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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 OCTOBER 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _______________
------------------------------------
COMMISSION FILE NUMBER 0-21709
PUMA TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0349154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 NORTH FIRST STREET
SAN JOSE, CALIFORNIA 95131
(Address and Zip Code of principal executive office)
408-321-7650
(Registrant's Telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes /X/ No / /
The number of shares outstanding of the registrant's common stock, par value
$0.001 per share, as of October 31, 1999 was 15,289,448
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THIS REPORT CONSISTS OF 28 PAGES.
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PUMA TECHNOLOGY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements 3
- - Condensed Consolidated Balance Sheet 3
October31, 1999 and July 31, 1999
- - Condensed Consolidated Statement of Operations 4
Three Ended October 31, 1999 and 1998
- - Condensed Consolidated Statement of Cash Flows 5
Three Months Ended October 31, 1999 and 1998
- - 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 Disclosures About Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults upon Senior Securities 24
Item 4 Submission of Matters to a Vote of Security Holders 24
Item 5 Other Information 24
Item 6 Exhibits and Reports on Form 8-K 25
Signature 26
Summary of Trademarks 28
</TABLE>
2
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PUMA TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
OCTOBER 31, JULY 31,
1999 1999
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,953 $ 13,461
Short-term investments 14,918 11,877
Accounts receivable, net 3,993 3,027
Inventories 399 258
Other current assets 1,514 450
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Total current assets 30,777 29,073
Property and equipment, net 2,654 2,580
Other assets 14,037 1,590
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TOTAL ASSETS $ 47,468 $ 33,243
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,162 $ 723
Accrued liabilities 3,292 2,220
Deferred revenue 4,061 3,737
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Total current liabilities 8,515 6,680
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Total liabilities 8,515 6,680
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Stockholders' equity:
Common stock, $0.001 par value; 15,289 and 13,335 shares issued and
outstanding at October 31, 1999 and July 31, 1999, respectively 15 13
Additional paid-in capital 50,303 35,342
Receivable from stockholders (429) (428)
Deferred stock compensation (18) (25)
Other comprehensive income (loss) 1,084 877
Accumulated deficit (12,002) (9,216)
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Total stockholders' equity 38,953 26,563
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,468 $ 33,243
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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PUMA TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
OCTOBER 31,
1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $ 6,278 $ 4,412
Cost of revenue 605 685
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GROSS PROFIT 5,673 3,727
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OPERATING EXPENSES:
Research and development 2,202 3,099
Sales and marketing 2,307 1,850
General and administrative 777 804
In-process research and development 4,218 --
Restructuring and other charges -- 768
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Total operating expenses 9,504 6,521
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OPERATING (LOSS) INCOME (3,831) (2,794)
Interest and other income, net 1,237 1,392
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INCOME (LOSS) BEFORE INCOME TAXES (2,594) (1,402)
Provision for income taxes (192) (204)
- -------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (2,786) $ (1,606)
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NET INCOME (LOSS) PER SHARE:
Basic $ (0.21) $ (0.13)
DILUTED $ (0.21) $ (0.13)
SHARES USED IN PER SHARE CALCULATION:
Basic 13,435 12,557
DILUTED 13,435 12,557
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
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PUMA TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
OCTOBER 31,
1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(Loss) $ (2,786) $ (1,606)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
In-process research and development 4,218
Depreciation and amortization 348 554
Customer deposits and other 324 86
Realized gain on sale of investment (892) --
Changes in operating assets and liabilities (1,846) 512
- -------------------------------------------------------------------------------------------------
Net cash used in operating activities (634) (454)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (348) (98)
Maturities (purchases) of short-term investments (1,937) 5,095
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Net cash (used in) provided by investing activities (2,285) 4,997
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations -- (69)
Net proceeds upon exercise of stock options 55 25
Note repayments (advances) by stockholders, net (1) --
Net proceeds from newly issued common stock 121 120
Payments to settle acquired liabilities (764) --
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Net cash (used in) provided by financing activities (589) 76
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Net increase (decrease) in cash and cash equivalents (3,508) 4,619
Cash and cash equivalents at the beginning of the period 13,461 7,418
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Cash and cash equivalents at the end of the period $ 9,953 $ 12,037
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATMENTS
5
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PUMA TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements for the three
months ended October 31, 1999 and 1998 are unaudited and reflect all normal
recurring adjustments which are, in the opinion of management, necessary for
their fair presentation. These condensed consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1999. The results of operations for the
interim period ended October 31, 1999 are not necessarily indicative of results
to be expected for the full year.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition" which
superseded SOP 91-1 and provides guidance on generally accepted accounting
principles for recognizing revenue on software transactions. SOP 97-2 requires
that revenue recognized from software arrangements be allocated to each element
of the arrangement based on the relative fair values of the elements, such as
software products, upgrades, enhancements, post contract customer support,
installations or training. Under SOP 97-2, the determination of fair value is
based on objective evidence, which is specific to the vendor. If such evidence
of fair value for each element of the arrangement does not exist, all revenue
from the arrangement is deferred until such time that evidence of fair value
does exist or until all elements of the arrangement are delivered. SOP 97-2 was
amended in February 1998 by Statement of Position 98-4 ("SOP 98-4"), "Deferral
of the effective date of Provision of SOP 97-2" and was amended again in
December 1998 by Statement of Position 98-9 ("SOP 98-9"), "Modification of 97-2,
Software Revenue recognition with Respect to Certain Transactions." Those
amendments deferred and then clarified, respectively, the specification of what
was considered vendor specific objective evidence of fair value for the various
elements in a multiple element arrangement. The Company adopted the provisions
of SOP 97-2 and SOP 98-4 as of August 1, 1998. The adoption has, in certain
circumstances, resulted in the deferral of software license revenues that would
have been recognized upon delivery of the related software under prior
accounting standards.
SOP 98-9 is effective for all transactions entered into by the Company in fiscal
year 2000. The adoption of this statement is not expected to have material
impact on the Company's operating results, financial position or cash flows.
NOTE 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 is
effective for all fiscal quarters beginning with the quarter ending June 30,
1999. SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the Financial Accounting
Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities--Deferral of
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the effective date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred
the effective date until the first fiscal quarter ending June 30, 2000. The
Company will adopt SFAS 133 in its quarter ending July 31, 2000 and does not
expect such adoption to have an impact on the Company's results of operations,
financial position or cash flows.
NOTE 3. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential common
shares and warrants consist of the incremental common shares issuable upon the
exercise of stock options for all periods.
Basic and diluted earnings per share were calculated as follows during the three
months ended October 31, 1999 and 1998 respectively:
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
OCTOBER 31,
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
BASIC:
Weighted average common shares 13,435 12,557
-------- --------
-------- --------
Net income (loss) $ (2,786) $ (1,606)
-------- --------
-------- --------
Net income (loss) per share $ (0.21) $ (0.13)
-------- --------
-------- --------
DILUTED:
Weighted common shares 13,435 12,557
Common equivalent shares from stock
options and warrants -- --
-------- --------
Shares used in per share calculation 13,435 12,557
-------- --------
-------- --------
Net income (loss) $ (2,786) $ (1,606)
-------- --------
-------- --------
Net income (loss) per share $ (0.21) $ (0.13)
-------- --------
-------- --------
</TABLE>
Diluted loss per share calculation excludes the effect of 1,732,132 and 172,382
options outstanding as of October 31,1999 and October 31, 1998 respectively
because of their antidilutive impact.
