below market value and $1.4 million in warrants associated with
AtMobile.
In connection with option grants and restricted stock issued to certain
employees, we recognized additional deferred compensation of approximately
$1.7 million for the six months ended December 31, 2000 and $7.5 million for
the years ended June 30, 2000 and prior. The deferred compensation represents
the aggregate differences between the exercise prices of options at their
dates of grant and the deemed fair value for accounting purposes of the common
shares subject to such options.
In connection with our acquisition of APiON, Angelica, and AtMobile, we
recorded additional deferred stock-based compensation of approximately $1.4
million for the six months ended December 31, 2000, and $6.7 million for the
years ended June 30, 2000 and prior. For the six-month period ended
December 31, 2000 the Company recorded $1.4 million in expense as a result of
the underlying value of warrants issued by AtMobile in conjunction with a Web
development, hosting, maintenance and licensing agreement.
We may in the future issue stock options with exercise prices below the then
current fair market value, which would increase deferred stock-based
compensation.
Amortization of Goodwill and Intangible Assets
Amortization of goodwill and intangible assets of approximately $159.7
million and $318.1 million for the three and six months ended December 31,
2000 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 the goodwill and other intangible assets which were acquired
in past acquisitions are being amortized on a straight-line basis over a three
to five-year period. We expect goodwill and intangible assets amortization
from past acquisitions of approximately $315.7 million in the remainder of
2001, and $631.3 million and $416.1 million in the fiscal years ending June
30, 2002 and 2003, respectively. In addition, we may have additional
acquisitions in future periods which could give rise to additional goodwill or
other intangible assets being acquired.
In-Process Research and Development
For each of our prior acquisitions, the Company determined the allocation
between developed and in-process research and development (IPR&D). This
allocation was based on whether or not technological feasibility had been
achieved and whether there was 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. For the previous acquisitions of APiON in October 1999,
Paragon in March 2000, Onebox in April 2000, and bCandid in June 2000, the
Company concluded that the purchased IPR&D of $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, the Company expensed these
costs, according to the provisions of FASB interpretation No. 4, Applicability
of SFAS No. 2 to Business Combinations Accounted for by the Purchase Method.
As of December 31, 2000, the Company is still in the development stage of the
previously written-off IPR&D.
23
Merger and integration costs
As a result of the merger with Software.com, we recorded merger costs of
approximately $80.0 million as follows (in thousands):
Amount paid Accrued as
through of
Total December 31, December 31,
cost 2000 2000
------- ------------ ------------
Bankers fees............................... $73,352 $29,352 $44,000
Regulatory fees............................ 2,248 2,248 --
Professional services...................... 3,965 2,865 1,100
------- ------- -------
Total...................................... $79,565 $34,465 $45,100
======= ======= =======
In addition, we recorded integration costs of $3.0 million related to the
merger with Software.com including but not limited to the Company's name
change and other consulting fees, of which $2.7 million has been paid through
December 31, 2000, and $0.3 million is included in accrued acquisition costs
in the accompanying condensed consolidated balance sheet. We expect to incur
additional integration costs totaling $5.0 million in future periods.
Interest and Other Income, Net
Interest and other income, net increased from $4.8 million to $7.2 million
for the three months ended December 30, 1999 and 2000, respectively, and from
$7.1 million to $15.5 million for the six months ended December 31, 1999 and
2000, respectively. The increase resulted primarily from earnings on increased
cash, cash equivalents and short-term investment balances as a result of the
secondary public offering in November 1999, partially offset by an increase in
interest expense related to obligations under capital leases and our long-term
debt.
Income Taxes
Income tax expense totaled $1.7 million and $0.9 million for the three
months ended December 31, 2000 and 1999, respectively, and $4.3 million and
$1.0 million for the six months ended December 31, 2000 and 1999,
respectively. Income tax expense for the three and six months ended December
31, 2000 and 1999 consisted primarily of foreign withholding taxes.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of convertible preferred stock which totaled $66.0 million in aggregate
net proceeds through March 31, 1999, through our initial public offering in
June 1999 which generated net proceeds of $146.6 million, and through our
secondary public offering in November 1999 which generated net proceeds of
approximately $390.4 million. As of December 31, 2000, we had $435.3 million
of cash, cash equivalents and short-term investments.
