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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 000-25687
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PHONE.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3219054
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
</TABLE>
800 Chesapeake Drive
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 562-0200
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $2,229,779 as of August 31, 1999, based upon the
closing sale price on the Nasdaq National Market reported for such date. Shares
of Common Stock held by each officer and director and by each person who owns
5% of more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
There were 31,259,864 shares of the registrant's Common Stock issued and
outstanding as of August 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the Company's 1999 Annual Meeting of
Stockholders to be filed hereafter (incorporated into Part III hereof).
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PART I
Item 1. Business.
We are a leading provider of software that enables the delivery of Internet-
based services to mass-market wireless telephones. Using our software, network
operators can provide Internet-based services to their wireless subscribers,
and wireless telephone manufacturers can turn their mass-market wireless
telephones into mobile Internet appliances. Wireless subscribers thus have
access to Internet- and corporate intranet-based services, including email,
news, stocks, weather, travel and sports. In addition, subscribers have access
via their wireless telephones to network operators' intranet-based telephony
services, which may include over-the-air activation, call management, billing
history information, pricing plan subscription and voice message management.
Our software platform consists of the UP.Link Server Suite, which is installed
on network operators' systems, and UP.Browser, which is embedded in wireless
telephones. As of August 1999, 31 network operators have licensed our software
and have commenced or announced commercial service or are in market or
laboratory trials. In addition, 25 wireless telephone manufacturers have
licensed UP.Browser.
In September 1999, we announced MyPhone, our mobile Internet portal platform
that enables network operators to rapidly deploy branded portal sites for their
wireless subscribers. With MyPhone, network operators can provide their
subscribers with a customized set of information services and applications that
are optimized for the mobile user, thereby enhancing subscriber loyalty and
capturing new revenue opportunities.
Industry Background
Growth of the Internet
The Internet has emerged as a global communications medium enabling millions
of people to share information and conduct business electronically.
International Data Corporation, or IDC, estimates that there were approximately
159 million users of the Internet worldwide at the end of 1998 and that the
number of users will grow to 410 million by the end of 2002. We cannot assure
you that this estimate will be achieved. The dramatic growth in the number of
business and consumer Internet users has led to a proliferation of useful
information and services on the Internet, including email, news, electronic
commerce, educational and entertainment applications and a multitude of other
value-added services. As a result, the Internet has become a primary and
ubiquitous daily resource for millions of people.
Growth of Wireless Telecommunications
Worldwide use of wireless telecommunications has grown rapidly as cellular
and other emerging wireless communications services have become more widely
available and affordable for the mass business and consumer markets. Advances
in technology, changes in telecommunications regulations and the allocation and
licensing of additional radio spectrum have contributed to this growth
worldwide. Dataquest estimates that there were approximately 187 million
digital wireless subscribers worldwide at the end of 1998 and that the number
of subscribers will grow to 590 million by the end of 2002. We cannot assure
you that this estimate will be achieved.
The Wireless Network Operator Environment
As a result of deregulation, new radio frequency spectrum licenses,
privatizations and rapid network expansion by new entrants, the competitive
environment among network operators in major markets worldwide has become
intense. Efforts to attract and retain subscribers have resulted in significant
price-based competition. Increased competition has in turn raised the costs
associated with acquiring new subscribers, has lowered average revenues per
subscriber, and has increased the propensity of subscribers to switch from one
network operator to another. For these reasons, network operators are looking
for new revenue sources in the form of value-added services they can deliver to
their wireless subscribers. They are also looking for ways to
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differentiate their product offerings in an effort to retain subscribers.
Finally, they are focused on finding and deploying solutions that enable them
to deliver and support their services in a more cost-effective manner.
The Convergence of the Internet and Mobile Telephony
As people have become increasingly dependent on email services, remote
access to corporate intranets, and other Internet-based services, mass-market
wireless telephones that provide mobile access to these resources have become
increasingly useful tools. Phone.com was a pioneer in the convergence of the
Internet and mobile telephony. In 1995, Phone.com developed its initial
technology, which enables the delivery of Internet-based services to wireless
telephones. In 1996, Phone.com introduced and deployed its first products based
on this technology.