7
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NOTE 4. RESTRUCTURING
In the first quarter of fiscal 1999, we implemented a restructuring program for
the purpose of consolidating the majority of our engineering and development
work at existing facilities in Nashua, New Hampshire. As part of this program,
we implemented a reduction in force of 40 positions that primarily affected the
engineering group located at the San Jose facility. The severance charge in the
first quarter was $210,000.
Additional restructuring charges were also incurred for vacating of a part of
the San Jose facility, as well as a recently leased facility in Nashua. The
restructure charge was $558,000.
The following table depicts the restructuring activity through October 31, 1999:
<TABLE>
<CAPTION>
(in Thousands)
Restructuring Charges Severance and Accrued lease costs for Total
Benefits excess facilities
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accrued balance at October 31, 1998 $ 210 $ 558 $ 768
Cash payments 210 306 516
------------------------------------------------------
Accrued balance at October 31, 1999 $ - $ 252 $ 252
=== ===== =====
</TABLE>
NOTE 5. COMPREHENSIVE INCOME/(LOSS)
Our total comprehensive earnings (loss) were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
OCTOBER 31
----------
(In thousand of dollars) 1999 1998
------- -------
<S> <C> <C>
Net income (loss) $(2,786) $(1,606)
Unrealized gains 212 86
Foreign Exchange Translation Loss (5) --
------- -------
Total comprehensive earnings (loss) $(2,579) $(1,520)
======= =======
</TABLE>
The balance of unrealized gains at October 31, 1999 and 1998 consisted entirely
of unrealized gains for our holdings of Amazon.com common stock.
8
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NOTE 6. ACQUISITION
On October 28, 1999, we completed the acquisition of ProxiNet, Inc.
("ProxiNet"), a software development company focusing on software that will
enable users with handheld devices and wireline or wireless modems to access the
Internet quickly, conveniently and securely. The consolidated financial
statements include the results of operations of ProxiNet since the date of
acquisition. Under the terms of the agreement, we issued 2,600,000 shares of
Common Stock in exchange for all outstanding shares of ProxiNet.
The ProxiNet acquisition has been accounted for as a purchase. The total
purchase price of approximately $17,384,000 (including liabilities of
$2,070,000), was assigned, based on independent appraisal, to the fair value of
the assets acquired, including $676,000 to tangible assets acquired, $3,378,000
to identified intangible assets, $4,218,000 to in process research and
development, and $9,112,000 to goodwill. The in-process research and development
was expensed at the acquisition date. Amortization of the intangible assets
acquired is computed using the straight-line method over the estimated useful
life of the assets, 18 months to 5 years.
The value assigned to acquired in-process research and development was
determined by identifying research projects in areas for which technology
feasibility had not been established as of the acquisition date. These include
projects for ProxiWare and ProxiWeb technology. The value was determined by
estimating the revenue contribution and the percentage of complete of each of
these products. The projects were deemed to be 55% complete on the date of
acquisition. The net cash flows were then discounted utilizing a weighted
average cost of capital of 27.5%. This discount rate takes into consideration
the inherent uncertainties surrounding the successful development of the
in-process research and development, the expected profitability levels of such
technology, and the uncertainty of technological advances that could potentially
impact the estimates described above. Revenues were projected to be generated in
2000 for the products in development at the acquisition date. If these projects
are not successfully developed our future revenues and profitability may be
adversely affected. Additionally, the value of other intangible assets acquired
may become impaired.
The following unaudited pro forma consolidated financial information reflects
the results of operations for the three months ended October 31, 1999, as if the
acquisition had occurred on August 1, 1999 and after giving effect to purchase
accounting adjustments but excluding the impact of write offs of acquired
in-process technology. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what operating
results would have been had the acquisition actually taken place on August 1,
1999 and may not be indicative of future operating results (in thousands, except
per share data).
<TABLE>
<CAPTION>
Three months ended October 31, 1999
<S> <C>
Pro forma revenue $ 6,278
Pro forma net loss $ (523)
Pro forma basic and diluted loss per share $ (0.03)
</TABLE>
9
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NOTE 7. SUBSEQUENT EVENT
On December 8, 1999 we signed a definitive agreement to acquire NetMind
Technologies, Inc., a leading provider of Internet infrastructure software for
personalization. Under the terms of the agreement, we will exchange 5,000,000
shares of our common stock for all of NetMind's outstanding capital stock,
warrants and options. The merger is expected to qualify as a tax-free
reorganization and we expect to account for the transaction as a pooling of
interest. Closing of the merger is subject to certain closing conditions and
approval by the shareholders of both our company as well as NetMind's. Certain
affiliates of NetMind have agreed to vote their shares in favor of the merger.
The transaction is expected to close in our third fiscal quarter ending April
30, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED ELSEWHERE IN
THIS FORM 10-Q AND IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS IN THE COMPANY'S FORM 10-K. THIS QUARTERLY REPORT ON FORM 10-Q, AND
IN PARTICULAR MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTAINS FORWARD-LOOKING STATEMENTS REGARDING FUTURE
EVENTS OR THE FUTURE PERFORMANCE OF THE COMPANY THAT INVOLVE CERTAIN RISKS AND
UNCERTAINTIES INCLUDING THOSE DISCUSSED IN "FACTORS THAT MAY AFFECT FUTURE
OPERATING RESULTS" AND "BUSINESS RISKS" BELOW. IN THIS FORM 10-Q, THE WORDS
"ANTICIPATES", "BELIEVES", "EXPECTS", "INTENDS", "FUTURE" AND SIMILAR
EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. ACTUAL EVENTS OR THE ACTUAL
FUTURE RESULTS OF THE COMPANY MAY DIFFER MATERIALLY FROM ANY FORWARD-LOOKING
STATEMENTS DUE TO SUCH RISKS AND UNCERTAINTIES. THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT ACTUAL RESULTS
OR CHANGES IN FACTORS OR ASSUMPTIONS AFFECTING SUCH FORWARD-LOOKING ASSUMPTIONS.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE HEREOF. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION
TO THESE FORWARD-LOOKING STATEMENTS, WHICH MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS. ALL INFORMATION IS BASED ON THE COMPANY'S FISCAL CALENDAR.
RESULTS OF OPERATIONS
OVERVIEW
Puma develops markets and supports mobile device management and synchronization
software, enabling consumers, mobile professionals and information technology
officers to harness the full capabilities of handheld computers, smart phones,
and other wireless personal
10
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communication platforms. The Company currently has six primary families of
products: its Intellisync-Registered Trademark- family of products, which
performs advanced data synchronization from handheld devices to personal
computers; its Intellisync Anywhere-TM- server product, which performs advanced
data synchronization from handheld devices to corporate groupware messaging
servers; its Intellisync Software Development Kit ("SDK"), which enables
customers to develop translators for both applications and devices, which can
then be incorporated into the Company's product offerings; its Satellite
Forms-TM- product, which is a visual rapid application development tool for
devices based on the Palm Computing-Registered Trademark- platform; its
TranXit-Registered Trademark- family of products, which supports infrared
connectivity, and its Intellisync for Notebooks family of products, which
combines infrared connectivity with advanced data synchronization.
