<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________________
Commission File Number: 000-26379
SOFTWARE.COM, INC.
(exact name of registrant as specified in its charter)
Delaware 77-0392373
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
525 Anacapa Street
Santa Barbara, CA 93101
(Address of principal executive offices)
(805) 882-2470
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
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 [ ]
The number of outstanding shares of the registrant's Common Stock, $.001 par
value, was 49,000,878 as of August 10, 2000.
<PAGE>
SOFTWARE.COM, INC.
INDEX
PART I: FINANCIAL INFORMATION
Item Page
--------- ----------------------------------------------------------- ----
Item 1. Condensed Consolidated Financial Statements - unaudited 3
Condensed Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999 3
Condensed Consolidated Statements of Operations - three
and six months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows - six
months ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Item 3 Quantitative and Qualitative Disclosure About Market Risk 27
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 29
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
Software.com, Inc.
Condensed Consolidated Balance Sheet
(In Thousands)
<S> <C> <C>
June 30, December 31,
2000 1999
---------------- ---------------
Assets
Current Assets:
Cash and cash equivalents....................................... $ 41,712 $ 41,175
Short-term investments.......................................... 45,707 25,748
Accounts receivable, net........................................ 30,738 23,054
Prepaid expenses and other current assets....................... 2,982 1,974
---------------- ---------------
Total current assets........................................... 121,139 97,951
Property and equipment, net..................................... 9,636 5,302
Goodwill and intangibles, net................................... 70,213 8,048
Deposits and other assets....................................... 829 591
---------------- ---------------
Total assets.................................................... $ 201,817 $ 111,892
================ ===============
Liabilities and shareholder's equity
Current liabilities:
Accounts payable................................................ $ 5,114 $ 3,423
Accrued liabilities............................................. 6,658 5,878
Deferred revenue................................................ 20,519 10,488
Current portion of capital lease obligations
and long-term debt.............................................. 485 1,183
---------------- ---------------
Total current liabilities....................................... 32,776 20,972
Capital lease obligations and long-term debt,
less current portion............................................ 28 5,756
Shareholder's equity:
AtMobile convertible preferred stock -
Series A, B & C ................................................ - 12,969
Common stock.................................................... 230,470 120,053
Deferred Compensation........................................... (1,368) (1,673)
Unrealized (loss) on investments................................ (29) (6)
Accumulated deficit............................................. (60,060) (46,179)
---------------- ---------------
Total shareholder's equity...................................... 169,013 85,164
---------------- ---------------
Total liabilities and shareholder's equity...................... $ 201,817 $ 111,892
================ ===============
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
Software.com, Inc.
Condensed Consolidated Statements of Operations
(In Thousands, except per share amounts)
<S> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues:
Software licenses........................................... $ 20,183 $ 5,226 $ 33,620 $ 10,285
Services.................................................... 9,310 4,382 15,992 7,666
---------- --------- ---------- ----------
Total revenues.............................................. 29,493 9,608 49,612 17,951
Cost of revenues:
Software licenses........................................... 697 767 1,328 1,142
Services.................................................... 7,283 3,306 12,057 5,823
---------- --------- ---------- ----------
Total cost of revenues...................................... 7,980 4,073 13,385 6,965
---------- --------- ---------- ----------
Gross profit................................................ 21,513 5,535 36,227 10,986
Operating expenses:
Sales & marketing........................................... 8,320 4,412 15,685 8,249
Research & development...................................... 6,882 3,451 12,651 6,784
General & administrative.................................... 2,847 1,425 5,778 3,076
Stock based compensation-acquisition related.............. 1,582 - 3,646 -
Amortization of goodwill and purchased intangible assets.... 1,293 - 1,716 -
Purchased in-process research and development............... 2,000 - 2,000 -
Acquisition-related costs................................... 10,268 - 10,395 -
Legal assessment............................................ - (200) - (200)
---------- --------- ---------- ----------
Total operating expenses.................................... 33,192 9,088 51,871 17,909
---------- --------- ---------- ----------
Loss from operations........................................ (11,679) (3,553) (15,644) (6,923)
Interest and other income (expense), net.................... 990 (231) 2,119 (489)
---------- --------- ---------- ----------
Loss before income taxes.................................... (10,689) (3,784) (13,525) (7,412)
Provision for income taxes.................................. (323) (79) (356) (146)
---------- --------- ---------- ----------
Net loss.................................................... (11,012) (3,863) (13,881) (7,558)
Accretion on redeemable convertible preferred stock......... - (193) - (403)
---------- --------- ---------- ----------
Net loss applicable to common stockholders................... $ (11,012) $ (4,056) $ (13,881) $ (7,961)
========== ========= ========== ==========
Basic and diluted net loss per share....................... $ (0.23) $ (0.13) $ (0.30) $ (0.27)
========== ========= ========== ==========
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share.................................. 47,508 30,290 45,633 29,740
========== ========= ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
Software.com, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
<S> <C> <C>
Six Months Ended
June 30,
---------------------------------------
2000 1999
---------------- ---------------
Operating activities
Net loss........................................................ $ (13,881) $ (7,558)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.................................. 3,390 918
Deferred compensation.......................................... 304 240
Non employee equity-based compensation......................... 3,646 -
Write-off of in-process R&D.................................... 2,000 -
Accrued interest on convertible notes.......................... 26 -
Provision for doubtful accounts................................ 375 308
Changes in operating assets and liabilities, net of the
effect of acquisitions:
Accounts receivable.......................................... (7,267) (1,957)
Prepaid expenses and other current assets.................... (917) (408)
Accounts payable............................................. 1,016 1,833
Accrued payroll and related liabilities...................... (69) 201
Other accrued liabilities.................................... 286 (495)
Deferred revenue............................................. 9,062 459
---------------- ---------------
Net cash used in operating activities..................... (2,029) (6,459)
---------------- ---------------
Investing activities
Acquisition of property and equipment........................... (5,745) (613)
Purchase of marketable securities............................... (70,905) (2,971)
Maturities of marketable securities............................. 50,924 496
Cash from bCandid acquisition................................... 547 -
Decrease in other assets........................................ (204) (8)
---------------- ---------------
Net cash used in investing activities...................... (25,383) (3,096)
---------------- ---------------
Financing activities
Repayments of long-term debt................................... (728) (2,674)
Proceeds from long-term debt.................................... - 4,763
Repayments of note payable...................................... (698) (7,089)
Proceeds from note payable...................................... - -
Exercise of stock options....................................... 8,980 2,188
Proceeds from issuance of ESPP.................................. 1,891 -
Proceeds from issuance of convertible preferred stock, net...... - 10,000
Proceeds from issuance of AtMobile preferred stock, net......... 12,504 -
Proceeds from issuance of common stock, net..................... - 67,992
---------------- ---------------
Net cash provided by financing activities.................. 21,949 75,180
---------------- ---------------
Net increase/(decrease) in cash and cash equivalents............ (5,463) 65,624
Cash and cash equivalents at beginning of period................ 47,175 6,262
---------------- ---------------
Cash and cash equivalents at end of period...................... $ 41,712 $ 71,886
================ ===============
</TABLE>
See accompanying notes.
5
<PAGE>
SOFTWARE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared by Software.com, Inc. (the "Company") without audit (except for the
balance sheet information as of December 31, 1999, which was derived from
audited consolidated financial statements) in accordance with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Certain information
and footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted in accordance with such rules and regulations. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. The results of
operations for interim periods are not necessarily indicative of the results
that may be expected for the fiscal year or any other period. The condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes included in the
Company's Annual Report on Form 10-K and supplemental financial statements on
Form 8-K for the year ended December 31, 1999, which were filed with the
Securities and Exchange Commission ("SEC") on March 30, 2000 and July 17, 2000,
respectively.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ materially from those estimates.
Reclassification
Certain prior period amounts have been reclassified to conform to the
current period presentation.
Cash and Cash Equivalents
The Company considers cash equivalents to be only those investments which
are highly liquid, readily convertible to cash and which mature within three
months from date of purchase. Cash and cash equivalents include commercial
paper, money market accounts and auction rate securities at June 30, 2000 and
December 31, 1999.
Marketable Securities
Marketable securities consist of investments in commercial paper,
government securities, corporate notes and certificates of deposit that have
maturities greater than three months but less than one year from date of
purchase.
The Company considers its investment portfolio available-for-sale as
defined in Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" issued by the Financial
Accounting Standards Board ("FASB"). Accordingly, these investments are recorded
at fair value.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 provides additional guidance for revenue recognition under
6
<PAGE>
certain arrangements. The Company has evaluated the impact of SAB 101 on its
financial statements and related disclosures and does not expect that the impact
will have a material effect on the Company's results of operations.
Note 2. Acquisitions
In April 2000, the Company completed its acquisition of AtMobile.com,
Inc. ("AtMobile"), a leading wireless Internet application service provider with
wireless Instant Messaging technology and Wireless Intelligent Network
integration expertise. In connection with the acquisition of AtMobile, the
Company issued or reserved for issuance an aggregate of 3,750,000 shares of
Software.com common stock in exchange for all of the issued and outstanding
common stock of AtMobile, as well as the assumption of all outstanding warrants
and options to purchase shares of AtMobile. The acquisition has been accounted
for as a pooling of interests. Accordingly, the financial information presented
reflects the combined financial position and operations of Software.com and
AtMobile for all dates and periods presented.
