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 September 30, 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
===============================================================================
PHONE.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3219054
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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 October 31, 2000, there were 83,999,256 shares of the registrant's
Common Stock outstanding.
INDEX
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Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed consolidated balance sheets at September 30, 2000 and
June 30, 2000 3
Condensed consolidated statements of operations for the three
month periods ended September 30, 2000 and 1999 4
Condensed consolidated statements of cash flows for the three
month periods ended September 30, 2000 and 1999 5
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K. 31
SIGNATURES 33
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHONE.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, June 30,
2000 2000
----------- -----------
Assets
Current assets:
Cash and cash equivalents ...................... $ 94,529 $ 78,873
Short-term investments ......................... 323,589 356,715
Accounts receivable (net of allowances of $881
and $1,050 as of September 30, 2000 and June 30,
2000, respectively) ............................ 58,041 46,939
Prepaid expenses and other current assets ...... 13,633 9,033
----------- -----------
Total current assets .................. 489,792 491,560
Property and equipment, net ......................... 30,348 25,188
Restricted cash and investments ..................... 20,700 20,700
Deposits and other assets ........................... 7,663 8,508
Goodwill and other intangible assets, net ........... 1,460,667 1,612,877
----------- -----------
$ 2,009,170 $ 2,158,833
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of equipment loans
and capital lease obligations ............... $ 2,858 $ 2,882
Accounts payable ............................... 5,299 9,062
Accrued liabilities ............................ 36,630 45,497
Deferred revenue ............................... 99,930 77,344
----------- -----------
Total current liabilities ............. 144,717 134,785
Equipment loans and capital lease obligations,
less current portion ............................. 2,634 3,291
----------- -----------
Total liabilities ..................... 147,351 138,076
----------- -----------
Stockholders' equity:
Common stock ................................... 83 83
Additional paid-in capital ..................... 2,340,872 2,335,683
Deferred stock-based compensation .............. (4,770) (6,659)
Notes receivable from stockholders ............. (650) (724)
Accumulated other comprehensive loss ........... (413) (532)
Accumulated deficit ............................ (473,303) (307,094)
----------- -----------
Total stockholders' equity ............ 1,861,819 2,020,757
----------- -----------
$ 2,009,170 $ 2,158,833
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
3
PHONE.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
September 30,
-------------------------
2000 1999
--------- ---------
Revenues:
License ................................... $ 33,327 $ 5,262
Maintenance and support services .......... 6,569 2,465
Consulting services ....................... 6,577 820
--------- ---------
Total revenues ...................... 46,473 8,547
--------- ---------
Cost of revenues:
License ................................... 5,988 228
Maintenance and support services .......... 4,521 1,585
Consulting services ....................... 4,003 537
--------- ---------
Total cost of revenues .............. 14,512 2,350
--------- ---------
Gross profit ........................ 31,961 6,197
--------- ---------
Operating expenses:
Research and development .................. 19,228 5,469
Sales and marketing ....................... 20,537 4,925
General and administrative ................ 6,940 1,938
Stock-based compensation .................. 3,563 212
Amortization of goodwill and
intangible assets ...................... 152,285 --
--------- ---------
Total operating expenses ............ 202,553 12,544
--------- ---------
Operating loss ...................... (170,592) (6,347)
Interest and other income, net ................. 6,939 1,498
--------- ---------
Loss before income taxes ............ (163,653) (4,849)
Income taxes ................................... 2,556 89
--------- ---------
Net loss ............................ ($166,209) ($ 4,938)
========= =========
Basic and diluted net loss per share ........... ($ 2.02) ($ 0.08)
========= =========
Shares used in computing basic and
diluted net loss per share ................ 82,279 61,932
========= =========
See accompanying notes to the condensed consolidated financial statements.
4
PHONE.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
September 30,
----------------------
2000 1999
--------- ---------
Cash flows from operating activities:
Net loss .............................................. ($166,209) ($ 4,938)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization .................... 155,190 506
Amortization of stock-based compensation ......... 3,563 212
Changes in operating assets and liabilities:
Accounts receivable .......................... (11,102) 10,000
Prepaid expenses and other assets ............ (3,755) (236)
Accounts payable ............................. (3,763) 467
Accrued liabilities .......................... 10,780 608
Deferred revenue ............................. 22,586 1,645
--------- ---------
Net cash provided by operating
activities .............................. 7,290 8,264
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net .............. (8,065) (3,436)
Payments related to acquisition indebtedness........... (19,722) --
Purchases of short-term investments ................... (46,924) (66,600)
Proceeds from sales and maturities
of short-term investments .......................... 80,333 4,500
--------- ---------
Net cash provided by (used for) investing
activities ................................. 5,622 (65,536)
--------- ---------
Cash flows from financing activities:
Issuance of common stock .............................. 3,515 5
Repayment of notes receivable from stockholders ....... 74 --
Repayment of equipment loans and capital lease
obligations ........................................ (681) (111)
--------- ---------
Net cash provided by (used for) financing
activities ................................. 2,908 (106)
--------- ---------
Effect of exchange rate on cash and cash equivalents........ 164 --
--------- ---------
Net increase (decrease) in cash and cash equivalents
15,656 (57,378)
Cash and cash equivalents at beginning of period ........... 78,873 79,803
--------- ---------
Cash and cash equivalents at end of period ................. $ 94,529 $ 22,425
========= =========
Supplemental disclosures of cash flow information:
Deferred stock-based compensation ..................... $ 1,674 $ --
========= =========
See accompanying notes to the condensed consolidated financial statements.
5
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 2000, and
the results of its operations and cash flows for the three-month periods ended
September 30, 2000 and 1999. These financial statements should be read in
conjunction with the Company's audited financial statements as of June 30,
2000, 1999 and 1998 and for each of the years in the three-year period ended
June 30, 2000, including notes thereto, included in the Company's fiscal 2000
Annual Report on Form 10-K. Operating results for the three-month period ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2001.
NOTE 2 - Revenue Recognition
Effective July 1, 1998, the Company adopted 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 multiple-element arrangements are allocated to undelivered
elements of the arrangement, such as maintenance and support services and
consulting services, based on the fair values of the undelivered elements. The
determination of fair value is based on objective evidence which is specific to
the Company. Revenue from delivered elements is recognized using the residual
method.
Revenue from license fees is generally 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. In addition, sales
through channel partners are recognized upon sell-through to the end-user
customer. The Company considers all arrangements with payment terms extending
beyond one year not to be fixed and determinable. If the fee is not fixed and
determinable, revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee is
collected.
The Company licenses its UP.Link Server Suite and related server-based
software products to network operators through its direct sales force and
indirectly through its channel partners. The Company's license agreements do not
provide for a right of return. Allowances for future estimated warranty costs
are provided at the time revenue is recognized. Licenses for UP.Link Server
Suite and related server-based software products can be purchased under a
perpetual license model either on an as-deployed basis or on a prepaid basis, or
alternatively, under a monthly or quarterly time-based license model.