Intellisync software is used for advanced synchronization of calendar, e-mail,
contact and task data between PCs and popular handheld computers smart phones
and smart pagers. Intellisync software is currently distributed directly to end
users; through the Company's retail distribution channel, Web store, and
fulfillment houses; and is bundled with products offered by certain handheld
device manufacturers. Intellisync Anywhere and Satellite Forms software are
currently distributed directly to the end user and through the Company's
corporate marketing/fulfillment partner, Rainmaker Systems, Inc. TranXit and
Intellisync for Notebooks software is bundled with products offered by certain
handheld device manufacturers.
We also license and distribute SDK's. SDK's are primarily licensed directly to
both hardware and software manufacturers for the purpose of gaining
compatibility with our synchronization engine and the other devices and
applications the engine supports.
We recently acquired ProxiNet Inc., a startup company involved in the
development of software, enabling users of handheld devices to connect to the
Internet. We are in the process of combining our synchronization technology with
ProxiNet's web connectivity technology and we expect to announce product
offerings in the near future.
The following table sets forth-certain consolidated statement of operations data
as a percentage of revenue for the periods indicated:
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
OCTOBER 31,
1999 1998
- --------------------------------------------------------------------------------
REVENUE 100.0 % 100.0 %
- --------------------------------------------------------------------------------
Cost of revenue 9.6 15.5
- --------------------------------------------------------------------------------
GROSS PROFIT 90.4 84.5
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OPERATING EXPENSES:
Research and development 35.1 70.2
Sales and marketing 36.7 42.0
General and administrative 12.4 18.2
In-process research and development 67.2 --
Restructuring and other charges -- 17.4
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11
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<TABLE>
<S> <C> <C>
Total operating expenses (151.4) 147.8
- --------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (61.0) (63.3)
Interest and other income, net 19.7 31.5
- --------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (41.3) (31.8)
Provision for income taxes (3.1) (4.6)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) (44.4)% (36.4)%
- --------------------------------------------------------------------------------
</TABLE>
REVENUE. Our revenue is derived from two primary sources: software licenses and
fees for service. License revenue is derived from the licensing of software
products and royalty agreements with OEMs. Our revenue for the three months
ended October 31, 1999 increased by 42% to $6,278,000 as compared to $4,412,000
for the same period in 1998. Revenue increases resulted from higher retail sales
of Intellisync, additional sales of our Software Development Kits and sales of
Satallite Forms.
Service revenue is derived from fees for services including customer funded
engineering services and amortization of maintenance contract programs. Service
revenue of $392,000 and $382,000 represented 6% and 9% of our revenue for the
three months ended October 31, 1999 and 1998, respectively.
OEM revenue continues to represent a significant portion of our revenue. OEM
revenue of $3,262,000 and $2,432,000 represented 52% and 55% of our revenue, in
the three months ended October 31, 1999 and 1998 respectively. Revenue from
Toshiba Corporation of $738,000 and $883,000 represented 12% and 20% of revenue
for the three months ended October 31, 1999 and 1998, respectively. Although
several OEMs are subject to certain contractual minimum purchase obligations,
there can be no assurance that any particular OEM will satisfy the obligation.
Accordingly, we recognize revenue from minimum guaranteed royalties when such
royalties are earned and become payable. We believe that the percentage of
revenue derived from OEMs may fluctuate in future periods depending in part upon
the marketing channels used by us for future products currently under
development, and the level of shipments by OEM customers of products with our
software.
International revenue continues to represent a significant portion of our
revenue. International revenue of $2,520,000 and $1,808,000 represented
approximately 40% and 41% of our revenue in the first fiscal quarter of 2000 and
1999, respectively.
Actual events or the actual future results may differ materially from any
forward-looking statements due to a number of risks and uncertainties including
those set forth below under "Factors That May Affect Future Operating Results"
and "Business Risks." Introduction of new products and enhancements of existing
products can have a significant impact on our revenue. Any delays in the
scheduled release of major new products and enhancements can have a material
adverse impact on our business, operating results and financial condition. Any
delays in introduction of new products or failure of new products to achieve
anticipated levels of market acceptance will have an adverse impact on our
business, operating results and financial
12
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condition. The foregoing statements regarding new product information are
forward-looking statements.
COST OF REVENUE. Cost of revenue consists primarily of product media and
duplication, manuals, packing supplies, shipping expenses and personnel related
costs incurred under customer funded software engineering services. For the
three months ended October 31, 1999 and 1998, cost of revenue was $605,000 and
$685,000, respectively. This represented 10% and 16% of total revenue, for the
three months ended October 31, 1999 and 1998, respectively.
Our cost of revenue is affected by the mix among our distribution channels as
well as the mix among our revenue sources including royalties, packaged product,
customer funded engineering contracts and sales and fulfillment via our Web
site. Generally customer funded engineering carriers a lower gross profit
margin.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and other related expenses for research and development
personnel, quality assurance personnel, fees to outside contractors and the cost
of facilities and depreciation of capital equipment. Research and development
expenses decreased 29% to $2,202,000 in the first fiscal quarter of 2000 from
$3,099,000 in the comparable fiscal quarter of 1999. The decrease in research
and development expenses was primarily due to the consolidation and restructing
efforts in the first fiscal quarter of 1999. A portion of our research and
development expenses are comprised of fees paid to outside contractors which are
engaged by us on a project-by-project basis. In addition, we believe research
and development expenses may fluctuate from quarter to quarter both in absolute
dollars as well as a percentage of revenue, depending upon the status of various
development projects.
Research and development expenses have been expensed as incurred. Statement of
Financial Accounting Standards No. 86 requires capitalization of certain
software development costs once technological feasibility is established. We
define establishment of technological feasibility at the point which product
reaches beta. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general market
availability of the product are capitalized, if material. To date, all of these
software development costs have been insignificant and expensed as incurred.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries,
commissions, promotional expenses and other related expenses of sales and
marketing personnel. Sales and marketing expenses increased 25% to $2,307,000 in
the first fiscal quarter of 2000 from $1,850,000 for the comparable quarter in
the prior year. The increase in sales and marketing expenses as compared to the
first fiscal quarter of 1999 was primarily due to increased personnel-related
spending in sales due to increased headcount and related spending. Additional
sales and marketing personnel have been added, primarily to support sales to
Corporations. We anticipate that sales and marketing expenses will continue to
increase in absolute dollars throughout the remainder of fiscal 2000 as we
expand our direct sales force in both the United States and Europe.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other related expenses of administrative, executive
and financial personnel and other outside professional fees. General and
administrative expenses decreased 3% to $777,000 in the first fiscal quarter of
2000 from $804,000 for the same period in the prior year. The decrease
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in spending is primarily attributable to decreased legal expenses and a decrease
in reserve for bad debts.