In connection with the acquisition of AtMobile the Company recorded $10.3
million of acquisition related costs for the three months ended June 30, 2000.
Acquisition related costs consist primarily of investment banker fees associated
with the close of acquisitions as well as legal and accounting professional
services fees. Additionally, the Company recorded $1.6 million and $3.7 million
of stock based compensation-acquisition related expenses for the three and six
months ended June 30, 2000, respectively. Stock based compensation-acquisition
related expense consists primarily of charges recorded for the underlying value
of warrants issued by recently acquired AtMobile in conjunction with a Web
development, hosting, maintenance and licensing agreement entered into with a
contractor in late 1999. The Company will continue to record related charges
based on the underlying value of the warrants as the warrants continue to vest.
Separate financial information of the combined entities for three and six-month
periods ended June 30, 2000 is as follows:
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended June 30, 2000 Software.com AtMobile
--------------------------------------------------------------------------
<S> <C> <C>
Net revenues $ 9,048 $ 560
Net loss (2,873) (990)
Net loss applicable to
common stockholders (3,066) (990)
Six Months Ended June 30, 2000 Software.com AtMobile
--------------------------------------------------------------------------
Net revenues $17,119 $ 832
Net loss (4,926) (2,632)
Net loss applicable to
common stockholders (5,329) (2,632)
</TABLE>
In June 2000, the Company completed its acquisition of bCandid
Corporation, a market leader in providing carrier-class discussion server
infrastructure software to service providers worldwide. In connection with the
acquisition of bCandid, the Company issued approximately 667,000 shares of
Software.com common stock with a value of $65.4 million in exchange for all of
the issued and outstanding capital stock of bCandid, as well as the assumption
of all outstanding warrants and options to purchase shares of bCandid. The
acquisition was accounted for as a purchase and, accordingly, their operating
results have been included in Software.com's consolidated financial statements
results from the acquisition date. The purchase price plus costs directly
attributable to the completion of the acquisition have been allocated to the
assets and liabilities acquired based on their approximate fair market value.
Using proven valuation procedures and techniques in an independent appraisal,
the purchase price was allocated as follows (in thousands):
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Net assets $ (485)
Covenant not to compete 300
Assembled workforce 400
Customer relationships 600
In-process research and development 2,000
Developed technology 6,700
Goodwill 55,900
--------
</TABLE>
Total purchase price $65,400
Goodwill and identified intangibles are being amortized on a straight-line
basis over their estimated economic useful lives of two to four years. The
Company recorded $1.3 million and $1.7 million of amortization of goodwill and
other intangibles related to acquisitions for the three and six months ended
June 30, 2000, respectively.
The appraisal of the acquired business included an allocation of in-
process research and development. This acquired technology had not yet reached
technological feasibility and had no alternative future uses. Accordingly, the
Company wrote off $2.0 million at the time of the acquisition. On the date of
its acquisition, bCandid's technology was classified between core or developed
technology and IPR&D. Five principal bCandid products were identified and their
reliance on the developed technology and IPR&D was determined. Two of these
products contained IPR&D and were further analyzed to determine: (1) the
estimated time required to complete the development, (2) the estimated cost to
complete and (3) the complexity involved in overcoming technological obstacles
that must be resolved during development. The completion of in-process
development at the time of the acquisition ranged from 82% to 86%.
These IPR&D valuations represent the five year after-tax cash flow of this
technology using a discounted rate of 31%. In valuing the developed technology
and IPR&D, the initial focus was on the revenue contribution generated by each
of the products. Revenue estimates were based on the following: (1) aggregate
revenue growth rates for the business as a whole, (2) individual product
revenues, (3) growth rates for related products, (4) anticipated product
development and introduction schedules, (5) product sales cycles and (6) the
estimated useful life of a product's underlying technology. The aggregate
product revenue amounts were estimated and segregated between the developed
technology and IPR&D. Operating expenses were deducted from the revenue
estimates to arrive at operating income. Operating expenses include cost of
revenue, selling and marketing, and general and administrative expenses but no
non-cash charges such as depreciation and amortization. Certain adjustments were
made to operating income to derive the after-tax cash flow. These adjustments
included the calculation of an applicable tax expense and an appropriate charge
for the use of contributory assets necessary to generate revenue and operating
income associated with the subject intangible assets.
The allocation is preliminary and subject to adjustment as the Company
completes its review and evaluation of the acquired assets and assumed
liabilities.
The following pro forma financial information presents the combined
results of operations of the Company and bCandid as if the acquisition had
occurred as of the beginning of each period presented, after giving effect to
certain adjustments, including amortization of goodwill and intangible assets,
but excludes the non-recurring charge for the write-off of in-process research
and development related to bCandid.
<TABLE>
<CAPTION>
(In thousands except per
share amounts)
<S> <C> <C>
Six Months Ended June 30 2000 1999
---------------------------------------------------------
Net revenues $ 51,873 $ 19,829
Net Loss (13,313) (8,012)
Pro forma net loss per
share:
Basic and Diluted $ (0.29) $ (0.26)
</TABLE>
8
<PAGE>
The pro forma results are not necessarily indicative of those that would
have actually occurred had the acquisitions taken place at the beginning of the
periods presented.
Note 3. Net Income (Loss) Per Share
Basic and diluted net income (loss) per common share are presented in
conformity with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (FAS128), for all periods presented. Basic income (loss) per share is
computed using the weighted-average number of common shares outstanding during
the period. Diluted income (loss) per share is computed using the weighted-
average number of common stock and common stock equivalents outstanding during
the period. For the three and six months ended June 30, 2000 and 1999, common
stock equivalent shares have been excluded from the computation as their effect
would be anti-dilutive.
Note 4. Stock Options
For the three and six months ended June 30, 2000, options to purchase
approximately 652,000 and 2,503,000 shares of common stock, respectively, were
exercised with net proceeds to the Company of approximately $2.6 million and
$9.0 million, respectively.
Note 5. Comprehensive Loss
During the three and six months ended June 30, 2000, total comprehensive
loss was $11.0 million and $13.9 million, respectively. The comprehensive loss
for the three and six months ended June 30, 2000 includes the effects of the
Company's other comprehensive gain of $3,000 and other comprehensive loss of
$26,000, respectively, both a result of unrealized gain/loss on the Company's
available-for-sale securities.
Note 6. Subsequent Events
On August 8, 2000, the Company and Phone.com signed a definitive merger
agreement. Under the terms of the agreement, which was unanimously approved by
the Boards of Directors of both companies, stockholders of Phone.com and
Software.com will each own approximately 50 percent of the combined company.
Each Software.com stockholder will be entitled to receive 1.6105 shares of
Phone.com common stock for each share of Software.com common stock. The merger
is expected to be accounted for as a pooling of interests and is intended to be
tax-free to stockholders of both companies. Subject to stockholder and
regulatory approval and other standard closing conditions, the merger is
expected to close at the end of fiscal 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions identify such forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those indicated in the forward-looking
statements. Factors which could cause actual results to differ materially
include those set forth in the following discussion, and, in particular, the
risks discussed below under the subheading "Additional Risk Factors that Could
Affect Operating Results and Market Price of Stock." Unless required by law, the
Company undertakes no obligation to update publicly any forward-looking
statements.
Overview
Software.com is a leading developer and provider of scalable Internet
infrastructure software applications. Our products and services are specifically
9
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designed to enable service providers to market Internet-based services to
businesses and consumers. We have focused on developing carrier-scale, high
performance messaging and directory software applications for providers of
Internet communications and services. We currently develop, market, sell, and
support a variety of Internet standards-based messaging and directory software
to customers worldwide, including traditional telecommunications carriers,
Internet service providers and wholesalers, application service providers,
cable-based Internet access providers, competitive local exchange telephone
carriers, Internet destination sites or portals and wireless telephony carriers.
We have developed three product packages: InterMail Mx, InterMail Kx and
Post.Office based on our infrastructure platform. These products allow our
customers to provide a variety of advanced messaging services to their Internet-
based consumer and business users.
In April 1999, we completed the acquisition of Mobility.Net Corporation, a
California company incorporated in July 1996. Mobility.Net developed an
integrated Web mail and calendaring system using a Java-based technology
platform that complements our product offerings. The acquisition of Mobility.Net
has been accounted for as a pooling-of-interests. Accordingly, the financial
information presented reflects the combined financial position and operations of
Software.com and Mobility.Net for all dates and periods presented. In October
1999, we completed the acquisition of Telarc, Inc., which provides carrier-scale
Short Messaging Service (SMS) technologies that complement our product
offerings. The acquisition of Telarc Inc. has been accounted for as a purchase.
In April 2000, we completed our acquisition of AtMobile.com, Inc. ("AtMobile"),
a leading wireless Internet application service provider with wireless Instant
Messaging technology and Wireless Intelligent Network integration expertise. The
acquisition of AtMobile has been accounted for as a pooling-of-interests.
Accordingly, the financial information presented reflects the combined financial
position and operations of Software.com and AtMobile for all dates and periods
presented. In June 2000, we completed our acquisition of bCandid Corporation
("bCandid"), a market leader in providing carrier-class discussion server
infrastructure software to service providers worldwide. The acquisition of
bCandid has been accounted for as a purchase.
On August 8, 2000, we signed a definitive merger agreement with Phone.com.