Net cash used for operating activities was $42.9 million for the six months
ended December 31, 2000. The net cash used was attributable primarily to $37.2
million paid in merger costs and integration costs related to Software.com,
increases in accounts receivable of $39.3 million, offset by increases in
deferred revenue and accrued liabilities of $20.0 million and after
consideration of non-cash amortization expenses principally relating to
goodwill, and other intangible assets as a result of the acquisitions of
APiON, Angelica, AtMotion, Paragon, Onebox, Telarc, AtMobile, and MyAble.
24
Net cash provided by investing activities was $53.5 million for the six
months ended December 31, 2000, primarily reflecting net sales of short-term
investments, offset by continued investments in property and equipment and
cash paid to satisfy acquisition related liabilities.
Net cash provided by financing activities was $23.4 million for the six
months ended December 31, 2000, primarily reflecting stock options exercised.
As of December 31, 2000, 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
that is under construction and is expected to be completed in the year 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 on the anniversary
of the initial month of the commencement of the lease. 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 December 31, 2000, we have guaranteed the letter of credit and have 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 6.7 % interest and the resulting income earned is not subject to
any restrictions. The lease further requires that we pay leasehold
improvements which are expected to be at least $15 million over the next year.
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 at all. 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.
Factors That May Affect Future Results
In addition to the other information in this report, the following factors
should be considered carefully in evaluating the Company's business and
prospects.
Our future profitability is uncertain because we have a limited operating
history.
Because we commenced operation in 1994 and commercially released our first
products in 1995, we only have a limited operating history on which you can
base your evaluation of our business.
We may not continue to grow or sustain 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;
25
. 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
. the increase in our customers' cost to buy, the Oracle 8i database,
which is currently necessary to use one of our significant 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 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 quarterly operating results are subject to significant fluctuations, and
our stock price may decline if we do not meet expectations of investors and
analysts.
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter 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;
26
. 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, consulting and maintenance and support
services revenues; and
. changes in accounting standards, including standards relating to revenue
recognition, business combinations and stock-based compensation.
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 expectation regarding future
revenues. As a result, any shortfall in revenues relative to our expectations
could cause significant changes in our operating results from quarter to
quarter. Due to the foregoing factors, we believe period to period comparisons
of our revenue levels and operating results are not meaningful. You should not
rely on our quarterly revenues and operating results to predict our future
performance.
We may be unable to successfully integrate acquired companies into our
business or achieve the expected benefits of the acquisitions.
To date, we have completed the acquisition or merger of 12 companies or
their assets, including Software.com, AtMobile, Mobility.net, bCandid, MyAble,
Velos, Onebox, Paragon, AtMotion, Angelica, APiON, and Telarc. Our merger with
Software.com, our largest business combination to date, which was completed in
November 2000, will require further integration of the products, business and
operations of these companies with our company. We may not be able to
successfully assimilate the personnel, operations and customers of these
companies into our business. Additionally, we may fail to achieve the
anticipated synergies from the acquisitions, 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.
27
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 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.
In the future we may make strategic investments in other companies. Some of
these investments may be made in immature businesses with unproven track
records and technologies, and may 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.
Quarterly 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 customer approval process for our products. For example, many of our
prospective customers have neither budgeted expenses for the provision of
Internet-based services to wireless subscribers nor specifically dedicated
personnel for the procurement and implementation of our products and services.
As a result, 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 quarterly 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. 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 telephones,
which may slow their rate of adoption or implementation of the
28
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 telephones 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 quarter for the foreseeable future. Any failure by us to capture a
significant share of these customers could materially harm our business.
We are exposed to the credit risk of some of our customers and to credit
exposures in weakened markets.
A significant proportion 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 experienced losses due to customers failing to meet their
obligations. 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 our efforts on mass-market wireless telephones as the
principal means of delivery of Internet-based services using our products. If
wireless telephones 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 telephones 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 device
29
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 competitors, including Nokia, have announced or are
expected to announce enhanced features and functionality as proprietary
extensions to the WAP protocol. 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;
. 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;
. Comunication service providers, such as NTT DoCoMo;
. Providers of Internet software applications and content, electronic
messaging applications and personal information management software
solutions; and
. United messaging providers, such as Comverse.