For licenses purchased on an as-deployed basis, license revenue is
generally recognized quarterly as subscribers are activated to use the services
that are based on the Company's UP.Link Server Suite and related server-based
software products.
For arrangements under which licenses are purchased on a prepaid basis and
the Company does not have objective evidence of the fair value of maintenance
and support
6
services, prepaid license fees are recognized ratably over the period that
maintenance and support services are expected to be provided, generally 12 to 30
months, commencing at the beginning of the month delivery and acceptance occur
by the network operator. For arrangements under which licenses are purchased on
a prepaid basis and the Company has objective evidence of the fair value of
maintenance and support services, prepaid license fees are recognized upon
delivery and acceptance by the network operator. For arrangements where the
Company has committed to provide the customer with future unspecified products
under a subscription arrangement. Under a subscription arrangement, prepaid
license fees are recognized ratably over the contractual term of the
subscription arrangement (i.e., the date the prepaid licenses expire if not
used), generally 12 to 30 months, commencing at the beginning of the month
delivery and acceptance occur by the network operator.
For customers that license the Company's products under a time-based
license model, revenues are recognized over the term of the license, generally
three months based on the number of the customer's subscribers using the
services that are based on the Company's products during the respective license
terms.
Revenues from consulting services provided to network operators are
recognized as the services are performed.
The Company recognizes revenues from UP.Browser agreements with wireless
telephone manufacturers ratably over the period during which the services are
performed, generally one year. The Company provides its wireless telephone
manufacturer customers with support associated with their efforts to port its
UP.Browser software to their wireless telephones, software error corrections,
and new releases as they become commercially available.
NOTE 3 - Comprehensive Income
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 income 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 marketable securities and foreign currency translation
adjustments.
Comprehensive loss includes unrealized gains and losses on "available-for
sale" marketable securities that have been excluded from net income and
reflected in equity, and foreign currency translation adjustments. A summary
of comprehensive loss follows:
Three Months Ended
September 30,
-------------------------
2000 1999
-------------------------
Net loss................... $ (166,209) $ (4,938)
Currency translation adjustments... (163) -
Unrealized gain (loss) on securities 282 -
----------- ---------
Comprehensive loss.................. $ 166,090 $ (4,938)
=========== =========
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):
Three Months Ended
September 30,
----------------------
2000 1999
---------- ----------
Shares issuable under stock options ................. 21,020 9,783
Shares of restricted stock subject
to repurchase .................................... 668 456
Shares issuable pursuant to
warrants to purchase common stock ................ 10 --
The weighted-average exercise price of stock options outstanding was $60.47
and $5.34 as of September 30, 2000 and 1999, respectively. The weighted-average
purchase price of restricted stock subject to repurchase was $0.52 and $0.38 as
of September 30, 2000 and
7
1999, respectively. The weighted-average exercise price of outstanding warrants
was $8.43 as of September 30, 2000.
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 hold any derivative financial instrument in the
ordinary course of its operations and does not engage in hedging activities.
As a result, the Company has determined that the adoption of SFAS No. 133 has
not had a material effect on the Company's consolidated financial position or
results of operations .
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 is in the process of assessing any
impact that the adoption of SAB 101 will have on its consolidated financial
statements or results of operations.
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 EITF published their consensus on EITF Issue No. 00-3,
Application of AICPA Statement of Position 97-2, Software Revenue Recognition,
to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware. EITF Issue No. 00-3 states that a software element covered
by SOP 97-2 is only present in a hosting arrangement if the customer has the
contractual right to take possession of the software at any time during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on its own hardware or contract with another party
unrelated to the vendor to host the software. The Company adopted EITF Issue No.
00-3 on July 1, 2000. The Company determined that EITF Issue No. 00-3 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. The Company determined that FIN 44 has not had a material effect
on its consolidated financial position or results of operations.
NOTE 7 - Geographic, Segment, and Significant Customer Information
8
During 1999, the Company adopted the provisions of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operational decisions and assessments of financial
performance.
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. Therefore, the Company operates
in a single operating segment: software that enables the delivery of
Internet-based services to mass-market wireless telephones and related services.
The disaggregated information reviewed on a product basis by the CEO is as
follows (in thousands):
Three Months Ended
September 30,
--------------------
2000 1999
------- -------
Revenues:
UP.Link Server Suite ........ $35,572 $ 5,800
UP.Browser .................. 4,324 1,927
Consulting services ......... 6,577 820
------- -------
Total revenues .......... $46,473 $ 8,547
======= =======
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
September 30,
--------------------
2000 1999
------- -------
Revenues:
North America ............... $14,163 $ 2,482
Europe ...................... 13,352 1,896
Asia Pacific ................ 18,958 4,169
------- -------
Total revenues .......... $46,473 $ 8,547
======= =======
Information regarding the Company's revenues in different countries is as
follows (in thousands):
Three Months Ended
September 30,
--------------------
2000 1999
------ ------
Revenues:
United States ................. $12,938 $ 2,463
Japan ......................... 11,755 4,056
9
United Kingdom ................ 8,212 9
Other foreign countries ....... 13,568 2,019
------- -------
Total revenues ............ $46,473 $ 8,547
======= =======
Note 8 - Merger with Software.com, Inc.
On August 8, 2000, the Company entered into an agreement to merge with
Software.com, Inc. (Software) in a transaction to be accounted for as a
pooling of interests. Under the terms of the agreement, each issued and
outstanding share of Software common stock will be exchanged for 1.6105 shares
of Phone.com common stock. In addition, all outstanding stock options and
warrants of Software will be exchanged for Phone.com stock options and warrants
based on the exchange ratio. Included in the merger agreement is an option for
the Company to acquire 9,724,460 shares of Software.com common stock at a price
of $125.7197 per share in the event of termination of the merger agreement by
Software.com. Management believes the likelihood of the merger being terminated
is remote. Therefore, no value has been assigned to the option. In connection
with the merger, the Company and Software.com expect to incur merger transaction
costs and other merger-related costs of approximately $100 million. The proposed
merger is subject to approval by the respective shareholders of Phone.com and
Software and satisfaction of customary closing conditions and is expected to
close on or about November 17, 2000.
Note 9 - Acquisitions
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 network operators in Europe and had expertise in
GSM Intelligent Networks, wireless data and WAP technology. Former employees of
APiON received consideration totaling approximately $2.2 million in cash with
the remaining $4.3 million payable in common stock of the Company on the
one-year 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 with the remaining $5.1 million
payable in common stock of the Company on each of the first two anniversaries of
the closing of the acquisition of APION contingent upon continue employment. The
actual number of Phone.com shares to be issued to the then current and former
employees of APiON will depend upon the fair value of Phone.com 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. Contingent common stock issuable in the future to former
employees of APiON has been treated as contingent consideration. The common
stock that is issued to the former employees of APiON upon the satisfaction of
certain future events will be added to goodwill and amortized over the remaining
useful life. Common stock 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 $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.