Under the terms of the agreement, which was unanimously approved by the Boards
of Directors of both companies, stockholders of Phone.com and Software.com will
each own approximately 50 percent of the combined company. Each Software.com
stockholder will be entitled to receive 1.6105 shares of Phone.com common stock
for each share of Software.com common stock. The merger is expected to be
accounted for as a pooling of interests and is intended to be tax-free to
stockholders of both companies. Subject to stockholder and regulatory approval
and other standard closing conditions, the merger is expected to close at the
end of fiscal 2000.
We recognize revenue from sales of software upon delivery of a license key
to the customer, provided that persuasive evidence of an arrangement exists, the
license fee is fixed and determinable, and collection of the fee is considered
probable. If the license agreement has a multi-year term, as is typical with an
InterMail Mx contract, or the license fees are calculated based on variable
measures, such as the number of mailboxes in use, we recognize revenue as the
customer activates mailboxes on their system. When we enter into a contract
where a customer may activate up to a specified number of mailboxes and support
and maintenance fees are based on that specified number, we recognize revenue
evenly and ratably as payments become due over the term of the arrangement. When
we enter into license agreements under which our revenues are based on a
percentage of our customer's revenues, we recognize revenue as earned and
reported by the customer. Revenues from sales to significant resellers are not
recognized until the product is sold through to the end user and the license key
is issued.
Service revenue is composed of revenue from support and maintenance
contracts as well as professional services and training. Revenues from support
and maintenance contracts are recognized ratably over the term of the support
and maintenance period. Substantially all of our InterMail Mx and InterMail Kx
customers purchase support and maintenance, which is paid generally on a
quarterly basis. Although the majority of our Post.Office customers initially
purchase an annual support and maintenance contract, a relatively small
percentage of these customers renew the contracts after the first year. This is
primarily due to the ease of use of the
10
<PAGE>
product and the customers' ability to purchase more economical "per-incident"
support services. Consulting services revenues are primarily related to
deployment services performed on a time-and-materials basis under separate
service arrangements. We recognize revenue, contract costs, and profit on
management and consulting contracts for fixed fee contracts on the percentage-
completion method. Revenue, contract costs, and profit on time-and-material of-
contracts are recorded based upon direct labor hours at fixed hourly rates and
cost of materials as incurred. When current estimates of total contract revenue
and contract cost indicate a loss, a provision for the entire loss on the
contract is recorded. When software and services are billed prior to the time
the related revenue is recognized, deferred revenue is recorded.
In a typical InterMail Mx customer relationship, we receive software
license revenue, support and maintenance revenue, and professional services
revenue. We recognize these three types of revenue at different stages of our
customer relationship. Substantially all of our professional services are
performed prior to the activation of mailboxes by the customer. As a result, we
generally recognize revenue from professional services in advance of revenue
from software license fees. If a customer has a large number of existing users,
we typically see a large revenue contribution at the time the customer transfers
or "migrates" existing user mailboxes to our software platform. After this
transfer, the software license revenue primarily reflects the growth in the
number of mailboxes on the customer's system. Support and maintenance revenue
begins after installation of our software and also primarily reflects the growth
in the number of mailboxes.
Revenues attributable to customers outside of North America accounted
for approximately 45% of our total revenues for the three months ended June 30,
2000. We are making significant expenditures on expansion in Europe and Asia,
including the translation of our products for use in these regions, and we
expect these expenditures to increase. If our revenues from international
operations do not exceed the expense of establishing and maintaining these
operations, our business, financial condition and operating results will suffer.
We believe our success depends on our ability to execute on our global
sales strategy and continue to develop carrier-class products and services that
address the unique requirements of service providers. Accordingly, we intend to
continue to invest heavily in sales, support, and research and development.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenues and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Additionally, despite our sequential
quarterly revenue growth during 1999 and 1998, we do not believe that our
historical growth rates are necessarily sustainable or indicative of future
growth. Furthermore, as a result of past acquisitions and future acquisitions
that we may make, we expect to incur losses as a result of the amortization of
non-cash acquisition related costs for the next several quarters. However, at
this time we expect to be operationally profitable, exclusive of one-time cash
acquisition related costs and continuing non-cash and/or non-recurring charges.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth our results of operations expressed as a
percentage of total revenues.
<TABLE>
Software.com, Inc.
Condensed Consolidated Statements of Operations
(In Thousands, except per share amounts)
<S> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Condensed Consolidated Statements of Operations Data:
Software licenses........................................... 68% 54% 68% 57%
Services.................................................... 32% 46% 32% 43%
---------- --------- ---------- ----------
Total revenues.............................................. 100% 100% 100% 100%
Gross Margins:
Software licenses........................................... 97% 85% 96% 89%
Services.................................................... 22% 25% 25% 24%
---------- --------- ---------- ----------
Gross profit................................................ 73% 58% 73% 61%
Operating expenses:
Sales & marketing........................................... 29% 46% 33% 46%
Research & development...................................... 23% 36% 25% 38%
General & administrative.................................... 10% 15% 12% 17%
Stock based compensation-acquisition related................ 5% - 7% -
Amortization of goodwill and purchased intangible assets.... 4% - 3% -
Purchased in-process research and development............... 7% - 4% -
Acquisition-related costs................................... 35% - 21% -
Legal matter................................................ - (2)% - (1)%
---------- --------- ---------- ----------
Total operating expenses.................................... 113% 95% 105% 100%
---------- --------- ---------- ----------
Loss from operations........................................ (40)% (37)% (32)% (39)%
---------- --------- ---------- ----------
Net Loss.................................................... (37)% (40)% (28)% (42)%
</TABLE>
Comparison of Three and Six Months Ended June 30, 2000 and 1999
Software Licenses. Software license revenue increased $15.0 million, or
286%, from $5.2 million for the three months ended June 30, 1999 to $20.2
million in the same period in 2000. Software license revenue increased $23.3
million, or 227%, from $10.3 million for the six months ended June 30, 1999 to
$33.6 million in the same period in 2000. The increase in software license
revenue was primarily due to greater revenue from sales of our InterMail product
offerings, somewhat offset by a decrease in sales of our Post.Office product.
The largest contributor to software license revenue continues to be our
InterMail Mx product offering, which grew 414% and 321% in the three and six
months ended June 30, 2000, respectively over the same periods in 1999. The
increase in InterMail Mx revenue was primarily a result of increased growth from
existing and new customers. Notably, in the second quarter of 2000, we had a one
-time recognition of revenue of approximately $2.0 million
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relating to previously provisioned mailboxes from one customer who switched from
a revenue sharing license agreement to a regular per mailbox provisioning
license agreement.
The increase in software license revenue as a percentage of total revenues
was primarily related to increased growth in licenses of our InterMail products
from existing and new customers.
Services. Services revenue is primarily derived from consulting services,
maintenance and support contracts, and training. Services revenue increased $4.9
million, or 112%, from $4.4 million in the three months ended June 30, 1999 to
$9.3 million in the same period in 2000. Services revenue increased $8.3
million, or 109%, from $7.7 million in the six months ended June 30, 1999 to
$16.0 million in the same period in 2000. The increase in services revenue for
the three months ended June 30, 2000 from the same period in 1999 was primarily
due to a $2.9 million increase in professional services as the number of
professional services engagements increased and to a $1.8 million increase in
support and maintenance contracts as our customer base grew. The number of
professional services engagements increased to 38 for the three months ended
June 30, 2000 as compared to 17 in the same period in 1999. The increase in
services revenue for the six months ended June 30, 2000 from the same period in
1999 was primarily due to a $4.5 million increase in professional services as
the number of professional services engagements increased and a $3.5 million
increase in support and maintenance contracts as our customer base grew. The
number of professional services engagements increased to 65 for the six months
ended June 30, 2000 as compared to 30 in the same period in 1999. As a
percentage of total revenues, services revenue decreased from 46% and 43% in the
three and six months ended June 30, 1999, respectively, to 32% in the same
periods in 2000. This decrease was primarily related to an increase in license
revenue of our InterMail products. In 2000, we expect services revenue as a
percentage of total revenues to remain relatively the same as we continue to
install our products in service provider customers worldwide.
Cost of Software License Revenue. Cost of software license revenue
consists primarily of the cost of third party products integrated into our
products or resold by us and the salaries and related costs for our
documentation department and the production of documentation for our InterMail
products. Cost of software license revenue decreased $100,000, or 13%, from
$800,000 in the three months ended June 30, 1999 to $700,000 in the same period
in 2000. The decrease was primarily due to the fact that in the three months
ended June 30, 1999, we resold a third party database to three of our InterMail
Mx customers, and the cost of that software was included in cost of software
license revenue in that quarter. In the three months ended June 30, 2000, we did
not resell any third-party software and did not have the associated costs. Cost
of software license revenue increased $200,000, or 18%, from $1.1 million in the
six months ended June 30, 1999 to $1.3 million in the same period in 2000. The
increase was primarily due to an increase in the size of our documentation
department as well as increased investment in product translation for our
international markets.
Cost of Services Revenue. Cost of services revenue includes salaries and
related costs of our consulting services, customer support and training
organizations, cost of third parties contracted to provide consulting services
to our customers, and an allocation of our facilities and depreciation expenses.
Cost of services revenue increased $4.0 million, or 120%, from $3.3 million in
the three months ended June 30, 1999 to $7.3 million in the same period in 2000.