IN-PROCESS RESEARCH AND DEVELOPMENT. In the first quarter of Fiscal 2000 we
recorded a charge of $4,218,000 for in-process research and development
associated with the asset purchase of ProxiNet. The ProxiNet acquisition has
been accounted for as a purchase. The total purchase price of approximately
$17,384,000 (including liabilities of $2,070,000), was assigned, based on
independent appraisal, to the fair value of the assets acquired, including
$676,000 to tangible assets acquired, $3,378,000 to identified intangible
assets, $4,218,000 to in process research and development, and $9,112,000 to
goodwill. The in-process research and development was expensed at the
acquisition date.
The value assigned to acquired in-process research and development was
determined by identifying research projects in areas for which technology
feasibility had not been established as of the acquisition date. These include
projects for ProxiWare and ProxiWeb technology. The value was determined by
estimating the revenue contribution and the percentage of complete of each of
these products. The projects were deemed to be 55% complete on the date of
acquisition. The net cash flows were then discounted utilizing a weighted
average cost of capital of 27.5%. This discount rate takes into consideration
the inherent uncertainties surrounding the successful development of the
in-process research and development, the expected profitability levels of such
technology, and the uncertainty of technological advances that could potentially
impact the estimates described above. Revenues were projected to be generated in
2000 for the products in development at the acquisition date. If these projects
are not successfully developed our future revenues and profitability may be
adversely affected. Additionally, the value of other intangible assets acquired
may become impaired.
RESTRUCTURING. In the first quarter of fiscal 1999, we implemented a
restructuring program for the purpose of consolidating the majority of our
engineering and development work at existing facilities in Nashua, New
Hampshire. As part of this program, we implemented a reduction in force of 40
positions that primarily affected the engineering group located at the San Jose,
California facility. The severance charge was $210,000. This plan was completed
at the end of February 1999. As of October 31, 1999, there was no unused
balance.
Also as part of the restructuring, we announced plans for vacating a portion of
the San Jose facility. We reduced the total cost of leased facilities by
subleasing the excess office space. The restructure charge was $558,000. The
unused balance as of October 31, 1999 was $252,000.
INTEREST AND OTHER INCOME, NET. Interest and other income, net, represents
interest earned by us on our cash and short-term investments, offset by interest
expense on capitalized leases and miscellaneous fees and charges. Additionally,
a gain related to our investment in PlanetAll, which was acquired by Amazon.com,
is also included in the first fiscal quarters of both 2000 and 1999. Interest
and other income, net, decreased to $1,237,000 in the first fiscal quarter of
2000 from $1,392,000 for the same period in the prior year. The decrease in
interest and other income, net, was primarily due to the recognition of a gain
of $892,000 in first fiscal quarter of 2000 as compared with a gain of
$1,103,000 in first fiscal quarter of 1999 attributable to the Amazon.com
acquisition of PlanetAll.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to $192,000
in the first fiscal quarter of 2000 from $204,000 for the same period in the
prior year. The provision for
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income taxes primarily represents foreign withholding taxes on royalties earned
from certain foreign customers. Our overall effective tax rate for fiscal 2000
is significantly dependent on the amount and mix of income derived from sources
subject to foreign withholding taxes.
LIQUIDITY AND CAPITAL RESOURCES
Our operating activities used $634,000 of cash in the first three months of
fiscal 2000 and used $454,000 in the first three months of fiscal 1999,
respectively. Net cash used in the first three months of fiscal 2000 was
primarily due to the net loss adjusted for non-cash depreciation and
amortization, in-process research and development related asset acquisition and
adjusted for changes in deferred revenue, accrued expenses, accounts receivable,
prepaid expenses, inventory and accounts payable.
Cash used by investing activities was $2,285,000 in the first three months of
fiscal 2000. This compares to $4,997,000 of cash generated in the first three
months of fiscal 1999. Cash used in the first three months of fiscal 2000 was
primarily due to purchases of short-term investments and to a lesser extent,
purchases of property and equipment.
Cash used by financing activities was $589,000 in the first three months of
fiscal 2000. This compares to $76,000 of cash generated in the first three
months of fiscal 1999. Cash used in the first three months of fiscal 2000 was
due to payments made to settle liabilities of ProxiNet adjusted for issuance of
common stock under our stock option plan as well as our Employee Stock Purchase
Plan.
At October 31, 1999 our principal source of liquidity represented by cash, cash
equivalents and short-term investments totaled $24,871,000. We currently have no
significant capital commitments or bank financing arrangements. We believe that
our current cash, cash equivalents and short-term investment balances and cash
generated from operations, if any, will be sufficient to meet our working
capital and other cash requirements for at least the next twelve months.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
We expect that our future operating results could fluctuate significantly as a
result of numerous factors including, but not limited to, the demand for our
products, our success in developing new products, the timing of new product
introductions by us and our competitors, the timing of releases of new handheld
devices by our customers, market acceptance of our new and enhanced products,
the emergence of new industry standards, the timing of customer orders, the mix
of products sold, competition, the mix of distribution channels employed, the
evolving and unpredictable nature of the markets for our products and mobile
computing devices generally, the rate of growth of the personal computer market
in general and general economic conditions.
Our revenue is difficult to forecast in part because the market for data
synchronization software is rapidly evolving. In addition, we typically operate
with a relatively small order backlog. As a result, quarterly sales and
operating results depend in part on the volume and timing of orders received
within the quarter, which are difficult to forecast. In addition, a significant
portion of our expense level is fixed in advance based in large part on our
forecasts of future revenue. If revenue is below expectations in any given
quarter, the adverse impact of the shortfall on our
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operating results may be magnified by our inability to adjust spending to
compensate for the shortfall. Therefore, a shortfall in actual revenue as
compared to estimated revenue would have an immediate adverse effect on our
business, financial condition and operating results that could be material.
We historically have derived a substantial portion of our revenue from OEMs. Due
to our ongoing efforts to expand into retail and reseller distribution channels,
in addition to expanding sales to corporations, an increasing percentage of our
sales will come from these areas. Sales into these channels are harder to
predict and may have lower margins than other channels. We have generally
recognized a substantial portion of our revenue in the last month of each
quarter, when we typically receive royalty reports from our OEM customers. Any
significant deferral of purchases of our products by our customers could have a
material adverse effect on our business, operating results and financial
condition in any particular quarter. To the extent that significant sales occur
earlier than expected, operating results for subsequent quarters may be
adversely affected.
Our gross margin on our service revenue is substantially lower than its gross
margin on license revenue. Any increase in service revenue would have a
corresponding increase in cost of revenue and may have an adverse effect on our
gross margins. We may also reduce prices or increase spending in response to
competition or to pursue new market opportunities. The operating results of many
software companies reflect seasonal fluctuation. For example, sales in Europe
and certain other countries typically are adversely affected in the summer
months when business activity is reduced. Our revenues and operating results may
be adversely affected by diminished demand for our products on a seasonal basis.
Because of these factors, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and that such comparisons
should not be relied upon as indications of future performance. As a result of
the foregoing and other factors, our operating results and stock price may be
subject to significant volatility, particularly on a quarterly basis.