10
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.
On March 4, 2000, the Company acquired all of the outstanding common and
preferred stock of Paragon Software (Holdings' Limited (Paragon)), a company
incorporated in England and Wales, in exchange for 3,015,016 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
million in cash was paid in July 2000. Additional cash payments of $3.9
million will be paid within one year to be allocated among certain employees
of Paragon. These 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 amount
recorded for in-process research and development, which was expensed on the
acquisition date.
On April 14, 2000, the Company acquired all of the outstanding common and
preferred stock of Onebox.com, Inc. (Onebox), a company based in San Mateo,
California, in exchange for 6,206,865 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,
voicemail, 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 $814.1 million, with
$789.7 million attributable to goodwill, $590,000 attributable to assemble
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.
11
On June 14, 2000, the Company acquired all of the outstanding common stock
of 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.
For each acquisition, the Company 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 can be
achieved through the completion of a detail program design or, in its absence,
completion of a working model. As of the respective dates of the acquisitions of
APiON, Paragon and Onebox 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 Phone.com, including the results of
operations of ApiON, AtMotion, Paragon, Onebox, and MyAble as if each company
had been acquired on July 1, 1999 (in thousands, except per share data):
Three Months Ended
September 30,
------------------
1999
------------------
Revenues ............................................ $ 9,333
Net loss attributable to common stockholders ........ ($162,424)
Basic and diluted net loss per share ................ ($ 2.14)
Shares used in pro forma per share computation ...... 75,864
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the period 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 10 - Litigation
In April 2000, the Company 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 the Company and that the patent is also invalid and
unenforceable. The Company 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 the Company's complaint and
asserted a counterclaim against the Company alleging that the Company
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 the Company and others. Geoworks
seeks 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. The Company denies Geoworks' allegations and while it intends to
pursue its position vigorously, the outcome of any litigation is uncertain,
and the Company may not prevail. Additionally, the Company may incur
substantial expenses in defending against this claim. Should the Company be
found to infringe the Geoworks patent, it may be liable for potential monetary
damages, and could be required to obtain a license from Geoworks. If the
Company is unable to obtain a license on commercially reasonable terms it may
not be able to proceed with development and sale of some of its products. The
Company is unable to estimate the range of potential loss, if any, in connection
with the litigation with Geoworks.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions identify such forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
expressed or forecasted. Factors that might cause such a difference include, but
are not limited to, those discussed in the section entitled "Factors That May
Affect Future Results" and those appearing elsewhere in this Form 10-Q. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which apply only as of the date hereof. The Company assumes no obligation to
update these forward-looking statements to reflect actual results or changes in
factors or assumptions affecting such forward-looking statements.
Overview
We were incorporated in December 1994 and, from inception until June 1996,
our operations consisted primarily of various start-up activities, including
development of technologies central to our business, recruiting personnel and
raising capital. In 1995, we developed our initial technology, which enables the
delivery of Internet-based services to wireless telephones. In 1996, we
introduced and deployed our first products based on this technology. We first
recognized license revenues in August 1996, and generated license revenues of
approximately $522,000, $5.2 million and $43.7 million for the fiscal years
ended June 30, 1998, 1999 and 2000, respectively, and $33.3 million for the
three months ended September 30, 2000. We incurred net losses of approximately
$166.2 million for the three months ended September 30, 2000 and $10.6 million,
$20.8 million and $265.1 million for the fiscal years ended June 30, 1998, 1999
and 2000, respectively. As of September 30, 2000, we had an accumulated deficit
of approximately $473.3 million.
To provide a worldwide standard for the delivery of Internet-based services
over mass-market wireless telephones, we co-founded the WAP Forum in 1997. 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 network operators, 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 through the CDG and also with the W3C for the development of
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.
We generate revenues from licenses, maintenance and support services and
consulting services. We receive license revenues primarily from licensing our
software platform directly to network operators and indirectly through
value-added resellers. Currently, our software platform consists of the UP.Link
Server, the Mobile Management Server and the MyPhone Application Suite. As of
September 30, 2000, 83 network operators have licensed our software and have
commenced or announced commercial service or are in market or laboratory trials.
Those customers serve over 278 million voice subscribers. Maintenance and
support services revenues are from engineering and support services provided to
wireless telephone manufacturers and wireless network operators. Consulting
services revenues are derived from consulting services provided to network
operator customers either directly by us or indirectly through resellers.
Our future success depends on our ability to increase revenues from sales
of products and services to new and existing network operator customers. If the
market for Internet-based services via wireless telephones fails to develop or
develops more slowly than expected, then our business would be materially and
adversely affected. In addition, because there is a relatively small number of
network operators worldwide, any failure to sell our products to network
operator customers successfully could result in a shortfall in revenues that
could not be readily offset by other revenue sources.
Our business strategy also relies to a significant extent on the widespread
propagation of UP.Browser-enabled telephones through our relationships with
network operators and
13
wireless telephone manufacturers. In order to encourage adoption of
UP.Browser-enabled wireless telephones, we generally license our UP.Browser
software to wireless telephone manufacturers free of per-unit royalties and
other license fees and provide maintenance and support services for an annual
flat fee. As of September 30, 2000, we had licensed UP.Browser to 83 wireless
telephone manufacturers.
Effective July 1, 1998, we adopted 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 multiple-element arrangements are allocated to elements of the
arrangement, such as maintenance and support services and consulting services,
based on the fair values of the elements. The determination of fair value is
based on objective evidence which is specific to us. Revenue from delivered
elements is recognized using the residual method.
Revenue from license fees is generally recognized when persuasive evidence
of an arrangement exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed and
determinable, and collectibility is probable. In addition, sales through channel
partners are recognized upon sell-through to the end-user customer. We consider
all arrangements with payment terms extending beyond one year not to be fixed
and determinable. If the fee is not fixed and determinable, revenue is
recognized as payments become due from the customer. If collectibility is not
considered probable, revenue is recognized when the fee is collected.
We license our UP.Link Server Suite and related server-based software
products to network operators through our direct sales force and indirectly
through our channel partners. The Company's license agreements do not provide
for a right of return. Allowances for future estimated warranty costs are
provided at the time revenue is recognized. Licenses for UP.Link Server Suite
and related server-based software products can be purchased under a perpetual
license model either on an as-deployed basis or on a prepaid basis, or
alternatively, under a monthly or quarterly time-based license model.