Microsoft Corporation has announced its intention to introduce products and
services that may compete directly with our 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.
Furthermore, 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 comunication service
providers' WAP servers. If Nokia's WAP server is widely adopted by corporate
customers and content providers, it could undermine the need for comunication
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 MyPhone products and
services. These existing and potential competitors may include
telecommunications companies such as Lucent Technologies, traditional Internet
portals such as AOL, InfoSpace, Microsoft and Yahoo!, Internet infrastructure
software companies and several private mobile Internet portal companies. Our
FoneSync synchronization product will face competition from Motorola's
TrueSync product, and product from Puma, as well as from emerging
synchronization companies such as Fusion One.
30
In addition to the existing competitors listed above, voice mail solutions
providers could be formidable competitors in the unified communications
infrastructure software and Internet voice mail markets because of their
existing relationships with service providers and ownership of technologies
for the conversion of voice to data. If we are unable to cooperate or compete
effectively with Microsoft, existing voice mail solution providers, or our
other existing or emerging competitors, our business, financial condition and
operating results will suffer.
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 intense, and finding qualified personnel with experience in
these industries is even more difficult. We believe that there are only a
limited number of persons with the requisite skills to serve in many key
positions, and it is becoming increasingly 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
31
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.
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 comunication
service providers and wireless device manufacturers large enough to justify
significant and continued investments in these endeavors.
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
32
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 service provider customers 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, service
providers have been relatively slow to implement new complex services such as
wireless messaging services and wireless delivery of Internet content. In
addition, 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 service providers implement these new services. The failure of 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 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
33
software, documentation and other proprietary information. Except for certain
limited escrow arrangements, we do not provide third parties 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.
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 56% of our total
revenues for the three and six months ended December 31, 2000. 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:
. 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;
. difficulties in collecting accounts receivable and longer collection
periods;
. seasonable variations in customer buying patterns or electronic
messaging usage;
. political instability or economic downturns;
34
. potentially adverse tax consequences; and
. reduced protection for intellectual property rights in certain
countries.
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
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 quarterly 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;
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant customer or order; or
. changes in estimates or our financial performance or changes in
recommendations by securities analysts.
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
35
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Hedging Instruments
We transact business in various foreign currencies and, accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
To date, the effect of changes in foreign currency exchange rates on revenues
and operating expenses have not been material. Substantially all of our
revenues are earned in U.S. dollars. Operating expenses incurred by our
European and Japanese subsidiaries are denominated primarily in U.K. pounds
sterling and Japanese yen, respectively.
We currently do not use financial instruments to hedge operating expenses in
foreign currencies. We intend to assess the need to utilize financial
instruments to hedge currency exposures on an ongoing basis.
We do not use derivative financial instruments for speculative trading
purposes, nor do we currently hedge our foreign currency exposure to offset
the effects of changes in foreign exchange rates.
Fixed Income Investments
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 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. As of December 31, 2000, our interest rate risk was
further limited by the fact that all investments in our short-term investment
portfolio had a maturity of less than one year.
Principal amounts of short-term investments by expected maturity:
Period ending December 31, 2000
Expected maturity date Fair Value
-------------------------------------- December 31,
2001 2002 2003 2004 2005 Total 2000
-------- ---- ---- ---- ---- -------- ------------
(in thousands, except interest rates)
Corporate bonds........... $100,540 -- -- -- -- $100,540 $100,618
Commercial paper.......... 84,147 -- -- -- -- 84,147 84,482
Certificates of deposit... 64,670 -- -- -- -- 64,670 64,656
Federal agencies.......... 30,748 -- -- -- -- 30,748 30,783
-------- --- --- --- --- -------- --------
Total................... $280,105 -- -- -- -- $280,105 $280,540
======== ======== ========
Weighted-average
interest rate........ 6.64% 6.64%
======== ========
36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In April 2000, we filed a lawsuit against Geoworks Corporation in the U.S.