To provide a worldwide open standard enabling the delivery of Internet-based
services to mass-market wireless telephones, Phone.com, Ericsson, Motorola and
Nokia formed the Wireless Application Protocol Forum. In 1998, the WAP Forum
published technical specifications for application and content development and
product interoperability based on Internet technology and standards. By
complying with WAP specifications, wireless telephone manufacturers, network
operators, content providers and application developers can provide Internet-
based products and services that are interoperable.
In 1998, the WAP Forum published the Wireless Markup Language, or WML. WML
is compliant with the Extensible Markup Language, or XML, specification
published by the World Wide Web Consortium. XML is a programming language that
provides a means of describing and exchanging data in an open format. Content
providers and application developers use WML to optimize the display of, and
interaction with, Web-based data on wireless telephones. Based substantially on
technology that Phone.com contributed to the public domain, WML is optimized
for delivery of Internet content to mass-market wireless telephones, which have
numeric keypads instead of full keyboards, small screens, and limited memory
capacity, processing power, battery life and bandwidth. In the same manner that
the programming language known as Hypertext Markup Language, or HTML, has
provided an open standard that has fueled the development of Internet
applications and content for personal computers, WML is designed to be an
industry standard that will encourage the development of Internet applications
and content for wireless telephones.
Leading network operators, telecommunications device and equipment
manufacturers, and software and services companies worldwide have sanctioned
the specifications promulgated by the WAP Forum. Charles Parrish, Executive
Vice President of Phone.com, currently serves as the Vice Chairman of the WAP
Forum, which has grown to over 150 members as of September 1999, including the
following companies:
Board Members
<TABLE>
<S> <C>
Phone.com Motorola
Alcatel Nokia Mobile Phones
CEGETEL/SFR (Societe Francaise du Radio NTT Mobile Communications Network
Telephone) (NTT DoCoMo)
DDI Corporation SBC Communications
Ericsson Mobile Communications AB Sprint PCS
IBM Telstra Corporation
Matsushita Communication Industrial
</TABLE>
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Network Operators
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<S> <C>
AT&T Wireless Services Mannesmann
Bell Atlantic Mobile Nextel Communications
BellSouth Cellular Omnitel
Bouygues Telecom One 2 One
Cable & Wireless Orange Communications
Cellnet Communications Radiolinja
CoCoNet Global Interchange Rogers Cantel Mobile Communications
Connect Austria SK Telecom
Deutsche Telecom Mobilnet GmbH Sonera Corporation
FarEasTone Telecommunications SWISSCOM LTD.
Giesecke & Devrient Tokyo Digital Phone
Hongkong Telecom Mobile Services Telecom Italia Mobile
IDO Corporation Telenor Mobil Group
Japan Telecom TU-KA Cellular Tokyo
KPN Vodafone
LG TeleCom
</TABLE>
Device and Equipment Manufacturers
<TABLE>
<S> <C>
Acer Peripherals ORGA Kartensysteme GmbH
Bosch Telecom Danmark A/S Philips Consumer Communications
Bull CP8 Pioneer
CMG Telecommunications & Utilities Qualcomm
De La Rue Card Systems RTS Wireless
DENSO Samsung Electronics
Gemplus Schlumberger Industries S.A.
Hewlett-Packard Sema Group Telecom
Hitachi Sharp
ICO Global Communications Siemens AG
Intel Corporation Sony International (Europe) GmbH
LG Information & Communications Tecnomen Oy
Logica Aldiscon Telital S.p.A.
Lucent Technologies Toshiba
Mitsubishi Wireless Communications Uniden
NEC Technologies (UK) Unisys
Nissan Communications Systems
Nortel
</TABLE>
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Software and Services Companies
<TABLE>
<S> <C>
@MOTION M.D. Communications
Advance Systems Limited Merita Bank
Aether Systems Microsoft
Agency.com Mobile Services Group
ApiON Myalertcom
AU-System Mobile Oracle Corporation
Baltimore Technologies Peramon Technology
BEA Systems ProxiNet
Bussan Systems Integration Company Puma Technology
Certicom RSA Data Security
Charles Schwab & Co. Saraide
Comverse Network Systems Sendit AB
CCL (Computer & Communications Research Scandinavian Softline Technology Oy Softline
Laboratories, ITRI) Spyglass
CTC (Itochu Techno-Science Corporation) Symbian
CycleLogic Systems Engineering Consultants
Dr. Materna GmbH TANTAU Software
Digital Mobility Tegic Communications
Diversinet TWS
Dolphin Telecommunications Union Bank of Switzerland
Evolving Systems Usha Communications Technology
Fantastic Corporation VTT Information Technology
Fujitsu Software Corporation VeriSign
Geoworks Corporation Visa International
Glenayre Technologies WapIT
Lexacom Wireless Knowledge
LPG Innovations
MapQuest.com
</TABLE>
The Market Opportunity
In response to an increasingly competitive environment, network operators
are seeking to deliver Internet-based services to their wireless subscribers as
a means to generate revenues from new sources, differentiate their service
offerings, and reduce subscriber turnover and operating costs. To do this,
network operators require a scalable turnkey software and services solution to
deliver Internet-based services and content to their wireless subscribers.