For licenses purchased on an as-deployed basis, license revenue is
generally recognized quarterly as subscribers are activated to use the services
that are based on our UP.Link Server Suite and related server-based software
products.
For arrangements under which licenses are purchased on a prepaid basis and
we do not have objective evidence of the fair value of maintenance and support
services, prepaid license fees are recognized ratably over the period that
maintenance and support services are expected to be provided, generally 12 to 30
months, commencing at the beginning of the month delivery and acceptance occur
by the network operator. For arrangements under which licenses are purchased on
a prepaid basis and we have objective evidence of the fair value of maintenance
and support services, prepaid license fees are recognized upon delivery and
acceptance by the network operator. For arrangements where we commit to provide
the customer with future unspecified products under a subscription arrangement
prepaid license fees are recognized ratably over the contractual term of the
subscription arrangement (i.e., the date the prepaid licenses expire if not
used), generally 12 to 30 months, commencing at the beginning of the month
delivery and acceptance occur by the network operator.
For customers that license our products under a time-based license model,
revenues are recognized over the term of the license, generally three months
based on the number of the customer's subscribers using the services that are
based on our products during the respective license term.
Revenues from consulting services provided to network operators are
recognized as the services are performed.
We recognize revenues from UP.Browser agreements with wireless telephone
manufacturers ratably over the period during which the services are performed,
generally one year. We provide our wireless telephone manufacturer customers
with support associated with their efforts to port our UP.Browser software to
their wireless telephones, software error corrections, and new releases as they
become commercially available.
14
Deferred revenue was $99.9 million as of September 30, 2000, comprised of
$92.4 million in prepaid fees charged to wireless network operators and $7.5
million in prepaid maintenance and other service fees charged to wireless
telephone manufacturers. Although deferred revenues increased from $77.3 million
as of June 30, 2000,we expect that deferred revenue will decline in the long
term as network operators deploy services based on our products.
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 accounted for 72% and 71% of
our total revenues for the quarters ended September 30, 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. In particular, a number of
wireless phone manufacturers have delayed commercial release of WAP-compliant
wireless telephones, particularly affecting European and other markets based on
the GSM standard. 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.
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.
PROPOSED MERGER WITH SOFTWARE.COM, INC.
On August 9, 2000, we announced our intention to merge with Software.com
(see Note 8 to the Condensed Consolidated Financial Statements). The proposed
merger is subject to approval by the respective stockholders of Phone.com and
Software.com and satisfaction of customary closing conditions and is expected to
close on November 17, 2000. Software.com is a leading provider of platforms,
applications and services that enable the delivery of Internet-based services to
mass-market wireline devices. If completed, we expect that the combined company
will be a leading provider of highly scalable infrastructure and application
software enabling the delivery of e-mail, voicemail, unified messaging,
directory and wireless Internet access for IP-based networks. We further expect
that the combined company will benefit from cross-sell and up-sell opportunities
through the combined existing relationships with major communications service
providers worldwide.
15
If completed, the merger with Software.com will result in the new business
risks and integration challenges common in all mergers. For example, our ability
to successfully integrate the two companies will depend in part on our ability
to retain key personnel who are knowledgeable about our businesses. In addition,
our ability to continue to adequately operate and grow our existing businesses
will depend on our ability to retain existing customers and attract new
customers to the combined company's products. If we are unable to do so, it
could have a negative impact on our consolidated results.
RESULTS OF OPERATIONS
License Revenues
License revenues increased from $5.3 million for the three months ended
September 30, 1999 to $33.3 million for the three months ended September 30,
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 and Sprint in the United States, KDDI in Japan and Shinsegi
Telecom in Korea. This quarter also saw us recognize license revenues for the
first time from British Telecom in Europe and Nextel in the United States. In
total we are now recognizing license revenues from approximately 55 wireless
network operator customers in North America, Europe, Asia and other parts of the
world.
Maintenance and Support Services Revenues
Maintenance and support services revenues increased from $2.5 million for
the three months ended September 30, 1999 to $6.6 million for the three months
ended September 30, 2000. The increase in maintenance and support services
revenues reflects an increase in services provided to wireless telephone
manufacturers and increased installation and support fees from network
operators.
Consulting Services Revenues
Consulting services revenues increased from $820,000 for the three months
ended September 30, 1999 to $6.6 million for the three months ended September
30, 2000. The increase in consulting services revenue was primarily due to the
increased number of wireless network operators 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 license revenues increased from $228,000 for the three
months ended September 30, 1999 to $6.0 million for the three months ended
September 30, 2000. As a percentage of license revenues, cost of license
revenues for the three months ended September 30, 1999 and 2000 was 4% and 18%,
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 under the ASP
model. Under an ASP model, certain costs such as the depreciation costs
associated with operating a data center are charged to 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 network operators, and
engineering and support services to wireless telephone manufacturers. The
engineering and support services performed for wireless telephone manufacturers
include assistance relating to integrating our UP.Browser software into the
manufacturers' wireless telephones. Cost of maintenance and support services
revenues increased from $1.6 million for the three months ended September 30,
1999 to $4.5 million for the three months ended September 30, 2000. As a
percentage of maintenance and support service revenues, cost of maintenance and
support services revenues for the three months ended September 30, 1999 and 2000
was 64% and 69%, respectively. The margin decrease associated with the growth in
cost of maintenance and support services revenues from the quarter ended
September 30, 1999 to the quarter ended September 30, 2000, was attributable
primarily to an increase in personnel dedicated to support a larger number of
wireless telephone manufacturer customers and to increased staffing in
anticipation of growth in the
16
number of network operator customers. We anticipate that the cost of maintenance
and support services revenues will increase in absolute dollars in future
operating periods.
Cost of Consulting Services Revenues
Cost of consulting services revenues consists of compensation and
independent consultant costs for personnel engaged in our consulting services
operations and related overhead. Cost of consulting services revenues increased
from $537,000 for the three months ended September 30, 1999 to $4.0 million for
the three months ended September 30, 2000. As a percentage of consulting
services revenues, cost of consulting services revenues for the three months
ended September 30, 1999 and 2000 was 65% and 61%, respectively. The increase in
gross margins associated with consulting services revenues was due to a higher
mix of consulting services performed under fixed contractual arrangements
compared to consulting services performed on a time and materials basis. Gross
profit on consulting services revenues is impacted by the mix of company
personnel and independent consultants assigned to projects. The gross profit we
achieve is also impacted by the contractual terms of the consulting assignments
we undertake, and the gross profit on fixed price contracts typically is more
susceptible to fluctuation than contracts performed on a time-and-materials
basis. We anticipate that the cost of consulting services revenues will increase
in absolute dollars as we continue to invest in the growth of our consulting
services operations.