District Court in San Francisco, California, alleging, and seeking a court
order declaring, that U.S. Patent No. 5,327,529, assigned to Geoworks, is not
infringed by us and that the patent is also invalid and unenforceable. We took
this action in response to Geoworks' attempt to require industry participants
to obtain licenses under the Geoworks patent. On June 15, 2000, Geoworks filed
an answer to our complaint and asserted a counterclaim against us alleging
that we infringed the patent and seeking various forms of relief. On September
8, 2000, Geoworks filed a complaint with the International Trade Commission
requesting that the commission commence an investigation based on the
importation of WAP-compatible devices by us and others, seeking to have the
commission prohibit the importation of these WAP-compatible devices based on
Geoworks' allegation that they infringe U.S. Patent No. 5,327,529. On December
29, 2000, we settled this litigation with Geoworks and signed a royalty-free
patent cross-license agreement. Under the agreement, we received a world-wide
license to Geoworks' Flexible User Interface patent, which covers a method
that enables one software application to run on a variety of devices,
including mobile phones. We also received a world-wide license to a second
patent from Geoworks' patent portfolio to be selected by us over the next 18
months. In exchange, Geoworks received a license to our method and system
patent for combining narrowband and restricted narrowband channels for pushing
rich content. The patent enables companies to send notifications via
narrowband channels such as short-messaging services, better known as SMS, and
enables recipients to pull the associated rich content through a broader
channel, such as circuit-switched or packet-switched data. Geoworks also
received a license to a second patent from our patent portfolio to be selected
by Geoworks over the next 18 months.
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. The Company has
not yet responded to the complaint. 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.
Item 2. Changes in Securities and Use of Proceeds--Not Applicable
Item 3. Defaults Upon Senior Securities--Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on November 17, 2001,
stockholders adopted a resolution approving the merger agreement pursuant to
which Software.com, Inc. merged with and into Silver Merger Sub Inc., a
wholly-owned subsidiary of the Company, and the issuance of shares of common
stock of the Company pursuant to such merger (50,571,670 votes in favor,
112,179 votes against, 26,625 votes abstained, and 32,671,422 broker non-
votes).
Also at the Annual Meeting, two nominees were elected as directors of the
Company to serve three year terms. The directors elected at the 2000 Annual
Meeting were Donald J. Listwin (60,055,038 votes in favor, 5,402,383 votes
withheld and 17,924,475 broker non-votes) and Alain Rossmann (60,054,918 votes
in favor, 5,402,503 votes withheld and 17,924,475 broker non-votes). After the
meeting Roger Evans, David Kronfeld, Andrew Verhalen and Reed Hundt continued
their terms as directors, but subsequent to the meeting David Kronfeld and
Reed Hundt resigned their positions as directors and the board of directors of
the Company appointed Bernard Puckett and John MacFarlane to fill those
vacancies.
37
In addition, the stockholders approved an amendment to the Company's 1996
Stock Plan to increase the number of shares of common stock reserved for
issuance by 4,125,000 (44,858,445 votes in favor, 20,447,905 votes against,
150,671 votes abstained, and 17,924,875 broker non-votes). The stockholders
also ratified the appointment of KPMG LLP as independent auditors (60,306,395
votes in favor, 19,378 votes against, 131,678 votes abstained and 22,924,445
broker non-votes) and approved an amendment of Article IV Section (A) of the
Company's Amended and Restated Certificate of Incorporation to increase the
number of authorized shares of common stock from 250,000,000 shares to
1,000,000,000 shares (53,132,941 votes in favor, 12,189,367 votes against,
135,113 votes abstained and 17,924,475 broker non-votes).
Item 5. Other Information--Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Amendment
3.2 Certificate of Ownership and Merger
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated November 29, 2000,
during the quarter ended December 31, 2000 which reported "Item 2. Acquisition
or Disposition of Assets," "Item 5. Other Events" and "Item 7. Financial
Statements, Pro Forma Financial Statements and Exhibits."
On August 17, 2000, the registrant filed a Current Report on Form 8-K to
report that it had entered into (i) an Agreement and Plan of Merger, dated as
of August 8, 2000, by and among the registrant, Software.com, Inc. and Silver
Merger Sub Inc., and related agreements, and (ii) a Rights Agreement, dated as
at August 8, 2000, by and between the registrant and U.S. Stock Transfer
Corporation, as Rights Agent.
38
SIGNATURE
Pursuant to the requirements 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.
Openwave Systems Inc.
/s/ Alan Black
By: _________________________________
Alan Black
Senior Vice President, Corporate
Affairs
Chief Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
Date: February 14, 2000
39