The Phone.com Solution
We provide a leading software infrastructure platform that enables the
delivery of Internet-based services to mass-market wireless telephones. Using
our scalable platform, network operators can provide Internet-based content,
applications and services to their wireless subscribers, and wireless telephone
manufacturers can turn their mass-market wireless telephones into mobile
Internet appliances. Wireless subscribers thus have access to Internet- and
corporate intranet-based services, including email, news, stocks, weather,
travel and sports. In addition, the MyPhone service, our mobile Internet portal
platform, is designed to enable network operators to rapidly deploy branded
portal sites for their wireless subscribers and deliver Internet content and
applications optimized for the mobile user.
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Our infrastructure platform consists of the UP.Link Server Suite and
UP.Browser software products. The UP.Link Server Suite includes:
. a means of exchanging data between the Internet and mass-market wireless
telephones, commonly referred to as a gateway;
. a service platform that performs subscriber management and service
provisioning functions, as well as communicating with the network
operator's customer care and billing systems; and
. Internet-based applications such as email and personal information
management software.
The UP.Browser is a browser and messaging software product that is designed
and optimized for mass-market wireless telephones. In addition, as of August
1999, approximately 10,700 third-party developers have registered to use our
UP.SDK software development kit, and a variety of third-party content is
currently available for wireless telephones equipped with UP.Browser, including
information from ABCNews.com, Bloomberg, Reuters, Quote.com and ESPN
Sportszone.
With the introduction of the next version of our software solution,
currently available as a beta release, our products will provide an open,
interoperable, WAP-compliant platform for the delivery of Internet-based
services. Our software solution supports all major digital wireless telephony
standards in use around the world:
<TABLE>
<S> <C>
. CDMA (Code Division
Multiple Access) .GSM (Global System for Mobile Communication)
. TDMA (Time Division
Multiple Access) .CDPD (Cellular Digital Packet Data)
. iDEN (Integrated Digital
Enhanced Network) .PDC (Personal Digital Cellular)
. PHS (Personal Handyphone
System)
</TABLE>
The MyPhone service is complementary to our infrastructure platform and is
designed to allow network operators to rapidly deploy customized, branded
Internet portals for their wireless subscribers. MyPhone offers a framework for
the delivery of Internet applications, content and services optimized for
wireless telephones. Initial information services available through MyPhone
will include news feeds and financial information, as well as email, address
book and calendar functionality. The MyPhone service can be customized to
enable network operators to offer their wireless subscribers a branded portal
with a differentiated look and feel, content, customer care functionality and
other unique features. Wireless subscribers will also be able to access the
information services and applications available on MyPhone through a standard
PC web browser. MyPhone's extensible architecture is designed to facilitate the
development of new applications and services. MyPhone will be hosted by
Phone.com, and we expect to operate all back-end systems involved in offering
this service.
Key benefits of our products and services for network operators include the
following:
. Opportunity to generate incremental revenues. Network operators can
generate additional revenues by offering value-added Internet-based
services. They can also charge for the increased data and voice airtime
that these applications encourage. For example, a user can access an
email message via UP.Mail and initiate a voice call to any phone number
appearing in the message with the press of one button.
. Ability to differentiate services and improve subscriber retention. Using
our products and services, network operators can offer new Internet-based
services to wireless subscribers. In addition, by enabling wireless
subscribers to store personal contact information in their networks and
to personalize the selection and presentation of Internet content such as
stock quotes, sports scores and news, network operators can enhance
subscriber retention.