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 252% from $5.5 million, or 64% of revenues, for the three
months ended September 30, 1999, to $19.2 million, or 41% of revenues, for the
three months ended September 30, 2000. The increase in costs associated with
research and development were attributable primarily to the addition of
personnel in our research and development organization associated with product
development. We expect to continue to make substantial investments in research
and development and anticipate that research expenses will continue to increase
in absolute dollars. We further anticipate that research and development
expenses will increase substantially due to product development efforts
associated with all of our initiatives, including Unified Messaging. We have
also added significant number of engineering personnel through our acquisitions
of APiON, Angelica, AtMotion, Paragon, Onebox and MyAble.
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 317% from $4.9 million, or 58%
of revenues, for the three months ended September 30, 1999, to $20.5 million, or
44% of revenues, for the three months ended September 30, 2000. The increase in
sales and marketing expenses resulted from the addition of personnel in our
sales and marketing organizations, reflecting our increased selling effort to
develop market awareness of our products and services. We anticipate that sales
and marketing expenses will increase in absolute dollars as we increase our
investment in these areas. In addition, we expect that sales and marketing
expenses will increase as a result of the addition of sales and marketing
personnel in connection with the acquisitions of APiON, AtMotion, Paragon,
Onebox, Velos and MyAble.
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 258% from $1.9 million, or 23% of revenues, for the three
months ended September 30, 1999, to $6.9 million, or 15% of revenues, for the
three months ended September 30, 2000. These increases 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 lesser extent, legal expenses associated with increased product licensing and
patent activity. We expect general and administrative expenses to increase in
absolute dollars as we add personnel and incur additional expenses related to
the anticipated growth of our business, the management of our international
operations and our operation as a public company.
17
Stock-Based Compensation
Stock-based compensation expense totaled $0.2 million and $3.6 million for
the three months ended September 30, 1999 and 2000, respectively. All stock-
based compensation is being amortized in a manner consistent with Financial
Accounting Standards Board Interpretation No. 28. Some stock options granted and
restricted stock issued during the fiscal years ended June 30, 1998, 1999 and
2000, resulted in the recognition of deferred stock-based compensation. Total
deferred stock-based compensation associated with these equity arrangements
amounted to $2.4 million related to stock options granted and restricted stock
issued from October 1997 through June 1999. Of the total deferred stock-based
compensation recorded through June 1999, $0.2 million and $0.1 million was
amortized for the three months ended September 30, 1999 and 2000, respectively.
In November 1999, a stock option award was made to a new employee at a price
discounted from the then-current fair market value of our stock, giving rise to
deferred stock-based compensation in the amount of $2.8 million. In July 2000, a
stock option award was made to an employee at a price discounted from the then-
current fair market value of our stock, giving rise to deferred stock-based
compensation in the amount of $1.7 million that was recognized for the three
months ended September 30, 2000. For the three months ended September 30, 2000,
we recognized stock-based compensation expense related to these awards in the
amount of approximately $0.3 million. We expect amortization of approximately
$3.0 million, $0.6 million and $0.3 million in the fiscal years ending June 30,
2001, 2002 and 2003, respectively, relating to the amortization of the deferred
stock-based compensation associated with stock options granted and restricted
stock issued from October 1997 through July 2000.
In connection with our acquisition of APiON in October 1999, we recorded
additional deferred stock-based compensation of approximately $5.1 million. For
the three months ended September 30, 2000, we recognized stock-based
compensation expense related to APiON in the amount of approximately $1.0
million and we expect amortization of approximately $2.1 million and $0.4
million the fiscal years ending June 30, 2001 and 2002, respectively. In
connection with our acquisition of Angelica in October 1999, we recorded
additional deferred stock-based compensation of approximately $1.7 million. For
the three months ended September 30, 2000, we recognized stock-based
compensation expense related to Angelica of approximately $0.3 million, and we
expect amortization of approximately $0.7 million and $0.2 million in the fiscal
years ending June 30, 2001 and 2002, respectively. In connection with our
acquisition of Velos in June 2000, we recorded additional deferred stock-based
compensation expense related to Velos in the amount of $1.2 million. For the
three months ended September 30, 2000, we recognized stock-based compensation
expense related to Velos in the amount of approximately $0.2 million, and we
expect amortization of approximately $0.8 million and $0.3 million in the fiscal
years ending June 30, 2001 and 2002, respectively. 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 related to our October 1999
acquisitions of APiON and Angelica, and our acquisitions of AtMotion in February
2000, Paragon in March 2000, Onebox in April 2000, Velos in May 2000 and MyAble
in June 2000 resulted in amortization expense of approximately $152.3 million
for the three months ended September 30, 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-year period. We expect
amortization of approximately $609.1 million, $609.1 million and $394.8 million
in the fiscal years ending June 30, 2001, 2002 and 2003, respectively, relating
to the amortization of goodwill and other intangible assets. In addition, we may
have additional acquisitions in future periods which could give rise to
additional goodwill or other intangible assets being acquired. If we acquire
additional goodwill or other intangible assets, our acquisition-related
amortization may increase in future periods.
Interest and Other Income, Net
Net interest income increased from $1.5 million to $6.9 million for the
three months ended September 30, 1999 and 2000, respectively. The increase
resulted primarily from earnings on rising 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 equipment loans.
Income Taxes
Income tax expense was $89,000 and $2.6 million for the three months ended
18
September 30, 1999 and 2000, respectively. Income tax expense for the three
months ended September 30, 1999 and 2000 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 $66.8 million, and through our secondary
public offering in November 1999 which generated net proceeds of approximately
$390.4 million. As of September 30, 2000, we had $418.1 million of cash, cash
equivalents and short-term investments and working capital of $345.1 million.
Net cash provided by operating activities was $7.3 million for the three
months ended September 30, 2000. The net cash provided was attributable
primarily to increases in deferred revenue and accrued liabilities of $22.6
million and $10.8 million, respectively. These increases were offset in part by
the net loss of $166.2 million and the increase in accounts receivable of $11.1
million and after consideration of non-cash amortization expenses principally
relating to goodwill, in-process research and development, and other intangible
assets as a result of the acquisitions of APiON, Angelica, AtMotion, Paragon,
Onebox, Velos and MyAble. The increases in deferred revenue and accounts
receivable were due to increased sales to both wireless telephone manufacturers
and network operators.
Net cash provided for investing activities was $5.6 million for the three
months ended September 30, 2000, primarily reflecting net sales of short-term
investments, offset by continued investments in property and equipment and cash
paid to satisfy acquisitions related liabilities.
Net cash provided by financing activities was $2.9 million for the three
months ended September 30, 2000, primarily reflecting the net issuance of common
stock.
As of September 30, 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 September 30, 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 material other 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 we are unable to obtain this 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.
19
Our future profitability is uncertain because we have a limited operating
history.