BUSINESS RISKS
RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT AND TIMELY INTRODUCTION OF NEW AND
ENHANCED PRODUCTS. The market for our products is characterized by rapidly
changing technologies, evolving industry standards, frequent new product
introductions and short product life cycles. We first introduced our TranXit
products in October 1994, Intellisync for handheld devices in the first quarter
of fiscal 1997, Intellisync for Notebooks in the first quarter of fiscal 1998
and Intellisync Anywhere in the third quarter of fiscal 1999. Our future success
will depend to a substantial degree upon our ability to enhance our existing
products and to develop and introduce, on a timely and cost-effective basis, new
products and features that meet changing customer requirements and emerging and
evolving industry standards. Our acquisition of ProxiNet Inc. positions us to
offer products that connect handheld devices to the Internet. We do not have any
prior experience in developing these types of products. Our success will be
dependent on our ability to complete these products and get them to the market
in a timely manner. We budget amounts to expend for research and development
based on planned product introductions and enhancements; however, actual
expenditures may significantly differ from budgeted expenditures.
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Inherent in the product development process is a number of risks. The
development of new, technologically advanced software products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. The introduction of new or
enhanced products also requires us to manage the transition from older products
in order to minimize disruption in customer ordering patterns, avoid excessive
levels of older product inventories and ensure that adequate supplies of new
products can be delivered to meet customer demand. We are continually required
to recruit new engineering personnel to meet increased engineering and testing
requirements associated with patent development and enhancement. There can be no
assurance that we will successfully develop, introduce or manage the transition
to new products. Nor can there be any assurance that we will be able to hire and
retain sufficient engineering personnel to meet the requirements inherent in
this transition. We have in the past, and may in the future, experience delays
in the introduction of our products, due to factors internal and external.
We have recently entered the Internet technology arena with the acquisition of
ProxiNet and the intended purchase of NetMind. There are several risk factors
associated with this new product direction for us: (1) We are a relative
newcomer to the Internet product development space, and must overcome this
inexperience and some entrenched competition to be successful. (2) Success in
these Web-related endeavors is also dependent upon acceptance/growth of the
wireless handheld market. Wireless connectivity is essential for making the
kinds of Web connections from handheld devices that the ProxiNet and NetMind
technologies will fuel. (3) We will need to address competition in this area,
particularly from AvantGo and FusionOne. AvantGo is the most established
competitor, with more than 300,000 subscribers to its offline Web browsing
service for mobile users. FusionOne will compete with our recently announced
Intellisync.com service. (4) Finally, the success of these Internet-related
ventures will be linked to consumer awareness, making marketing a key factor in
driving acceptance of these new offerings.
BUSINESS STRATEGY. Our current business strategy with respect to the market for
synchronization software for handheld devices has been to identify multiple
handheld solutions and software applications, and offer an array of solutions in
our Intellisync product family. We have also transformed Intellisync into a
defacto standard platform by opening it to third party developers through the
sale of our SDK. In contrast, some of our direct competitors in this market
focus their efforts on fewer devices and fewer applications. Our success is
highly dependent upon the market acceptance of both the handheld devices and
software applications supported by our Intellisync products. Lack of market
acceptance of hardware or software products supported by our Intellisync product
is largely outside of our control and may have an adverse effect on the results.
And, because we are focusing on a variety of products, we may be slower to offer
features that are specific to each individual handheld-to-PC solution. Our
failure to identify in advance the devices and applications that may gain market
dominance and to sufficiently focus on the most popular solutions may adversely
affect our results of operations.
COMPETITION. We expect the market for mobile device management and
synchronization software, including data synchronization and IR connectivity
software to the extent it develops, to become intensely competitive. We
currently face direct competition with respect to a number of our individual
products from several private companies, including Traveling Software, Chapura,
DataViz, River Run, Randsoft, and Starfish (recently acquired by Motorola). In
the future, we will
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also face competition relative to our upcoming products from vendors offering
server-based mobile device data exchange products and services, including
Advanced Systems, Riverbed, and AvantGo. In addition to direct competition, we
face indirect competition from existing and potential customers that provide
internally developed solutions. As a result, we must educate prospective
customers as to the advantage of our products versus internally developed
solutions. We currently face limited direct competition from major applications
and operating systems software vendors who may choose to incorporate data
synchronization and IR connectivity functionality into their operating systems
software, thereby potentially reducing the need for OEMs to include our products
in their notebook and desktop PCs. For example, Microsoft's inclusion of certain
features permitting data synchronization and IR connectivity between computers
utilizing the Windows 98 operating system may have the effect of reducing
revenue from our software if users of Windows 98 perceive that their data
synchronization and IR connectivity needs are adequately met by Microsoft.
Certain of the companies with which we compete or may in the future compete,
including internal software development groups of our current and potential
customers, have substantially greater financial, marketing, sales and support
resources and may have more "brand-name" recognition than us. There can be no
assurance that we will be able to either develop software comparable or superior
to software offered by our current or future competitors or to adapt to new
technologies, evolving industry standards and changes in customer requirements.
In addition, the PC and mobile computing device markets experience intense price
competition, and we expect that, in order to remain competitive, we may have to
decrease our unit royalties on certain products.
PRODUCT CONCENTRATION; RISKS ASSOCIATED WITH NEW AND EVOLVING MARKETS. The
market for mobile device synchronization software, including wireless IR
connectivity and advanced data synchronization software, is new and evolving. To
date, we have derived a substantial portion of our revenue from the licensing of
our TranXit IR connectivity software. We believe that the TranXit and
Intellisync for Notebooks product families, although currently accounting for a
substantial portion of our revenue, will decline in overall revenue contribution
in the foreseeable future. The life cycle of TranXit and Intellisync for
Notebooks is difficult to estimate because of, among other factors, the emerging
nature of the USS software market and the possibility of future competition. As
a result, our future operating results, particularly, in the near term, are
dependent upon the continued market acceptance of TranXit and Intellisync for
Notebooks. We anticipate that the overall revenue contribution of the TranXit
and Intellisync for Notebooks business will decrease as a percentage of total
revenue, since these products are at a mature stage in their product life
cycles. There can be no assurance that TranXit will rebound from its decline or
that we will be successful in developing, introducing or marketing new or
enhanced products. A continued decline in the demand for TranXit, as a result of
competition, technological change or other factors, and the failure to
successfully develop, introduce or market new or enhanced products would have a
material adverse effect on our business, financial condition and results of
operations.
Our inability to continue to penetrate the existing market for USS products or
the failure of current markets to grow or new markets to develop or be receptive
to our products would have a material adverse effect on our business, operating
results and financial condition. The emergence of markets for our USS products
will also be affected by a variety of factors beyond our control. In particular,
our products are designed to conform to certain standard IR and data
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communications specifications, many of which have not been adopted as industry
standards. There can be no assurance that these specifications will be widely
adopted or that competing specifications will not emerge which will be preferred
by OEMs. The emergence of markets for our products is also critically dependent
upon continued expansion of the market for mobile computing devices and the
timely introduction and successful marketing and sale of notebook and desktop
personal computers ("PCs"), personal electronic organizers, smart phones and
smart pagers. In addition, there can be no assurance that IR technology itself
will be adopted as the standard or preferred technology for USS or that
manufacturers of personal computers will elect to bundle IR technology in their
products. There can be no assurance that these or other factors beyond our
control will not adversely affect the development of markets for our products.