. Opportunity to reduce operating costs. Our UP.Link Server Suite can also
be used by network operators to reduce operating costs. For example,
network operators' call centers are burdened by high rates of calls from
subscribers inquiring about billing, service availability, usage and
other service-related matters. Our software platform enables network
operators to leverage standards-based Internet technology to allow
subscribers to make many of these inquiries using their wireless
telephones without
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assistance by customer care representatives. By bypassing the call center
infrastructure for these activities, network operators can reduce their
operating costs.
. Ability to rapidly deploy a branded mobile Internet portal site. MyPhone
is designed to allow network operators to rapidly deploy a customized and
branded Internet portal for its wireless subscribers. We believe that by
aggregating content and applications optimized for mobile users in a
customized, branded portal service, network operators will be able to
increase subscriber loyalty and generate new revenue opportunities.
MyPhone's extensible architecture will facilitate new application
development, allowing network operators to continue to deliver new and
enhanced services to their subscribers.
The Phone.com Strategy
Our objective is to be the leading supplier to network operators of software
and services that enable the convergence of the Internet and mobile telephony.
Key elements of our strategy include:
. Focus on Providing Products and Services to Network Operators. We focus
on providing comprehensive solutions that enable network operators to
deliver Internet-based services to their wireless subscribers. Our close
working relationships with network operators provide us with a valuable
understanding of our customers' technology and operations, which we
intend to leverage to accelerate time to market of our products and
identify new sales opportunities. In order to drive revenues from our
UP.Link Server software and related services, we utilize direct and
indirect sales channels. Our direct sales force focuses on selling
products and consulting services and assists our indirect channel
partners in selling our products and services. Our indirect sales channel
partners are currently Alcatel, Itochu Techno-Science Corporation, Sema
Group and Siemens. These partners sell our products and services as an
integral part of their product and service offerings to network operators
primarily in international markets. We intend to add new partners to our
indirect sales channel to serve customers in key markets and expect that
sales through our indirect sales channel partners will represent an
increasing portion of our revenues. In addition, we intend to invest
significantly in the development of new mobile Internet applications and
services for the MyPhone service.
. Continue to Invest in our Technology. Network operators have stringent
requirements for server software performance, scalability and
reliability. Extensive technical expertise is required to integrate these
solutions with the network operators' complex systems. We also expect
that network operators will demand regular upgrades that include new
functions and features. Consequently, we intend to continue to invest
heavily in research and product development. We also intend to maintain
our technology leadership by leveraging our role in prominent industry
standard-setting organizations such as the WAP Forum and the World Wide
Web Consortium.
. Drive the Sale and Development of Internet-Based Applications and
Services. Network operators that offer Internet-based services by using
our UP.Link Server Suite generally seek new value-added applications to
offer to their subscribers. We currently offer the following Internet-
based applications:
. Up.Mail, which delivers email to wireless telephones,
. Up.Organizer, a personal information management application, and
. Up.Web, which enables subscribers to access, manage and update their
personal information and configuration for UP.Mail and UP.Organizer
from their personal computers.
We are continuously enhancing our existing products and developing new
applications and services to provide additional functionality for
network operators and wireless subscribers. In September 1999, we
announced the MyPhone service, a turnkey solution designed to provide
network operators a means to rapidly deploy customized mobile Internet
portals. We intend to market this service aggressively through our
existing sales channels. We believe that the adoption of our MyPhone
service by network operators will accelerate the adoption by subscribers
of Internet-based services
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using their wireless telephones as well as the development of new WAP-
compatible information services and applications.
. Propagate Widespread Use of UP.Browser in Mass-Market Wireless
Telephones. We believe that increasing the number of wireless
telephone manufacturers that incorporate UP.Browser into their mass-
market wireless telephones enhances the attractiveness of our UP.Link
server software to network operators. Therefore, in order to drive
widespread adoption, we license UP.Browser to wireless telephone
manufacturers, free of per-unit royalties. As of September 1999, we
have licensed UP.Browser to 25 wireless telephone manufacturers.
. Promote the Development of Internet-Based Services Over Mass-Market
Wireless Telephones. To encourage the growth of our business, we
actively encourage Internet content and application developers to
create WML applications. In connection with this activity, we provide
our UP.SDK software development kit and support to Internet content and
application developers free of charge. As of August 1999, there were
approximately 10,700 registered developers in our Developer Program.