Because we commenced operation in December 1994 and commercially released
our first products in June 1996, we only have a limited operating history on
which you can base your evaluation of our business. In addition, until our 1999
fiscal year, we have had less than $2.25 million in annual revenue, which
represents a small percentage of our future anticipated annual revenues.
We may not continue to grow or achieve profitability.
We face a number of risks encountered by early stage companies in the
wireless telecommunications and Internet software industries, including:
. our need for network operators to launch and maintain commercial
services utilizing our products;
. the uncertainty of market acceptance of 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 network operators and wireless telephone
manufacturers;
. 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 need to manage expanding operations; and
. our dependence upon key personnel.
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 cycle;
. 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 network operator customer;
. introduction of new products or services by us or our competitors;
. delays in developing and introducing new products and services;
. changes in our pricing policies or those of our competitors or
customers;
. changes in our mix of domestic and international sales;
. risks inherent in international operations;
20
. 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 our expenses, such as employee compensation 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.
Our acquisitions of AtMotion and Paragon, which were completed in February
2000 and March 2000, respectively, our acquisition of Onebox, which was competed
in April 2000, and our pending merger with Software.com, our largest business
combination to date, which was announced in August 2000, will require
integrating 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 not experienced in managing significant
facilities or operations in geographically distant areas. Finally, we cannot be
certain that we will be able to retain these companies' key employees.
If we fail to complete the merger with Software.com or if we do not successfully
integrate the combined companies, the market price of our common stock may
decline.
The merger of Software.com with us is subject to certain contingencies. If
the merger is not completed for any reason, the market price of our common stock
may decline to the extent that the current market price of our shares reflect a
market assumption that the merger will be completed. Additionally, if we do not
successfully integrate the combined companies, the market price of our common
stock may decline.
Any future merger or acquisition of companies or technologies may result in
disruptions to our business and/or the distraction of our management.
In addition to our pending merger with Software.com, we may 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.
To date, we have completed acquisitions of seven companies or their assets,
consisting of APiON, Angelica Wireless, AtMotion, Paragon, Onebox, Velos and
MyAble and have pending our merger with Software.com. We may merge with or
acquire other complementary businesses and technologies in the future. We may
not be able to identify other 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.
21
We may not 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 al 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 six 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 telephones 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 network
operators and their subscribers.
From inception through September 30, 2000, we have generated a significant
portion of our total cumulative revenues from fees paid to us by wireless
telephone manufacturers that embed our browser in their wireless telephones.
However, our future success depends on our ability to increase revenues from
sales of our UP.Link Server Suite and related server-based software and services
to new and existing network operator customers and on market acceptance of new
products and services, including our MyPhone wireless Internet protocol
framework and related server-based communications applications software
products, and we may not be able to achieve widespread adoption of these
products and services by these customers. This dependence is exacerbated by the
relatively small number of network operators worldwide. To date, only a limited
number of network operators have implemented and deployed services based on our
products. We cannot assure you that network operators 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 through wireless
telephones is rapidly evolving, and we may not be able to adequately address
this market.
The market for the delivery of Internet-based services through wireless
telephones is rapidly evolving and is 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 telephones. 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 network operator 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 services our products enable.
Historically, network operators have been relatively slow to implement new
complex services such as Internet-based services. In addition, network operators
may encounter greater customer service demands to support Internet-based
services via wireless telephones than they do for their traditional voice
22
services. We have limited or no control over the pace at which network operators
implement these new services. The failure of network operators 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.
Until recently, a significant portion of our revenues in any particular
period has been attributable to a limited number of customers, comprised
primarily of network operators and wireless telephone manufacturers. 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 those customers
could materially harm our business. For example, during the fiscal year ended
June 30, 1999, AT&T Wireless Services accounted for approximately 17% of our
total revenues, and DDI Corporation accounted for approximately 14% of our total
revenues. For the year ended June 30, 2000, AT&T Wireless Services and DDI
Corporation accounted for 6% and 18%, respectively of our total revenues. The
foregoing calculations are based on revenues derived from direct and indirect
sales to these customers.
If wireless telephones 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 telephones as a means of
accessing Internet-based services, our business would suffer.
If widespread integration of browser technology does not occur in wireless
telephone, our business could suffer.
Because our current UP.Link Server Suite and related server-based software
offers enhanced features and functionality that are not currently covered by the
specifications promulgated by the WAP Forum, subscribers currently must use
UP.Browser-enabled wireless telephones in order to fully utilize these features
and functionality. Additionally, we expect that future versions of our UP.Link
Server Suite 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 materiality if widespread integration of
UP.Browser or WAP-compliant third-party browser software in wireless telephones
does not occur. All of our agreements with wireless telephone manufacturers are
nonexclusive, so they may choose to embed a browser other than ours in their
wireless telephones. We may not succeed in maintaining and developing
relationships with telephone manufacturers, and any arrangements may be
terminated early or not renewed at expiration. In addition, wireless telephone
manufacturers may not produce products using UP.Browser in a timely manner and
in sufficient quantities, if at all.
Our strategy for the MyPhone business model is subject to uncertainties, and we
may not be able to generate sufficient revenues to achieve profitability.
In September 1999, we announced our MyPhone service. We offer MyPhone as an
OEM service to enable network operators to create branded mobile Internet
portals for their subscribers, and we do not currently intend to develop our own
branded portal site. We also offer MyPhone as software products that network
operators can license from us and host themselves. We have limited experience in
developing mobile Internet portals, and we may not be successful in executing
our business strategy for the MyPhone service and products. The success of
MyPhone will depend on a number of factors, including the successful transition
from offering MyPhone as a hosted service to also offering MyPhone products, the
adoption of MyPhone by network operators, our ability to provide compelling
applications and services through MyPhone, and the acceptance by end users of
the MyPhone services from network operators. Developing these capabilities and
commercializing the product offering will require us to incur significant
additional expenses, including costs relating to
23
operating the portal, as well as sales and marketing and research and
development expenses. We expect to incur these costs and expenses in advance of
generating revenues from the services and products. Furthermore, our business
model for MyPhone is new and evolving. Even if we are successful in executing
this strategy, we cannot be certain that our business model for the MyPhone
service and products will result in sufficient revenue to achieve profitability.
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, 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;
. Wireless network operators, such as NTT DoCoMo;
. Providers of Internet software applications and content, electronic
messaging applications and personal information management software
solutions; and
. Providers of unified messaging products and services, such as Comverse
and Critical Path.
In particular, Microsoft Corporation has announced its intention to
introduce products and services that may compete directly with our UP.Link,
UP.Browser and UP.Application 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 telephone subscribers to directly access
applications and services provided by these customers, rather than through
gateways provided by network operators' WAP servers. If Nokia's WAP server is
widely adopted by corporate customers and content providers, it could undermine
the need for network operators 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 service, such as the MyPhone
products and services, we will face additional competitors. As we enter the
unified messaging market, we will face competition from established voicemail
providers such as Comverse, and Internet-based unified messaging providers such
as a 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.