DEPENDENCE ON OEMS. Revenue from OEMs was a substantial portion of our revenue
during fiscal 1999, fiscal 1998 and fiscal 1997. OEM revenue as a percentage of
total revenue was 56%, 68% and 74% in fiscal 1999, fiscal 1998 and fiscal 1997,
respectively. Weakening demand from any key OEM customer and our inability to
replace revenue provided by these OEM customers could have a material adverse
effect on our business, operating results and financial condition. We maintain
individually significant receivable balances from major OEMs. If these OEMs fail
to meet their payment obligations, our operating results could be materially
adversely affected.
RISKS ASSOCIATED WITH DEVELOPMENT OF RETAIL DISTRIBUTION CHANNEL. We distribute
our products through distributors, major computer and software retailing
organizations, consumer electronics stores, discount warehouse stores and other
specialty retailers. We often sell on a purchase order basis, and there are
often no minimum purchase obligations on behalf of any principal distributor or
retailer. Distribution and retailing companies in the computer industry have
from time to time experienced significant fluctuations in their businesses, and
there have been a number of business failures among these entities. The
insolvency or business failure of any significant distributor or retailer of
ours could have a material adverse effect on our business, operating results and
financial condition. Further, certain mass-market retailers have established
exclusive relationships under which such retailers will buy customer software
only from one or two intermediaries. In such instances, the price or other terms
on which we sell to such retailers may be materially adversely affected by the
terms imposed by such intermediaries, or we may be unable to sell to such
retailers on the terms, which we deem acceptable.
Retailers of our products typically have a limited amount of shelf space and
promotional resources, and there is intense competition among consumer software
producers for adequate levels of shelf space and promotional support from
retailers. We expect that, as the number of consumer multimedia and software
products and computer platforms increases, this competition for shelf space will
intensify. Due to increased competition for limited shelf space, retailers and
distributors are increasingly in a better position to negotiate favorable terms
of sale, including price discounts, price protection and product return
policies. Retailers often require software publishers to pay fees or provide
other accommodations in exchange for shelf space. Our products constitute a
relatively small percentage of each retailer's sales volume, and there can be no
assurance that retailers will continue to purchase our products or provide our
products with adequate shelf space and promotional support.
DEPENDENCE ON STRATEGIC BUSINESS RELATIONSHIPS; RISKS ASSOCIATED WITH
THIRD-PARTY SERVICES. We believe that our success is largely dependent on our
strategic
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relationships with key participants in the PC and mobile computing device
industries including 3COM, Acer, AT&T Wireless, Canon, Corex, Fujitsu, IBM,
Intel, Lucent Technologies, NEC, Nokia, Novell, Oracle, Phone.com, QUALCOMM,
Research in Motion, SalesLogix, Seiko Epson, Sharp, Symbol Technologies, Texas
Instruments and Toshiba, and many others. These relationships generally enable
us to receive prototypes from hardware manufacturers and software vendors prior
to their market introduction. We thereby are in a stronger position to launch
complementary product offerings shortly after the commercial release of these
companies' new hardware and software products. The loss of any of these
strategic relationships or any other significant partner could materially
adversely affect our product development efforts, business, operating results
and financial condition and our ability to realize strategic objective to be the
technological leader in the industry. In addition, we rely significantly on
third-party services. In particular, third party services translate our products
into over ten different native languages. We have generally been able to obtain
translated, functional versions of our products in a timely manner. However, any
significant delays by such third parties could delay new or existing shipments
of products and have a material adverse effect on our business, operating
results and financial condition.
DEPENDENCE ON KEY PERSONNEL. We believe our success will depend in a large part
upon our ability to attract and retain highly skilled managerial, technical,
sales and marketing, finance and operations personnel. In particular, we will
need to increase the number of technical staff members with experience, as we
further develop our product line. Competition for these highly skilled employees
in our industry is intense. Our failure to attract and retain these key
employees could have a material adverse effect on our business, results of
operations and financial condition.
We are seeking additional sales and marketing personnel. Competition for
qualified sales and marketing personnel is intense and we might not be able to
hire the kind and number of sales and marketing personnel we are targeting.
Unless we expand our sales and marketing force, we may not be able to increase
our revenue or extend our brand awareness.
The loss of the services of any of our key employees, the inability to attract
or retain qualified personnel in the future or delays in hiring required
personnel could hinder the development and introduction of and negatively impact
our ability to sell our products. In addition, employees may leave our company
and subsequently compete against us. Moreover, companies in our industry whose
employees accept positions with competitors frequently claim that their
competitors have engaged in unfair hiring practices. We may be subject to claims
of this type in the future as we seek to hire qualified personnel and some of
these claims may result in material litigation. We could incur substantial costs
in defending ourselves against these claims, regardless of their merits.
PROPRIETARY RIGHTS, RISKS OF INFRINGEMENT AND SOURCE CODE RELEASE. We rely on a
combination of patent, copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. We also believe that factors such as the technological and creative
skills of its personnel, new product developments, frequent product enhancements
and name recognition are essential to establishing and maintaining a technology
leadership position. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited
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protection. We currently have six issued United States patents that
expire in 2012, 2014, 2015, 2016 and has nine patent applications pending. In
addition, we have corresponding international patent applications pending under
the Patent Cooperation Treaty in countries to be designated at a later date.
There can be no assurance that our patents will not be invalidated, circumvented
or challenged, that the rights granted thereunder will provide competitive
advantage to us or that any of our pending or future patent applications,
whether or not being currently challenged by applicable governmental patent
examiners, will be issued with the scope of the claims sought by us, if at all.
Furthermore, there can be no assurance that others will not develop technologies
that are similar or superior to our technology or design around the patents
owned by us. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to which
piracy of our software products exists, software piracy can be expected to be a
persistent problem. We distribute our software products in the United States,
Japan, Taiwan and member countries of the European Union. The laws and practices
of some foreign countries in which we do business, in particular Taiwan, do not
ensure that our means of protecting our proprietary rights in the United States
or abroad will be adequate or that competition will not independently develop
similar technology. There can be no assurance that we will not distribute our
software products in the future to countries where the enforcement of
proprietary rights may be equally or more uncertain. We have also entered into
source code escrow agreements with a limited number of our customers requiring
release of source code in certain circumstances. Such agreements generally
provide that such parties will have a limited, non-exclusive right to use such
code in the event that there is a bankruptcy proceeding by or against us, if we
cease to do business or if we fail to meet our support obligations. We also
provide our source code to foreign language translation service providers and
consultants, in limited circumstances. The provision of source code may increase
the likelihood of misappropriation by third parties.
We are not aware that we are infringing any proprietary rights of third parties.
There can be no assurance, however, that third parties will not claim
infringement by us of their intellectual property rights. In particular, because
patent applications are kept confidential by the Patent and Trademark Office, we
have no means by which to monitor patent applications filed by our competitors,
which could result in future infringement claims against us. We expect that
software product developers will increasingly be subject to infringement claims
as the number of products and competitors in our industry segment grow and the
functionality of products in different industry segments overlaps and as patent
protection for software becomes increasingly popular. Any such claims, with or
without merit, could be time-consuming to defend, result in costly litigation,
and divert our attention and resources or cause product shipment delays. In
addition, such claims could require us to discontinue the use of certain
software codes or processes, to cease the manufacture, use and sale of
infringing products, to incur significant litigation costs and expenses and to
develop non-infringing technology or to obtain licenses to the alleged
infringing technology. There can be no assurance that we would be able to
develop alternative technologies or obtain such licenses or, if a license were
obtainable, that the terms would be commercially acceptable to us.