Cost of services revenue increased $6.3 million, or 107%, from $5.8 million in
the six months ended June 30, 1999 to $12.1 million in the same period in 2000.
The increase in cost of services was primarily due to an increase in our
consulting and support organizations from 58 employees at June 30, 1999 to 121
employees at June 30, 2000 to support our larger customer base.
Sales and Marketing. Sales and marketing expense consists primarily of
salaries and benefits of our sales, marketing, product management and business
development organizations, sales commissions, marketing programs, and an
allocation of our facilities and depreciation expenses. Sales and marketing
expense increased by $3.9 million, or 89%, from $4.4 million in the three months
ended June 30, 1999 to $8.3 million in the same period in 2000. Sales and
marketing expense increased by $7.5 million, or 90%, from $8.2 million in the
six months ended June 30, 1999 to
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$15.7 million in the same period in 2000. The increase in sales and marketing
expense was primarily due to growth in our global sales and product management
organizations as well as an increase in marketing programs. The total number of
employees in the sales and marketing organization increased from 72 at June 30,
1999 to 119 at June 30, 2000. The decrease in sales and marketing as a
percentage of total revenues was primarily due to increased growth in license
revenue from existing customers. We expect our sales and marketing expenses will
increase in absolute dollars in future periods due to the planned expansion of
our international sales and marketing operations.
Research and Development. Research and development expense consists
primarily of salaries and benefits of our engineering and quality assurance
organizations, and an allocation of our facilities and depreciation expenses.
Research and development expense increased by $3.4 million, or 97%, from $3.5
million in the three months ended June 30, 1999 to $6.9 million in the same
period in 2000. Research and development expense increased by $5.9 million, or
86%, from $6.8 million in the six months ended June 30, 1999 to $12.7 million in
the same period in 2000. The increase in research and development expense was
primarily due to an increase in our development organization from 99 employees
at June 30, 1999 to 170 employees at June 30, 2000. The decrease in research and
development as a percentage of total revenues was primarily due to increased
growth in license revenue from existing customers. We believe continued
investment in research and development is essential to our future success, and
we expect our research and development expenses to increase in absolute dollars
in future periods with the growth in demand of unified and wireless messaging
products.
General and Administrative. General and administrative expense consists
primarily of salaries and benefits of our finance, human resources and legal
services organizations, third party legal, accounting, and other professional
services fees, an allocation of our facilities and depreciation expenses and bad
debt expense. General and administrative expense increased by $1.4 million, or
100%, from $1.4 million in the three months ended June 30, 1999 to $2.8 million
in the same period in 2000. General and administrative expense increased by $2.7
million, or 87%, from $3.1 million in the six months ended June 30, 1999 to $5.8
million in the same period in 2000. The increase in general and administrative
expense was primarily related to an increase in our general and administrative
organization from 42 employees at June 30, 1999 to 59 employees at June 30, 2000
as well as fees for accounting and legal services and reserves for bad debts.
The decrease in general and administrative as a percentage of total revenues was
primarily due to increased growth in license revenue from existing customers. We
expect general and administrative expenses to increase in absolute dollars but
decrease slightly as a percentage of total revenues in future periods.
Stock Based Compensation - Acquisition Related Expense. Stock based
compensation-acquisition related expense consists primarily of charges recorded
for the underlying value of warrants issued by recently acquired AtMobile in
conjunction with a Web development, hosting, maintenance and licensing agreement
entered into with a contractor in late 1999. The charges recorded for the three
and six months ended June 30, 2000 were $1.6 million and $3.6 million,
respectively. We will continue to record related charges based on the underlying
value of the warrants as the warrants continue to vest.
Amortization of Goodwill and Purchased Intangible Assets. In June 2000, we
completed our acquisition of bCandid. The acquisition was accounted for as a
purchase and, accordingly, their operating results have been included in our
consolidated financial statements results from the acquisition date. The
purchase price plus costs directly attributable to the completion of the
acquisition have been allocated to the assets and liabilities acquired based on
their approximate fair market value. Using proven valuation procedures and
techniques in an independent appraisal, a portion of the purchase price was
identified as intangible assets as follows: $300,000 to a covenant not to
compete, $400,000 to assembled workforce, $600,000 to customer relationships,
$6.7 million to developed technology, and $55.9 million to goodwill. Goodwill
and identified intangibles are being amortized on a straight-line basis over
their estimated economic useful lives of two to four years. Additionally, in
October 1999, we completed our acquisition of Telarc, Inc. ("Telarc") which also
had a portion of the purchase price identified as intangible assets allocated as
follows: $263,000 to net intangible assets, $5.7
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million to developed technology, $125,000 to assembled workforce and other
intangibles and $2.3 million to goodwill. Goodwill and identified intangibles
from the Telarc acquisition are being amortized on a straight-line basis over
their estimated economic useful lives of three to five years. The Company
recorded $1.3 million and $1.7 million of amortization of goodwill and other
intangibles related to these acquisitions for the three and six months ended
June 30, 2000, respectively.
Purchased In-Process Research and Development. We obtained an independent
appraisal using proven valuation procedures and techniques for the acquisition
of bCandid. The appraisal allocated a portion of the acquired business to in-
process research and development. This acquired technology had not yet reached
technological feasibility and had no alternative future uses. Accordingly, the
Company wrote off $2.0 million at the time of the acquisition.
Acquisition Related Costs. Acquisition related costs consist primarily of
investment banker fees associated with the close of acquisitions as well as
legal and accounting professional services fees. The Company recorded $10.3
million and $10.4 million of acquisition related costs for the three and six
months ended June 30, 2000, respectively.
Interest and Other Income (Expense), Net. Interest and other income
(expense), net consists primarily of interest income from our cash and short-
term investments net of interest associated with a credit facility we had in
1999. Total other income (expense) increased $1.2 million, from an expense of
$200,000 in the three months ended June 30, 1999 to income of $1.0 million in
the same period in 2000. Total other income (expense) increased $2.6 million,
from an expense of $500,000 in the six months ended June 30, 1999 to income of
$2.1 million in the same period in 2000. The increase in both periods was
primarily related to interest earned on the proceeds of our initial public
offering of common stock in June 1999.
Provision for Income Taxes. Provision for income taxes consists mainly of
foreign withholding and income taxes. Provision for income taxes increased
$240,000 from $80,000 in the three months ended June 30, 1999 to $320,000 in the
same period in 2000. The increase was related to our continued expansion into
foreign tax withholding jurisdictions.
Stock-Based Compensation. We recorded deferred compensation of
approximately $770,000 and $1.5 million in 1999 and 1998, respectively,
representing the difference between the exercise prices of options granted to
employees during 1999 and 1998 and the deemed fair value for accounting purposes
of our common stock on the grant dates. We amortized deferred compensation
expense of $152,000 during the three months ended June 30, 2000 compared to
$136,000 for the same period in 1999. We amortized deferred compensation expense
of $304,000 during the six months ended June 30, 2000 compared to $240,000 for
the same period in 1999. This compensation expense relates to options awarded to
individuals in all operating expense categories.
Liquidity and Capital Resources
We have funded our operations primarily through the private placement of
equity securities and the initial public offering of shares, and raised net
proceeds of approximately $79.8 million in 1999. At June 30, 2000, our principal
sources of liquidity included approximately $41.7 million of cash and cash
equivalents and $45.7 million of marketable securities.
Net cash used in operating activities for the six months ended June 30,
2000 was primarily due to our net loss of $13.9 million which included
acquisition-related investment banker fees of $10.3 million and was also due to
an increase in accounts receivable of $7.3 million, primarily offset by
increases in deferred revenue of $9.1 million, non-employee equity-based
compensation of $3.6 million and depreciation and amortization of $3.4 million.
Cash used in operating activities for the same period in 1999 was primarily due
to our net loss of $7.6 million, partially offset by an increase in accounts
payable of $2.0 million.
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Net cash used in investing activities for the six months ended June 30,
2000 was primarily due to purchases (net of maturities) of marketable securities
of $20.0 million as well as $5.7 million in the acquisition of property and
equipment. Cash used in investing activities for the same period in 1999 was
primarily due to purchases (net of maturities) of marketable securities of $2.5
million.
Net cash provided by financing activities for the six months ended June
30, 2000 was primarily due to the issuance of $12.5 million of preferred stock
by AtMobile and $9.0 million in exercises of stock options. Cash provided by
financing activities for the same period in 1999 was primarily due to $68.0
million in net proceeds from the issuance of common stock in our initial public
offering and the issuance of $10.0 million of preferred stock, partially offset
by $5.0 million in repayments (net of proceeds) of long-term debt and notes
payable to bank.
We believe that our existing cash and marketable securities balanced
together with cash generated from operations will be sufficient to meet our
working capital, financing and capital expenditure needs for at least the next
twelve months. We continue to evaluate the potential acquisition of key
technology, complementary product lines and other companies. If we decide to
proceed with any such acquisitions, they may be financed by a variety of
sources, including equity or debt financing.
Risk Factors Related to the Proposed Merger.
We face risks relating to the proposed merger with Phone.com, Inc.
On August 8, 2000, we executed a merger agreement to merge with Phone.com.