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
24
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. Se 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 and Internet software industries is intense,
and finding qualified personnel with experience in both 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; for example, we are currently in the
process of implementing Oracle financial software;
. hire, train and retain additional qualified personnel;
. continue to expand and upgrade core technologies;
. effectively manage multiple relationships with various network
operators, wireless telephone manufacturers, content providers,
applications developers and other third parties; and
. successfully integrate the businesses of our acquired companies.
Our systems, procedures and controls may not be adequate to support our
operations, and our management may not be able to achieve the rapid execution
necessary to exploit the market for our products and services.
Our success, particularly in international markets, depends in part on our
ability to maintain and expand our distribution channels.
Our success depends in part on our ability to increase sales of our
products and services through value-added resellers and systems integrators and
to expand our indirect distribution channels. If we are unable to maintain the
relationships that we have with our existing distribution partners, increase
revenues derived from sales through our indirect distribution channels, or
increase the number of distribution partners with whom we have relationships,
then we may not be able to increase our revenues or achieve profitability.
We expect that many network operators 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.
25
We depend on others to provide content and develop applications for wireless
telephones.
In order to increase the value to customers of our product platform and
encourage subscriber demand for Internet-based services via wireless telephones,
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 telephones, 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 network operators
and wireless telephone manufacturers large enough to justify significant and
continued investments in these endeavors.
If we are unable to integrate our products with third-party technology, such as
network operators' systems, our business may suffer.
Our products are integrated with network operators' systems and wireless
telephones. 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
telephones, we are unable to integrate our products with these systems or
telephones, we could be required to redesign our software products. Moreover,
many network operators 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 such as our
UP.Link Server Suite. 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.
We may be unable to adequately protect our proprietary rights.
Our success depends significantly on our ability to protect our proprietary
rights to the technologies used in our products. If we are not adequately
protected, our competitors could use the intellectual property that we have
developed to enhance their products and services, which could harm our business.
We rely on patent protection, as well as a combination of copyright and
trademark laws, trade secrets, confidentiality provisions and other contractual
provisions, to protect our proprietary rights, but these legal means afford only
limited protection.
We may be sued by third parties for infringement of their proprietary rights.
The telecommunications and Internet software industries are characterized
by the existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of entrants into our market increases, the possibility of
an intellectual property claim against us grows. Any intellectual property
claims, with or without merit, could be time-consuming and expensive to litigate
or settle and could divert management attention from administering our core
business.
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. Geoworks seeks 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. We deny Geoworks'
allegations and while we intend to pursue our position vigorously, the outcome
of any litigation is uncertain, and we may not prevail. Additionally, we may
incur substantial expenses in defending against this claim. Should we be found
to infringe the Geoworks patent, we may be liable for potential monetary
damages, and could be required to obtain a license from Geoworks. If we are
unable to obtain a license on commercially reasonable terms we may not be able
to proceed with development and sale of some of our products. The Company is
unable to estimate the range of potential loss, if any, in connection with the
litigation with Geoworks.
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 72% of our total
revenues for the quarter ended September 30, 2000. We expect international sales
to continue to account
26
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 business, economic, political and
legal risks.
Undetected Year 2000 problems could potentially harm our business.
Although the date is now past January 1, 2000 and we have not experienced
any material adverse impact from the transition to the Year 2000, we cannot
provide assurance that our suppliers and customers have not been affected in a
manner that is not yet apparent. In addition, certain computer programs that
were date sensitive to the Year 2000 may experience difficulties with future
dates even though they have not experienced difficulties to date.
Our stock price, like that of many companies in the Internet and
telecommunications software industries, may be volatile.
Since our initial public offering in June 1999, 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; and
. changes in estimates or our financial performance or changes in
recommendations by securities analysts.
Additionally, the market price of Software.com is subject to many of the
same risks listed above. Because of our pending merger with Software.com,
fluctuations in their stock price can increase the volatility in the market
price of our common stock.
Our stock price may be volatile, exposing us to expensive and time-consuming
securities class action litigation.
The stock market in general, and the stock prices of Internet-related
companies in particular, have recently experienced extreme volatility, which has
often been unrelated to the operating performance of any particular company or
companies. If market or industry-based fluctuations continue, our stock price
could decline below current levels or the initial public offering price
regardless of our actual operating performance. Furthermore, the historical
trading volume of our stock is not indicative of nay 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 precise 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 target
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.
Our certificate of incorporation, bylaws, rights agreement and Delaware law
contain provisions that could discourage a takeover.
On August 8, 2000, in connection with our pending merger with Software.com,
our board of directors declared a dividend distribution of one right for each
share of our common stock outstanding on August 18, 2000. The rights are
exercisable for a series of our preferred stock under certain circumstances as
specified in our rights agreement dated August 8, 2000. The potential exercise
of rights under the rights agreement could discourage, delay or prevent a merger
or acquisition that a stockholder may consider favorable. Additionally,
provisions of our certificate of incorporation and bylaws and Delaware law may
discourage, delay or prevent a merger or acquisition. These provisions include
the following:
. establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
. authorizing the board to issue preferred stock;
27
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election
of the board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings.
28
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 September 30, 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:
(in thousands, except interest rates)
Period ending September 30, 2000
Expected maturity date
---------------------- Fair Value
2001 2002 2003 2004 2005 Total September 30,
2000
-------------------------------------------------------------------------------------
Corporate bonds $122,436 -- -- -- -- $122,436 $122,376
Commercial paper 82,278 -- -- -- -- 82,278 82,263
Certificates of deposit 69,995 -- -- -- -- 69,995 70,000
Federal agencies 48,956 -- -- -- -- 48,956 48,950
-------- -------- -------- -------- -------- -------- --------
Total $323,775 -- -- -- -- $323,775 $323,589
======== ======== ======== ======== ======== ======== ========
Weighted-average interest rate 6.61% 6.61%
======== ========
29
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 imporatation of WAP
compatible devices by us and others. Geoworks seeks 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. We deny Geoworks'
allegations and while we intend to pursue our position vigorously, the outcome
of any litigation is uncertain, and we may not prevail. Additionally, we may
incur substantial expenses in defending against this claim. Should we be found
to infringe the Geoworks patent, we may be liable for potential monetary
damages, and could be required to obtain a license from Geoworks. If we are
unable to obtain a license on commercially reasonable terms we may not be able
to proceed with development and sale of some of our products. The Company is
unable to estimate the range of potential loss, if any, in connection with the
litigation with Geoworks.
Item 2. Changes in Securities and Use of Proceeds.