In the event of a successful claim of product infringement against us and
failure or inability to license the infringed or similar technology, our
business, operating results and financial condition would be materially
adversely affected.
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DEPENDENCE ON LICENSED TECHNOLOGY. We license technology on a non-exclusive
basis from several companies for use with our products and anticipate that we
will continue to do so in the future. The inability to continue to license the
technology or to license other necessary technologies for use with our products
or substantial increases in royalty payments under third-party licenses could
have a material adverse effect on our business, operating results and financial
condition. In addition, the effective implementation of our products depends
upon the successful operation of these licenses in conjunction with our
products, and therefore any undetected errors in products resulting from such
licenses may prevent the implementation or impair the functionality of our
products, delay new product introductions and injure our reputation. Such
problems could have a material adverse effect on our business, operating results
and financial condition.
PRODUCT ERRORS; PRODUCT LIABILITY. Software products as complex as those offered
by us typically contain undetected errors or failures when first introduced or
as new versions are released. Testing of our products is particularly
challenging because it is difficult to simulate the wide variety of computing
environments in which our customers may deploy these products. Accordingly,
there can be no assurance that, despite testing by us and by current and
potential customers, errors will not be found after commencement of commercial
shipments, resulting in loss of or delay in market acceptance, any of which
could have a material adverse effect upon our business, operating results and
financial condition. Further, our license agreements with our customers
typically contain provisions designed to limit our exposure to potential product
liability claims. Although we have not experienced any product liability claims
the sale and support of products by us entails the risk of such claims. We do
not currently maintain product liability insurance. A successful product
liability claim brought against us could have a material adverse effect upon our
business, operating results and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. International revenue
accounted for a significant portion of our revenue in both the first quarter
of fiscal 2000 and the first quarter of fiscal 1999 respectively. We expect
that international revenue will continue to account for a significant portion
of our future revenue. Revenue from our international operations is subject
to certain inherent risks, including unexpected changes in regulatory
requirements and tariffs, difficulties in staffing and managing foreign
operations, longer payment cycles, problems in collecting accounts receivable
and potentially adverse tax consequences. In addition, sales in Europe and
certain other parts of the world typically are adversely affected in the
summer months of each year when many customers and users reduce their
business activities. These seasonal factors may have a material adverse
effect on our business, operating results and financial condition. Although
our revenue is currently denominated in U.S. dollars, fluctuations in
currency exchange rates could cause our products to become relatively more
expensive to customers in a particular country, leading to a reduction in
sales or profitability in that country. Furthermore, future international
activity may result in foreign currency denominated sales, particularly if
international revenue from distributors increases. Consequently, gains and
losses on the conversion to U.S. dollars of accounts receivable and accounts
payable arising from international operations may contribute to fluctuations
in our operating results. Royalty income from customers in certain countries,
such as Japan and Taiwan, is subject to withholding income taxes. The amount
and mix of our income derived from such customers will impact our provision
for income taxes. Differences in the amount and mix of our income actually
derived from customers subject to foreign withholding taxes as compared to
the amounts forecasted by us may adversely impact our income tax rate.
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UNCERTAINTIES ASSOCIATED WITH ACQUISITIONS. We have been involved in
acquisitions. These acquisitions have been motivated by many factors including
the desire to obtain new technologies, the desire to expand and enhance our
product lines and the desire to attract key personnel.
On December 8, 1999 we signed a definitive agreement to acquire NetMind
Technologies, Inc., a provider of Internet infrastructure software for
personalization. Under the terms of the agreement, we will exchange 5,000,000
shares of our common stock for all of NetMind's outstanding capital stock,
warrants and options. The merger is expected to qualify as a tax-free
reorganization and we expect to account for the transaction as a pooling of
interest. Closing of the merger is subject to certain closing conditions and
approval by the shareholders of both our company as well as NetMind's. Certain
affiliates of NetMind have agreed to vote their shares in favor of the merger.
The transaction is expected to close in our third fiscal quarter ending April
30, 2000.
On October 28, 1999 we completed the acquisition of ProxiNet Inc.,
headquartered in Emeryville, California, for 2,600,000 shares of our Common
Stock in exchange for all issued and outstanding preferred and common shares
of ProxiNet Inc., and assumption of all outstanding ProxiNet stock options.
As a result of the acquisition, we incured $4,218,000 in one-time charge for
in-process research and development for ProxiNet's products which have not
yet reached technological feasibility.
In July 1998, we acquired SoftMagic Corp. As a result of the acquisition, three
new employees and three new consultants joined us. SoftMagic had incurred a
cumulative loss through its acquisition by Puma on July 30, 1998 of
approximately $135,000 on cumulative revenue of $331,000.
In July 1997, we acquired substantially all of the assets of Real World
Solutions, Inc., ("a developer of client/server solutions. As a result of the
acquisition, four new employees joined us. Real World Solutions, Inc. had
incurred a cumulative loss through its acquisition by us on July 17, 1997 of
approximately $1.3 million on cumulative revenue of $0.5 million.
These purchases also involve numerous risks, including:
- - problems assimilating the purchased operations, technologies or products;
- - unanticipated costs associated with the acquisition;
- - diversion of management's attention from our core business;
- - adverse effects on existing business relations with suppliers and
customers;
- - incorrect estimates made in the accounting for acquisitions;
- - risks associated with entering markets in which we have no or limited prior
experience; and
- - potential loss of key employees of purchased organizations.
POTENTIAL VOLATILITY OF STOCK PRICE. The trading price of our Common Stock is
likely to be highly volatile and may be significantly affected by factors such
as actual or anticipated fluctuations in our operating results; announcements of
technological innovations; new products or new contracts by us or our
competitors; developments with respect to patents; copyrights or proprietary
rights; conditions and trends in the software and other technology industries;
adoption of new accounting standards affecting the software industry; changes in
financial estimates by securities analysts; general market conditions and other
factors. In addition, the
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stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the Common
Stocks of technology companies. These broad market fluctuations may materially
adversely affect the market price of our Common Stock.
DEPENDENCE ON YEAR 2000 COMPLIANCE OF THIRD-PARTY PRODUCTS. Some computers,
software, and other equipment include programming code in which calendar year
data is abbreviated to only two digits. As a result of this design decision,
some of these systems could fail to operate or fail to produce correct results
if "00" is interpreted to mean 1900, rather than 2000. These problems are widely
expected to increase in frequency and severity as the year 2000 approaches, and
are commonly referred to as the "Millennium Bug" or "Year 2000 Problem."
The Year 2000 Problem could affect computers, software, and other equipment
used, operated or maintained by us. We believe that our computer systems are
Year 2000 compliant.