Under the terms of the agreement, each outstanding share of Software.com common
stock will be exchanged for 1.6105 shares of Phone.com common stock. The
announcement of the proposed merger could have a negative impact on our ability
to sell our products and services, attract and retain employees and customers,
or develop and maintain strategic relationships. The merger is subject to
approval by the companies' stockholders and various regulatory agencies, and
there can be no assurance that the merger will be successfully completed. In
the event that the merger is not successfully completed, our results of
operations and common stock price could be materially adversely affected.
If the merger is successfully completed, holders of Software.com common
stock will become holders of Phone.com common stock. Phone.com's business
differs from our business, and Phone.com's results of operations, as well as the
price of Phone.com common stock, may be affected by factors different than those
affecting our results of operations and the price of our common stock. In
particular, Phone.com's business is not operationally profitable and is not
predicted to be profitable for the foreseeable future. For a discussion of
Phone.com's business and certain factors to consider in connection with such
business, see Phone.com's Annual Report on Form 10-K for the fiscal year ended
June 30, 1999, as amended by Phone.com's Form 8-Ks filed on November 3, 1999,
February 24, 2000, and March 17, 2000, respectively, and Phone.com's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000.
If the Phone.com merger is completed, our stockholders will receive a fixed
number of shares of Phone.com common stock despite changes in the market
value of our common stock or Phone.com common stock.
Under the merger agreement, each share of Software.com common stock will
be converted into the right to receive 1.6105 shares of Phone.com common stock.
This exchange ratio is a fixed number and will not be adjusted in the event of
any increase or decrease in the price of Software.com common stock or Phone.com
common stock. The prices of Software.com common stock and Phone.com common stock
at the closing of the proposed merger may vary from their respective prices on
the date the merger agreement was signed. These prices may vary because of
changes in the business, operations or prospects of Software.com or Phone.com,
market assessments of the likelihood that the merger will be completed, the
timing of the completion of the merger, the prospects of post-merger operations,
regulatory considerations, general market and economic conditions and other
factors. Market pressure on Phone.com stock may also negatively affect the price
of Software.com common stock.
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The anticipated benefits of the proposed merger may not be realized.
The success of our business has historically in part depended on our
current and potential customers perceiving us as a supplier of software products
rather than services, and thus not a competitor for their service offerings.
Following the proposed merger, our existing and potential clients may perceive
our relationship with Phone.com, who currently runs a service for unified
communication, as compromising our ability to provide unbiased product
solutions. In addition, we may not able to integrate effectively our
technology, operations and personnel in a timely and efficient manner with those
of Phone.com. Moreover, integration of our business, products and technology
with those of Phone.com could be expensive and time-consuming, could disrupt our
ongoing business, and could distract our management. Negative customer
perception of the merger or failure to effectively integrate our technology,
operations, or personnel with those of Phone.com would likely have a material
adverse effect on our business and operating results and would result in
Phone.com and us not achieving the anticipated potential benefits of the
proposed merger.
Our failure to complete the proposed merger with Phone.com could adversely
affect our business.
If the merger is not completed, we may be subject to a number of material
risks, including the following:
. we may be required to pay a substantial termination fee;
. the option we granted to Phone.com to acquire 19.9% of the outstanding
shares of our common stock with an exercise price of $600.00 per share
may become exercisable and if Phone.com exercises the option, we may
not be able to account for future transactions as a "pooling of
interests";
. the price of our common stock may decline to the extent that the
current market price of our common stock reflects a market assumption
that the proposed merger will be completed and that Don Listwin will
assume the role of President and Chief Executive Officer of the
combined company; and
. costs related to the proposed merger, such as legal, accounting, and
financial advisor fees, must be paid even if the merger is not
completed.
Additional Risk Factors That Could Affect Operating Results and Market Price of
Stock
Our future revenues are unpredictable and we expect our quarterly operating
results to fluctuate, which could cause our stock price to decline
We cannot accurately forecast our revenues in any given period as a result
of our limited operating history, the emerging nature of the markets in which we
compete and our reliance on a small number of products and large customers. Our
revenues could fall short of our expectations if we experience delays in signing
new customer accounts or cancellation of one or more current or new customer
accounts. A number of factors are likely to cause fluctuations in our operating
results, including:
. the volume and timing of mailbox activation by our InterMail Mx
customers;
. the length of our sales and product deployment cycles for our InterMail
products;
. our ability to attract and retain customers in new markets, including
Europe and Asia;
. our continuing dependence on the InterMail line of products and related
services for substantially all of our revenues;
. our dependence on a small number of large customers;
. our dependence on continued growth of the service provider market;
17
<PAGE>
. any delays in our introduction of new products or enhancements;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our operations;
. the announcement or introduction of new or enhanced products or
services by our competitors;
. adverse customer reaction to technical difficulties or "bugs" in our
software;
. the growth rate and performance of the Internet in general and of
Internet communications in particular;
. the growth rate and performance of wireless networks in general and of
wireless communications in particular;
. the volume of sales by our distribution partners and resellers;
. our pricing policies and those of our competitors; and
. the increase in our cost to resell, or our customers' cost to buy, the
Oracle 8i database which is currently necessary to use our InterMail Mx
product and any related price concessions on our InterMail Mx product
that our customers demand as a result.
Due to the foregoing factors, our quarterly operating results have
fluctuated significantly and we expect that future operating results will be
subject to similar fluctuations. Our revenue from large-scale installations of
our software depends heavily on the customers' timing of deployment of our
software, the migration of their installed base of users to our software
platform, and the rate of growth of their customer base. Accordingly, a delay in
a deployment past the end of a particular quarter could negatively impact our
results of operations for that quarter. It is possible that in future quarters
our operating results could fall below the expectations of public market
analysts or investors. In this event, the price of our common stock may fall.
We plan to significantly increase our operating expenses to expand our
international sales and marketing operations and fund greater levels of research
and development. Our operating expenses, which include sales and marketing,
research and development, and general and administrative expenses, are based on
expectations of future revenues and are relatively fixed in the short term. If
revenues fall below our expectations and we are not able to quickly reduce our
spending in response, our business, financial condition, and operating results
will suffer. Accordingly, period-to-period comparisons of our operating results
are not a good indication of our future performance. It is possible that our
operating results in some quarters will not meet the expectations of stock
market analysts and investors. In that event, our stock price would probably
decline.
Variations in the time it takes to sell, deploy and activate mailboxes using
our InterMail Mx product may cause fluctuations in our operating results,
which could cause our stock price to decline
Variations in the length of our sales and deployment cycles for InterMail
Mx could cause our revenue, and thus our business, financial condition and
operating results, to fluctuate widely from period to period. Our customers
generally take a long time to evaluate our InterMail Mx product, and many people
are involved in the evaluation process. We expend significant resources
educating and providing information to our prospective customers regarding the
use and benefits of InterMail Mx. Additionally, at present, in order to deploy
our InterMail Mx product, a customer must have a license to use an Oracle 8i
database. Our customers' cost for purchasing an Oracle 8i database, whether from
us or directly from Oracle, has increased and may cause potential customers to
decide not to buy our InterMail Mx product. If this happens, we may be forced to
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absorb some of the costs of the increase in order to sell the InterMail Mx
product. In either case, unless we are able to identify and implement a suitable
alternative to the Oracle database, our revenues from our InterMail Mx product
would decrease. Although we are actively evaluating alternative databases, there
can be no assurance that we will be able to substitute a new database for Oracle
in a timely and cost-effective manner. Even if a customer decides to purchase
our InterMail Mx product, our customers tend to integrate InterMail Mx into
their existing systems slowly and deliberately. The timing of the deployment
depends upon:
. the efforts of our professional services staff;
. the geographic disbursement of the customer's hardware;
. the complexity of the customer's network and the resulting degree of
hardware configuration necessary to deploy InterMail Mx on their
system;
. the internal technical capabilities of the customer;
. the customer's budgetary constraints; and
. the stability and sophistication of the customer's current messaging
system.
Because of the number of factors influencing the sales and deployment
processes, the period between our initial contact with a new customer and the
time when we begin to recognize revenue from that customer varies widely in
length. Our sales cycles for InterMail Mx typically range from six months to a
year, and our software deployment cycles typically range from three to six
months thereafter, although occasionally these cycles can be much longer. During
these cycles, we typically commit substantial resources in advance of receiving
any software license revenue.
In addition, the amount of software license revenue that we are able to
recognize in any given period depends on how quickly our customers activate new
mailboxes and report the activation of those new mailboxes to us. Under our
InterMail Mx license agreements, our customers typically pay us a fee for each
new user account, or "mailbox," they activate using InterMail Mx. We recognize
software license revenue from these agreements when our customer reports its
mailbox activations to us or we otherwise learn of such activations. Customers
typically report activations on a quarterly basis after they have completed a
deployment of InterMail Mx. Because we charge our customers only for activating
"new" mailboxes, a customer can reassign a lost subscriber's mailbox to a new
subscriber without having to pay us a fee. We cannot control how quickly our
customers activate new mailboxes. The primary factors affecting the timing are
the ability of our customers to retain subscribers and grow their subscriber
bases by attracting end users to their online services, and their willingness to
promote InterMail Mx messaging services with their subscribers. Mailbox
activations and the associated revenue may be concentrated in a particular
quarter and, as a result, our revenue for a particular quarter is not a good
indication of our future revenue. Our revenues may fluctuate widely from period
to period depending on the timing of our customers' activation of new mailboxes,
and any delay in or failure by our customers to activate new mailboxes will harm
our business, financial condition, and operating results.