On November 16, 1999, in connection with our secondary offering, a
Registration Statement on Form S-1 (No. 333-89879) was declared effective by the
Securities and Exchange Commission, pursuant to which 3,041,500 shares of our
common stock were offered and sold for our account at a price of $135.00 per
share, generating net proceeds of $390.4 million. The managing underwriters were
Credit Suisse First Boston Corporation, Goldman, Sachs and Co., Hambrecht &
Quist, BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc., and
Bank of America Securities LLC.
On October 26, 1999, in connection with our acquisition of APiON Telecom
Limited, or APiON, we issued 2,393,026 shares of our common stock to the
existing stockholders of APiON in exchange for all of the outstanding shares of
capital stock of APiON. The actual number of shares issued in connection with
the transaction is subject to downward adjustment to the extent that claims are
made against an escrow fund created at the time of the transaction. The
transaction did not involve any underwriters, underwriting discounts or
commissions, or any public offering, and we believe that it was exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), by virtue of Section 4(2) thereof. The recipients of the
securities represented their intentions to acquire the securities for investment
only, had access to all relevant material information regarding the Company
necessary to evaluate the investment and were either accredited investors, had
sufficient knowledge and experience to evaluate the investment, or relied upon a
purchaser representative.
On October 27, 1999, in connection with our acquisition of substantially
all of the assets of Angelica Wireless ApS, or Angelica, we issued 16,000 shares
of our common stock to existing employees of Angelica contingent upon their
continued employment with Phone.com. The actual number of shares issued in
connection with the transaction is subject to reduction to the extent that
certain key employees do not remain with us for a period of time from at least
one to three years. The transaction did not involve any underwriters,
underwriting discounts or commissions, or any public offering, and we believe
that it was exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), by virtue of Section 4(2) thereof. We
received reasonable assurances that the investors acquired the securities for
investment only. In addition, the recipients of the securities had access to all
relevant material information regarding the Company necessary to evaluate the
investment and were either accredited investors, had sufficient knowledge and
experience to evaluate the investment, or relied upon a purchaser
representative.
On February 8, 2000, in connection with our acquisition of AtMotion, Inc.,
or AtMotion, we issued 2,280,287 shares of our common stock to the existing
stockholders of AtMotion in exchange for all of the outstanding shares of
capital stock of AtMotion. The actual number of shares issued in connection with
the transaction is subject to downward adjustment to the extent that claims are
made against an escrow fund created at the time of the transaction. The
transaction did not involve any underwriters, underwriting discounts or
commissions, or any public offering. We believe that the transaction was exempt
from the registration requirements of the Securities Act by virtue of Section
3(a)(10) because the
30
California Department of Corporations held a fairness hearing and granted a
permit pursuant to Section 25121 of the California Corporations Code to issue
the securities.
On March 4, 2000, in connection with our acquisition of Paragon Software
(Holdings) Limited, or Paragon, we issued 3,051,016 shares of our common stock
to the existing stockholders of Paragon in exchange for all of the outstanding
shares of capital stock of Paragon. The actual number of shares issued in
connection with the transaction is subject to downward adjustment to the extent
that claims are made against an escrow fund created at the time of the
transaction. The transaction did not involve any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that it was
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), by virtue of Section 4(2) thereof. The
recipients of the securities represented their intentions to acquire the
securities for investment only, had access to all relevant material information
regarding the Company necessary to evaluate the investment and were either
accredited investors, had sufficient knowledge and experience to evaluate the
investment, or relied upon a purchaser representative.
On April 14, 2000, in connection with our acquisition of Onebox.com, Inc.,
or Onebox, we issued 6,207,865 shares of our common stock to the existing
stockholders of Onebox in exchange for all of the outstanding shares of capital
stock of Onebox. The actual number of shares issued in connection with the
transaction is subject to downward adjustment to the extent that claims are made
against an escrow fund created at the time of the transaction. The transaction
did not involve any underwriters, underwriting discounts or commissions, or any
public offering. We believe that the transaction was exempt from the
registration requirements of the Securities Act by virtue of Section 3(a)(10)
because the California Department of Corporations held a fairness hearing and
granted a permit pursuant to Section 25121 of the California Corporations Code
to issue the securities.
On May 4, 2000, in connection with our acquisition of Velos 2 S.r.l., or
Velos, we issued 18,000 shares of our common stock to the existing stockholders
of Velos in exchange for all of the outstanding shares of capital stock of
Velos. The actual number of shares issued in connection with the transaction is
subject to downward adjustment to the extent that claims are made against an
escrow fund created at the time of the transaction. The transaction did not
involve any underwriters, underwriting discounts or commissions, or any public
offering, and we believe that it was exempt from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"), by virtue of
Section 4(2) thereof. The recipients of the securities represented their
intentions to acquire the securities for investment only, had access to all
relevant material information regarding the Company necessary to evaluate the
investment and were either accredited investors, had sufficient knowledge and
experience to evaluate the investment, or relied upon a purchaser
representative.
On June 14, 2000, in connection with our acquisition of MyAble, Inc., or
MyAble, we issued 193,873 shares of our common stock to the existing
stockholders of MyAble in exchange for all of the outstanding shares of capital
stock of MyAble. The actual number of shares issued in connection with the
transaction is subject to downward adjustment to the extent that claims are made
against an escrow fund created at the time of the transaction. The transaction
did not involve any underwriters, underwriting discounts or commissions, or any
public offering, and we believe that it was exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
by virtue of Section 4(2) thereof. The recipients of the securities represented
their intentions to acquire the securities for investment only, had access to
all relevant material information regarding the Company necessary to evaluate
the investment and were either accredited investors, had sufficient knowledge
and experience to evaluate the investment, or relied upon a purchaser
representative.
On August 8, 2000, our Board of Directors declared a dividend distribution
of one Right for each outstanding share of Common Stock, par value $.001 per
share, of Phone.com at the close of business on August 18, 2000. Each Right
entitles the registered holder to purchase from us one one-thousandth of a share
of a series of our preferred stock designated as Series A Junior Participating
Preferred Stock at a price of $500 per one one-thousandth of a share, subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement between the Company and U.S. Stock Transfer Corporation, as Rights
Agent, a copy of which appears as Exhibit 1 to our Form 8-A12B, filed with the
SEC on August 17, 2000, which exhibit is incorporated herein by reference.
Item 3. Defaults Upon Senior Securities - Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
31
(b) Reports on Form 8-K
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.
32
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.
Phone.com, Inc.
By: /s/ ALAN BLACK
--------------------------------------------
Alan Black
Vice President, Finance and
Administration, Chief Financial Officer and
Treasurer (Principal Financial and
Accounting Officer)
Date: November 14, 2000
33
EXHIBIT INDEX
EXHIBIT EXHIBIT
NO. DESCRIPTION
- -------------- ----------------------------------------
27.1 Financial Data Schedule