We believe that we have substantially identified and resolved all potential Year
2000 Problems with any of the software products which we develop and market.
However, we also believe that it is not possible to determine with complete
certainty that all Year 2000 Problems affecting our software products have been
identified or corrected due to the complexity of these products and the fact
that these products interact with other third party vendor products and operate
on computer systems which are not under the our control.
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, photocopiers, telephone switches,
security systems, elevators, and other common devices may be affected by the
Year 2000 Problem. We presently believe that our office and facilities equipment
are Year 2000 compliant.
We have limited or no control over the actions of third party suppliers. Thus,
while we expect that we will be able to resolve any significant Year 2000
Problems with these systems, there can be no assurance that the suppliers will
resolve any or all Year 2000 Problems with these systems before the occurrence
of a material disruption to our business or any of our customers. Any failure of
these third parties to resolve Year 2000 Problems with these systems in a timely
manner could have a material adverse effect on our business, financial
condition, and results of operation.
We expect to identify and resolve all Year 2000 Problems that would materially
adversely affect our business operations. However, we believe that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting us have been identified or corrected. The number of systems that could
be affected and the interactions among these systems are simply too numerous. In
addition, one cannot accurately predict how many Year 2000 Problem-related
failures will occur or the severity, duration, or financial consequences of
these perhaps inevitable failures. As a result, we expect that we would likely
suffer the following consequences:
- - a significant number of operational inconveniences and inefficiencies for
us and our clients that may divert our time and attention and financial and
human resources from ordinary business activities; and
24
<PAGE>
- - a greater number of serious system failures that may require significant
efforts by us or our clients to prevent or alleviate material business
disruptions.
We have not developed any Year 2000 contingency plans. We do not believe that
the Year 2000 Problem will have a material adverse effect on our business or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We believe that the market risk associated with our market risk
sensitive instruments as of October 31, 1999 is not material and therefore,
disclosure is not required.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
On December 8, 1999, we signed a definitive agreement to acquire
NetMind Technologies, Inc. For more information regarding this acquisition,
please see the Company's report on Form 8-K filed on December 10, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT TITLE
<S> <C> <C>
2.1 3 Agreement and Plan of Merger and Reorgonization by and
among Puma Technology, Inc. and Rocket Kitty Acquisition
Corp. and NetMind Technologies, Inc. dated December 8,
1999.
3.2 1 Certificate of Incorporation of Puma Technology, Inc., a
Delaware corporation.
3.4 1 Bylaws of Puma Technology, Inc., a Delaware corporation.
10.1 * 2 Amended and Restated 1993 Stock Option Plan and forms of
stock option agreements used thereunder.
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
10.2 * 2 Puma Technology, Inc. 1996 Employee Stock Purchase Plan and
form of notice of exercise used thereunder.
10.3 * 2 Puma Technology, Inc. 1998 Employee Stock Purchase Plan and
form of notice of exercised used thereunder.
10.4 1 Lease Agreement dated October 18, 1995, between the Company
and Photonics Corporation.
10.5 1 Form of Indemnity Agreement for directors and officers.
10.6 + 1 Software License Agreement dated as of May 30, 1995,
between the Company and Toshiba Corporation.
10.7 + 1 Software License Agreement dated as of September 14, 1995,
between the Company and NEC Technologies, Inc. and
Amendment No. 1 thereto dated October 25, 1995 and
Amendment No. 2 thereto dated January 10, 1996.
10.8 + 1 Software License Agreement dated as of May 23, 1995,
between the Company and NEC Corporation and Amendment No. 1
thereto dated February 19, 1996.
10.9 + 1 Software License Agreement dated as of May 20, 1996 between
the Company and NEC Corporation.
27.1 2 Financial Data Schedule (filed in EDGAR format only).
</TABLE>
+ Confidential treatment has been granted for portions of this exhibit.
* Management contract or compensatory plan or arrangement.
1. Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-11445).
2. Incorporated by reference to the Company's Annual Report on Form 10-K
filed on October 29, 1999.
3. Incorporated by reference to the Company's Report on Form 8-K filed on
December 10, 1999.
(b) Reports on Form 8-K
Form 8-K was filed on October 29, 1999 in conjunction with the
acquisition of ProxiNet Inc.
26
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Puma Technology, Inc.
Date: December 15, 1999 By: /s/ Kelly Hicks
------------------------------
Mr. Kelly Hicks
Vice President of Operations
and Chief Financial Officer
27
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER EXHIBIT TITLE
<S> <C> <C>
2.1 3 Agreement and Plan of Merger and Reorgonization by and
among Puma Technology, Inc. and Rocket Kitty Acquisition
Corp. and NetMind Technologies, Inc. dated December 8,
1999.
3.2 1 Certificate of Incorporation of Puma Technology, Inc., a
Delaware corporation.
3.4 1 Bylaws of Puma Technology, Inc., a Delaware corporation.
10.1 * 2 Amended and Restated 1993 Stock Option Plan and forms of
stock option agreements used thereunder.
10.2 * 2 Puma Technology, Inc. 1996 Employee Stock Purchase Plan and
form of notice of exercise used thereunder.
10.3 * 2 Puma Technology, Inc. 1998 Employee Stock Purchase Plan and
form of notice of exercised used thereunder.
10.4 1 Lease Agreement dated October 18, 1995, between the Company
and Photonics Corporation.
10.5 1 Form of Indemnity Agreement for directors and officers.
10.6 + 1 Software License Agreement dated as of May 30, 1995,
between the Company and Toshiba Corporation.
10.7 + 1 Software License Agreement dated as of September 14, 1995,
between the Company and NEC Technologies, Inc. and
Amendment No. 1 thereto dated October 25, 1995 and
Amendment No. 2 thereto dated January 10, 1996.
10.8 + 1 Software License Agreement dated as of May 23, 1995,
between the Company and NEC Corporation and Amendment No. 1
thereto dated February 19, 1996.
10.9 + 1 Software License Agreement dated as of May 20, 1996 between
the Company and NEC Corporation.
27.1 2 Financial Data Schedule (filed in EDGAR format only).
</TABLE>
+ Confidential treatment has been granted for portions of this exhibit.
* Management contract or compensatory plan or arrangement.
1. Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-11445).
2. Incorporated by reference to the Company's Annual Report on Form 10-K filed
on October 29, 1999.
3. Incorporated by reference to the Company's Report on Form 8-K filed on
December 10, 1999.
28
<PAGE>
PUMA TECHNOLOGY, INC.
SUMMARY OF TRADEMARKS
The following trademarks of Puma Technology, Inc., which may be registered in
certain jurisdictions, are referenced in this Form 10-Q:
IntelliLink
Intellisync
Intellisync Anywhere
Puma Technology
TranXit
Universal Synchronization Solutions
All other brand or product names are trademarks or registered trademarks of
their respective holders.
29
<TABLE> <S> <C>
<PAGE>
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<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
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<SECURITIES> 14,918
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<CURRENT-ASSETS> 30,777
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<BONDS> 0
0
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<COMMON> 15
<OTHER-SE> 38,938
<TOTAL-LIABILITY-AND-EQUITY> 47,468
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<TOTAL-REVENUES> 6,278
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<INCOME-PRETAX> (2,594)
<INCOME-TAX> (192)
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<NET-INCOME> (2,786)
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