In addition, we base our quarterly revenue projections, in part, upon our
expectations of how many mailboxes our InterMail Mx customers will activate in
that quarter. Because the timing of mailbox activation is outside of our
control, it is often difficult for us to make accurate forecasts. If our
expectations, and thus our revenue projections, are not accurate for a
particular quarter, our actual operating results for that quarter could fall
below the expectations of analysts and investors.
Because we have a limited operating history, it may be difficult for you to
evaluate our business and prospects
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We have only a limited operating history, which makes it difficult for
investors to predict our future operating performance. When making your
investment decision, you should consider the risks, expenses, and difficulties
that we may encounter as a young company in a rapidly evolving market. These
risks include our ability to:
. expand our sales and marketing activities;
. expand our customer base;
. develop and introduce new products and services;
. identify and integrate acquisitions; and
. compete effectively.
We cannot be certain that our business strategy will be successful or that
we will successfully address these risks.
We have a history of losses for periods prior to the first quarter of 2000,
and we may not be able to sustain profitability in the future
We have a history of losses and may not be able to achieve or sustain
profitability in the future. We have historically invested heavily in our sales
and marketing efforts and in technology research and development. We expect to
continue to spend substantial resources on developing and introducing new
software products and on expanding our sales and marketing activities,
particularly in Europe, Japan and Asia Pacific. As a result, we need to generate
significant revenues to achieve and maintain profitability. We expect that our
sales and marketing expenses, research and development expenses, and general and
administrative expenses will continue to increase in absolute dollars and may
increase as percentages of revenues. In addition, any amortization of goodwill
or other intangible assets, or other charges resulting from the costs of
acquisitions could significantly impact our business, financial condition, and
operating results.
As of June 30, 2000, we had an accumulated deficit of approximately $60.1
million. Although our revenues have grown significantly in recent quarters, we
may not be able to sustain these growth rates or obtain sufficient revenues to
maintain profitability. Our failure to maintain profitability could adversely
affect our stock price.
We depend on a small number of customers for most of our revenues, and our
business, financial condition, and operating results could be harmed by a
decline or delay in revenue from these customers
We have generated a significant portion of our revenues from a limited
number of customers. We expect that a small number of customers will continue to
account for a significant portion of revenues for the foreseeable future. Our
target market is made up only of service providers, which constitute only a
small portion of all users of messaging and directory solutions. As a result, if
we lose a major customer, or if there is a decline in usage, or if there is a
downturn in the service provider industry, our business, financial condition,
and operating results will suffer. We cannot be certain that customers that have
accounted for significant revenues in past periods, individually or as a group,
will continue to generate revenues for us in any future period.
We must overcome significant and increasing competition in order to continue
our growth
The market for Internet standards-based messaging and infrastructure
products and services is intensely competitive, and we expect it to become
increasingly so in the future. We compete in our core service provider market
with many software providers and, in some instances, with outsourced messaging
providers who have either internally developed or acquired their own messaging
software. We also compete, principally on the basis of performance, features and
price, against messaging solutions based on public domain software code that is
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developed and enhanced internally by service providers. We compete to a more
limited extent with providers of messaging applications designed for the
enterprise market.
Our current software competitors in the service provider market include
iPlanet E-Commerce Solutions (a Sun|Netscape Alliance) and Isocor, which was
recently acquired by Critical Path. We also indirectly compete with Critical
Path when it offers outsourced messaging to the service provider market and with
Microsoft, whose current messaging product was developed for the enterprise
market but is sold to some service providers. In addition, with our
release of a highly scalable LDAP directory with InterMail Mx, we have become
more direct competitors with Novell's NDS technology and Microsoft's Active
Directory product, to the extent that these products are marketed to service
providers. We believe that competition will intensify as our current competitors
increase the sophistication of their offerings and as new market participants,
including additional providers of outsourced messaging services enter the
market. Many of our current and future competitors have longer operating
histories, larger installed customer bases, greater brand recognition, and
significantly greater financial, marketing and other resources than we do. In
addition, these competitors may benefit from existing strategic and other
relationships with each other or with our current customers. We must respond
quickly and effectively to the new products, services, and enhancements offered
by our competitors in order to continue our growth.
Microsoft and other competitors possess many competitive advantages over us
that present risks to the sales of our products
Microsoft, among other software providers, is well positioned to become
increasingly competitive in our core service provider messaging market. We
believe that Microsoft is currently in the process of developing electronic
messaging software to compete more directly in our core service provider market.
Because of its dominance in other software markets, Microsoft has many
competitive advantages over us. For example, Microsoft could incorporate
electronic messaging technology into its Web browser software, its client
operating system or email interface, or its server software offerings, possibly
at no additional cost to service providers or end users. In addition, Microsoft
may promote technologies and standards that are not compatible with our
technology, or that are less compatible with our technology than competitive
products offered by Microsoft. We believe that Microsoft's increasing presence
in the electronic messaging software industry will dramatically increase
competitive pressure in the market, leading to increased pricing pressure and
longer sales cycles. These competitive pressures may force us to reduce the
prices of our products, and may also materially reduce our market share.
In addition to the existing competitors listed above, voicemail solutions
providers could be formidable competitors in the unified communications
infrastructure software and Internet voicemail markets because of their existing
presences in service providers and ownership of technologies for the conversion
of voice to data. If we are unable to cooperate or compete effectively with
Microsoft, existing voicemail solution providers, or our other existing or
emerging competitors, our business, financial condition, and operating results
will suffer.
Our InterMail Kx product may interfere with sales of our other products
Competition from InterMail Kx has had a negative effect on our sales of
Post.Office and could have a negative impact on our sales of InterMail Mx, or
the prices we could charge for these products. Our InterMail Kx product was
introduced in March of 1999 and overlaps to some extent with our Post.Office
product as both products are targeted at small and medium size service providers
worldwide. We currently have several licenses for our Post.Office product with
service providers that have more than 25,000 subscribers and we have licensed
our InterMail Mx product to service providers with fewer than 250,000
subscribers. Accordingly, InterMail Kx may compete to some extent with our other
products. We may also divert sales and marketing resources from Post.Office in
order to successfully promote and develop InterMail Kx. This diversion of
resources could have a further negative effect on our sales of Post.Office. If
our revenues from
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InterMail Kx are not sufficient to compensate for the effect of any decrease in
sales or prices of our other products, our business, financial condition, and
operating results will suffer.
Our acquisition strategy could cause financial or operational problems
Our success depends on our ability to continually enhance and broaden our
product offerings in response to changing technologies, customer demands, and
competitive pressures. To this end, we may acquire new and complementary
businesses, products, or technologies, instead of developing them ourselves. We
do not know if we will be able to complete any acquisitions or that we will be
able to successfully integrate any acquired business, operate them profitably,
or retain their key employees. For example, we completed the acquisitions of
Mobility.Net Corporation, in April 1999, of Telarc, in October 1999, and of
bCandid, in June 2000, and continue to integrate these companies' products and
personnel into our organization. We completed the acquisition of AtMobile in
April 2000. AtMobile is a substantially larger organization than either
Mobility.Net or Telarc and therefore will present greater challenges in terms of
integration of products and employees. Integrating AtMobile or any other newly
acquired business, product or technology could be expensive and time-consuming,
could disrupt our ongoing business, and could distract our management. We may
face competition for acquisition targets from larger and more established
companies with greater financial resources. In addition, in order to finance any
acquisitions, we might need to raise additional funds through public or private
financings. In that event, we could be forced to obtain equity or debt financing
on terms that are not favorable to us and, in the case of equity financing, that
results in dilution to our stockholders. If we are unable to integrate AtMobile
or any other newly acquired entities or technologies effectively, our business,
financial condition, and operating results would suffer. In addition, any
amortization of goodwill or other assets, or other charges resulting from the
costs of acquisitions could harm our business, financial condition, and
operating results.
Our expanding international operations are subject to significant
uncertainties in addition to those we face in domestic markets
Revenues attributable to customers outside of North America accounted for
approximately 45% of our total revenues for the three months ended June 30,
2000. If our revenues from international operations, and particularly from our
operations in the countries and regions on which we have focused our spending,
do not exceed the expense of establishing and maintaining these operations, our
business, financial condition, and operating results will suffer. We continue to
invest significant financial and managerial resources to expand our sales and
marketing operations in international markets, and we must continue to do so for
the foreseeable future in order to succeed in these markets. In particular, we
are making significant expenditures on expansion in Europe and Asia, including
the translation of our products for use in these regions, and we expect these
expenditures to continue or increase. We are expending the most resources in the
countries and regions that we think will be the most receptive markets for our
products. We have only limited experience in international operations, and we
may not be able to capitalize on our investment in these markets. In this
regard, we face certain risks inherent in conducting business internationally,
including:
. fluctuations in currency exchange rates;
. problems caused by the ongoing conversion of various European
currencies into a single currency, the Euro;
. any imposition of currency exchange controls;
. unexpected changes in regulatory requirements applicable to the
Internet or our business;
. difficulties and costs of staffing and managing international
operations;
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. differing technology standards;
. difficulties in collecting accounts receivable and longer collection
periods;
. seasonal variations in customer buying patterns or electronic messaging
usage;
. political instability or economic downturns;
. potentially adverse tax consequences; and
. reduced protection for intellectual property rights in certain
countries.
Any of these factors could harm our international operations and,
consequently, our business, financial condition, and operating results.
The loss of any of our senior management or key personnel could harm our
business, financial condition, and operating results
Our success depends on the skills, experience and performance of our
senior management and certain other key personnel, some of whom have worked
together for only a short period of time. With the exception of certain key
personnel who have joined us in connection with acquisitions, we do not have
employment agreements with any of our senior management, and their employment is
at will. The loss of the services of any of our senior management or other key
personnel could harm our business, financial condition, and operating results.
If we are unable to attract and retain highly skilled employees, our
financial and operational results may suffer
Our success depends on our ability to recruit, integrate, retain, and
motivate highly skilled sales and marketing, engineering, and quality assurance
personnel. In particular, our ability to attract and retain qualified sales
management personnel is critical to the success of our planned expansion in
Europe and Asia. Competition for these people in the Internet messaging industry
is intense, and we may not be able to successfully recruit, train, or retain
qualified personnel. If we fail to retain and recruit necessary sales and
marketing, engineering, and quality assurance personnel, our ability to obtain
new customers, develop new products and provide acceptable levels of customer
service could suffer, and this could harm our business, financial condition, and
operating results.
We must adapt to rapid changes in technology and customer preferences in
order to remain competitive
The Internet messaging industry is characterized by rapidly changing
technology, changes in customer and end user requirements and preferences, and
evolving industry standards and practices that could render our software
products obsolete. Our success depends on our ability to enhance our existing
messaging and directory platform and products on a timely basis and to develop
new products that address the increasingly sophisticated and varied needs of our
customers and their end users. We must accurately forecast the features and
functionality required by our target customers and end users in order to
continually improve our products. For example, in response to customer and end
user demand, we have recently developed for some of our products a voicemail
feature based on Internet standards that govern data transmission and receipt,
known as Internet Protocol or "IP." In addition, in response to the rapid
development of opportunities in the wireless sector, we are aggressively
pursuing the development and/or acquisition of key technologies required by
service providers in the wireless sector. The development of proprietary
technology and product enhancements has required, and will continue to require,
substantial expenditures and lead-time, and we may not always be able to keep
pace with the latest technological developments. If we cannot, for technical,
legal, financial, or other reasons, adapt our products to changing customer or
end user
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requirements or industry standards in a cost-effective and timely fashion, or if
any new product, enhancement, or feature, including IP voicemail or the wireless
messaging products and technologies acquired in the Telarc acquisition and the
AtMobile.com acquisition is not favorably received and accepted by customers and
end users, our business, financial condition, and operating results will suffer.
Our software products may have unknown defects, which could harm our
reputation or impede market acceptance of our products
Despite testing by us, defects have in the past and may in the future
occur in our software. Complex software like ours is difficult to integrate with
customers' existing systems and often contains errors or defects, particularly
when first introduced or when new versions or enhancements are released.
Although we conduct extensive testing, we may not discover software defects that
affect our current or new products, including new releases or editions of our
InterMail products, the wireless messaging products acquired in the Telarc
acquisition or the wireless products intended to be developed as a result of the
AtMobile acquisition, until after they are sold. We also experience
difficulty in deploying software at our customer's sites due to its complex
nature. Any defect in other software or hardware with which our software
interacts could be mistakenly attributed to our software by our customers or
their end users. These defects or perceptions of defects could cause our
customers and their end users to experience service interruptions. Because our
customers depend on our software to provide critical services to their end
users, any service interruptions could damage our reputation or increase our
product development costs, divert our product development resources, cause us to
lose revenue, or delay market acceptance of our products, any of which could
harm our business, financial condition, and operating results.
The rapid growth of our operations could strain our resources and harm our
business, financial condition, and operating results
Our recent growth has placed and will continue to place a significant
strain on our management systems, infrastructure, and resources. We are
increasing the scope of our operations and our customer base domestically and
internationally, and we have recently increased our headcount substantially.
From December 31, 1997 to July 31, 2000 our total number of employees increased
from 144 to 516. We expect that we will need to continue to improve our
financial and managerial controls and reporting systems and procedures, and will
need to continue to expand, train, and manage our workforce worldwide. We expect
that we will be required to manage an increasing number of relationships with
various customers and other third parties. Our ability to successfully offer
products and services and implement our business plan in a rapidly evolving
market requires an effective planning and management process. Any failure to
expand any of the foregoing areas efficiently and effectively could harm our
business, financial condition and operating results. In addition, there can be
no assurance that our business will continue to grow at historical rates.
Our business depends on continued growth in use and improvement of the
Internet and our customers ability to operate their systems effectively
The infrastructure, products, and services necessary to maintain and
expand the Internet may not be developed, and the Internet may not continue to
be a viable medium for secure and reliable personal and business communication,
in which case our business, financial condition, and operating results would be
harmed. Because we are in the business of providing Internet infrastructure
applications, our future success depends on the continued expansion of, and
reliance of consumers and businesses on, the Internet for communications and
other services. The Internet may not be able to support an increased number of
users or an increase in the volume of data transmitted over it. As a result, the
performance or reliability of the Internet in response to increased demands will
require timely improvement of the high speed modems and other communications
equipment that form the Internet's infrastructure. The Internet has already
experienced temporary outages and delays as a result of damage to portions of
its infrastructure. The effectiveness of the Internet may also decline due to
delays in the development or adoption of new technical standards and protocols
designed to support increased levels of activity and due to the transmission of
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computer viruses.
In addition to problems that may affect the Internet as a whole, our
customers have in the past experienced some interruptions in providing their
Internet-related services, including services related to our software products.
We believe that these interruptions will continue to occur from time to time.
Our revenues depend substantially upon the number of end-users who use the
services provided by our customers. Our business may suffer if our customers
experience frequent or long system interruptions that result in the
unavailability or reduced performance of their systems or networks or reduce
their ability to provide services to their end users.
The market for wireless communications and the delivery of Internet-based
services through wireless technology is rapidly evolving, and we may not be
able to adequately address this market.
The market for wireless communications and the delivery of Internet-based
services through wireless technology is rapidly evolving and is characterized by
an increasing number of market entrants that have introduced or developed, or
are in the process of introducing or developing, products that facilitate
wireless communication and the delivery of Internet-based services through
wireless devices. We intend to devote significant efforts and resources on
developing and marketing infrastructure applications for wireless communications
and the wireless delivery of Internet-based content and services. Our
acquisitions of Telarc and AtMobile AtMobile and our proposed merger with
Phone.com, Inc. were undertaken in part to address opportunities in that market.
If wireless devices are not widely adopted for data communications or mobile
delivery of Internet-based services, we would not realize expected benefits from
these acquisitions and proposed merger and our business would suffer.
In addition, the emerging nature of the market for wireless communications
and Internet-based services via wireless devices may lead prospective customers
to postpone adopting wireless devices or using wireless technology. As a result,
the life cycle of our wireless products is difficult to estimate. We may not be
able to develop and introduce new products, services and enhancements that
respond to technological changes or evolving industry standards on a timely
basis, in which case our business would suffer. In addition, we cannot predict
the rate of adoption by wireless subscribers of these services or the price they
will be willing to pay for these services. As a result, it is extremely
difficult to predict the pricing of these services and the future size and
growth rate of the wireless market.
Our service provider customers face implementation and support challenges
in expanding wireless communications and introducing Internet-based services via
wireless devices, which may slow their rate of adoption or implementation of the
services our wireless messaging products enable. Historically, service providers
have been relatively slow to implement new complex services such as wireless
messaging services and wireless delivery of Internet content. In addition,
service providers may encounter greater customer service demands to support
Internet-based services via wireless devices than they do for their traditional
Internet services. We have limited or no control over the pace at which service
providers implement these new services. The failure of service providers to
introduce and support services utilizing our products in a timely and effective
manner could harm our business.
Our intellectual property or proprietary rights could be misappropriated,
which could force us to become involved in expensive and time-consuming
litigation
Our ability to compete and continue to provide technological innovation is
substantially dependent upon internally developed technology, including the
entire InterMail product line. We rely on a combination of copyright, trade
secret, and trademark law to protect our technology, although we believe that
other factors such as the technological and creative skills of our personnel,
new product developments, frequent product and feature enhancements, and
reliable product support and maintenance are more essential to maintaining a
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technology leadership position. As a result of the AtMobile acquisition, we
acquired one patent and a number of patent applications, specifically for
wireless subject matter.
We generally enter into confidentiality and nondisclosure agreements with
our employees, consultants, prospective customers, licensees, and corporate
partners. In addition, we control access to and distribution of our software,
documentation, and other proprietary information. Except for certain limited
escrow arrangements, we do not provide third parties with access to the source
code for our products. Despite our efforts to protect our intellectual property
and proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Effectively policing the unauthorized
use of our products is time consuming and costly, and there can be no assurance
that the steps taken by us will prevent misappropriation of our technology,
particularly in foreign countries where in many instances the local laws or
legal systems do not offer the same level of protection as in the United States.
If others claim that our products infringe their intellectual property
rights, we may be forced to seek expensive licenses, reengineer our products,
engage in expensive and time-consuming litigation, or stop marketing our
products
We attempt to avoid infringing known proprietary rights of third parties
in our product development efforts. However, we do not regularly conduct
comprehensive patent searches to determine whether the technology used in our
products infringes patents held by third parties. There are many issued patents
as well as patent applications in the electronic messaging field. Because patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which relate to our software products.
In addition, our competitors and other companies as well as research and
academic institutions have conducted research for many years in the electronic
messaging field, and this research could lead to the filing of further patent
applications. If we were to discover that our products violated or potentially
violated third party proprietary rights, we might not be able to obtain licenses
to continue offering those products without substantial reengineering. Any
reengineering effort may not be successful, nor can we be certain that any
licenses would be available on commercially reasonable terms.
Substantial litigation regarding intellectual property rights exists in
the software industry, and we expect that software products may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segments grows and the functionality of software products in different
industry segments overlaps. Any third-party infringement claims could be time-
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product and service delays or require us to enter into
royalty or licensing agreements. Any royalty or licensing arrangements, if
required, may not be available on terms acceptable to us, if at all. A
successful claim of infringement against us and our failure or inability to
license the infringed or similar technology could have a material adverse effect
on our business, financial condition, and results of operations.
The geographic disbursement of our senior management could impede their
ability to communicate effectively
Our senior management and key personnel are based in several different
offices, which makes coordination of projects more difficult. For example, John
MacFarlane, our Chief Executive Officer, and Amy Staas, our Chief Financial
Officer, are based at our headquarters in Santa Barbara, California, while
Valdur Koha, our President, and John Poulack, our Senior Vice President,
Operations, are based at our office in Lexington, Massachusetts. In addition,
acquisitions and our proposed merger with Phone.com, Inc. may have the effect of
increasing geographic disbursement of senior management and key personnel. The
geographic disbursement of our senior management team and key personnel could
impede their ability to communicate effectively or work together efficiently,
either of which could harm our business, financial condition, and operating
results.
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The security provided by our messaging products could be breached, in which
case our reputation, business, financial condition, and operating results
could suffer
The occurrence or perception of security breaches could harm our business,
financial condition, and operating results. A fundamental requirement for online
communications is the secure transmission of confidential information over the
Internet. Third parties may attempt to breach the security provided by our
messaging products, or the security of our customers' internal systems. If they
are successful, they could obtain confidential information about our customers'
end users, including their passwords, financial account information, credit card
numbers, or other personal information. Our customers or their end users may
file suits against us for any breach in security. Even if we are not held
liable, a security breach could harm our reputation, and even the perception of
security risks, whether or not valid, could inhibit market acceptance of our
products. Despite our implementation of security measures, our software is
vulnerable to computer viruses, electronic break-ins and similar disruptions,
which could lead to interruptions, delays, or loss of data. We may be required
to expend significant capital and other resources to license encryption or other
technologies to protect against security breaches or to alleviate problems
caused by these breaches. In addition, our customers might decide to stop using
our software if their end users experience security breaches.
Future governmental regulation of the Internet could limit our ability to
conduct our business
Although there are currently few laws and regulations directly applicable
to the Internet and commercial messaging, a number of laws have been proposed
involving the Internet, including laws addressing user privacy, pricing,
content, copyrights, distribution, antitrust, and characteristics and quality of
products and services. Further, the growth and development of the market for
online messaging may prompt calls for more stringent consumer protection laws
that may impose additional burdens on those companies, including us, that
conduct business online. The adoption of any additional laws or regulations may
impair the growth of the Internet or commercial online services, which would
decrease the demand for our services and could increase our cost of doing
business or otherwise harm our business, financial condition, and operating
results. Moreover, the applicability of existing laws governing property
ownership, sales and other taxes, libel, and personal privacy to the Internet is
uncertain and may take years to resolve.
Our stock price 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 any future trading volume of
our stock because a substantial portion of shares were not eligible for sale
until recently. Therefore, if a large number of shares of our stock are sold in
a short period of time, our stock price will decline. In the past, securities
class action litigation has often been brought against companies following
periods of volatility in their stock prices. We may in the future be the target
of similar litigation. Securities litigation could result in substantial costs
and divert our management's time and resources, which could harm our business,
financial condition, and operating results.
Provisions of our corporate documents and Delaware law could deter takeovers
and prevent you from receiving a premium for your shares
Provisions of our certificate of incorporation, our bylaws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so might be beneficial to our stockholders. For example, our certificate of
incorporation provides that our board may issue up to 5,000,000 shares preferred
stock without stockholder approval.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and sell in North America, South
America, Asia and Europe. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. As all sales are currently made in U.S. dollars,
a strengthening of the dollar could make our products less competitive in
foreign markets. Our interest income is sensitive to changes in the general
level of U.S. interest rates, particularly since the majority of our investments
are in short-term instruments. Due to the nature of our short-term investments
and debt, we have concluded that there is no material market risk exposure.
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SOFTWARE.COM, INC.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
On June 14, 2000, in connection with our acquisition of bCandid, we
issued 666,609 shares of our common stock to the existing stockholders of
bCandid in exchange for all of the outstanding shares of capital stock of
bCandid. 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 of the securities represented their
intentions to acquire the securities for investment only, had access to
all relevant information regarding the Company necessary to evaluate the
investment and were either accredited investors [or relied upon a
purchaser representative].
On April 11, 2000, in connection with our acquisition of AtMobile, we
issued 3,221,076 shares of our common stock to the existing stockholders
of AtMobile in exchange for all of the outstanding shares of capital stock
of AtMobile. 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 by virtue of
Section 4(2) thereof. The recipients of the securities of the securities
represented their intentions to acquire the securities for investment
only, had access to all relevant information regarding the Company
necessary to evaluate the investment and were either accredited investors
[or relied upon a purchaser representative].
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to the stockholders at our Annual
Meeting of Stockholders held on June 2, 2000. Each of these matters was
approved by a majority of the shares present at the meeting.
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1. The election of three Class I directors to serve for terms of three
years. The following is a summary of the nominees and voting results:
Class I Directors Votes For Votes Withheld
----------------- --------- --------------
John L. MacFarlane 36,633,962 71,098
Frank Perna 36,634,012 71,048
Neal Douglas 36,634,012 71,048
2. The ratification of the appointment of Ernst & Young LLP as our
independent auditors for our fiscal year ending December 31, 2000. Results
of the voting included 36,684,950 shares for, 15,247 shares against and
4,863 shares abstained.
Item 5. Other Information
Effective August 10, 2000, pursuant to a Preferred Stock Rights
Agreement between the Company and Wells Fargo Bank Minnesota, N.A., as
Rights Agent, the Company's Board of Directors declared a dividend of one
right (a "Right") to purchase one one-thousandth of a share of the
Company's Series A Participating Preferred Stock, $0.001 par value
("Series A Preferred"), for each outstanding share of common stock of the
Company. The dividend is payable on August 24, 2000 to stockholders of
record as of the close of business on that date. The Rights are not
currently exercisable. Under certain conditions, each Right entitles the
registered holder to purchase from the Company one one-thousandth of a
share of Series A Preferred at an exercise price of Six Hundred Dollars
($600.00) (the "Exercise Price"), subject to adjustment. If an acquirer
(an "Acquiring Person") obtains 15% or ore of the Company's common stock,
(other than pursuant to a tender offer deemed adequate and in the best
interests of the Company and its stockholders by the Board of Directors of
the Company and other than by Phone.com pursuant to the Merger Agreement,
the Option Agreement or the Voting Agreements executed as part of the
proposed merger with Phone.com), then each Right (other than Rights owned
by an Acquiring Person or its affiliates) will entitle the holder thereof
to purchase, for the Exercise Price, a number of shares of the Company's
common stock having a then current market value of twice the Exercise
Price. If, after an Acquiring Person obtains 15% or more of the Company's
common stock, (a) the Company merges into another entity, (b) an acquiring
entity merges into the Company or (c) the Company sells more than 50% of
the Company's assets or earning power, then each Right (other than Rights
owned by an Acquiring Person or its affiliates) will entitle the holder
thereof to purchase, for the Exercise Price, a number of shares of common
stock of the person engaging in the transaction having a then current
market value of twice the Exercise Price. Under certain conditions, the
rights may be redeemed by the Company's Board of Directors, in whole, but
not in part, at a price of $0.001 per right. The rights have no voting
privileges and will attach to and automatically trade with the Company's
common stock. The rights expire on the earlier of August 24, 2010, the
exchange or redemption of the rights, or the effectiveness of the
Phone.com merger.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 3.4 Certificate of Designation of Rights, Preferences and
Privileges of Series A Participating Preferred Stock of Registrant
Exhibit 4.8 Preferred Stock Rights Agreement Dated as of August 10, 2000
Exhibit 4.9 Specimen Common Stock Certificate
Exhibit 27 - Financial Data Schedule
b) On April 26, 2000, we filed a Current Report on Form 8-K to announce that
we had completed the acquisition of AtMobile. On June 26, 2000, we filed a Form
8-K/A with the required financial statements for AtMobile.
On June 29, 2000, we filed a Current Report on Form 8-K to announce that
we had completed the acquisition of bCandid.
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.
SOFTWARE.COM, INC.
Date: Aug 14, 2000 By: /S/ JOHN L. MACFARLANE
-----------------------
John L. MacFarlane
Chief Executive Officer
Date: Aug 14, 2000 By: /S/ AMY E. STAAS
-----------------------
Amy E. Staas
Chief Financial Officer
(Principal financial and
accounting officer)
29