Internet content providers that currently deliver content for wireless
telephones equipped with UP.Browser include ABCNews.com, BizTravel.com,
Bloomberg, Data Broadcasting Corporation, ESPN Sportszone,
InfoSpace.com, Quote.com, Reuters and Sportsfeed.
Products and Services
Products
Our software products enable the delivery of Internet-based services to
mass-market wireless telephones. Our software products include:
. UP.Link Server Suite--a product that network operators use to connect
their subscribers' mass-market wireless telephones to Internet services
. UP.Browser--a browser that is embedded in mass-market wireless telephones
and enables wireless subscribers to access Internet services
. UP.Smart--a suite of software applications that delivers personal digital
assistant features to smartphones
. UP.SDK--a software development kit that Internet content providers and
third-party developers use to create WML-compliant applications
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UP.Link Server Suite
UP.Link Server Suite is a turnkey software solution with features and
applications that enable network operators to offer Internet-based services to
their wireless subscribers. UP.Link Server Suite connects data-enabled wireless
telephones to applications and content hosted by Web servers on the Internet or
private intranets. UP.Link Server Suite also provides network operators with
subscriber provisioning and network management functions on a robust and
scalable software platform. The UP.Link Server Suite consists of the following
components:
<TABLE>
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Components Description
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<C> <S>
Gateway UP.Link Gateway provides the network-layer functions of the
UP.Link Server Suite, and connects Internet- and intranet-based
services to wireless networks and wireless telephones. UP.Link
Gateway connects the multiple protocols for wireless data
communications to the open standards of the Internet, thereby
enabling Web servers to recognize a wireless telephone as an
Internet standards-compliant client.
Administration The UP.Link administration component provides a Web-based
administration control system to keep the network operator's
Internet-based network components up and running, assess system
status and provision new subscribers.
The UP.Link Provisioning Application Programming Interface, or
PAPI, enables integration of UP.Link with the network
operator's existing customer care, help desk and billing
systems.
Services The services component provides an open application programming
framework with interfaces, or APIs, that standardize the way
that the services component interacts with applications. These
services include:
. Push Server--allows applications to push information to
wireless subscribers. For example, an email application can
use the Push Server to notify a wireless subscriber of new
messages.
. Fax Server--enables the forwarding of email attachments and
other data content to fax machines for printing.
. Identity Server--maintains a subscriber registry that retains
wireless subscribers' service settings and allows network
operators to track their subscribers' service usage.
. Content Translation Framework--provides forward and backward
compatibility of content formats between different
generations of browsers and wireless telephones. Translates
between international character sets in real-time. Also
translates standard HTML Web pages into WML pages for viewing
on wireless telephones.
. Application Registry--provides a structure for the
interoperability of different applications. For example,
third-party applications can retrieve and store contact
records in the UP.Organizer's address book or pass an email
address to UP.Mail.
Applications . UP.Applications is a suite of wireless Internet-based
applications, including:
. UP.Mail--provides access to the same email account through
both wireless telephones and personal computers.
. UP.Organizer--provides a suite of synchronized Internet-based
personal information management applications, including an
address book, calendar and to-do list.
. UP.Web--a Web-based user interface that allows subscribers to
use their personal computers to perform many of the same
tasks they perform on their wireless telephones with
UP.Organizer.
</TABLE>
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UP.Browser
UP.Browser is a browser and messaging software product that is designed and
optimized for mass-market wireless telephones. Using UP.Browser, subscribers
can access Web-based information and services that are hosted on network
operators' or third-party Web servers. Due to its open and highly portable
architecture, UP.Browser can be embedded into different types of wireless
telephones and utilize each telephone's specific display and input
characteristics, such as graphical displays and programmable keys. Key features
of UP.Browser include:
<TABLE>
<CAPTION>
Features Description
- ----------------- ------------------------------------------------------------------------------
<S> <C>
Browsing UP.Browser displays WML-designed pages from any Web or intranet site. In
addition, UP.Browser incorporates text-input software from Tegic
Communications.
Universal Inbox Notifies subscribers with a visual or audible indication when a Web page or
other data has been proactively "pushed" to their wireless telephones.
Universal Inbox also integrates in a single local mailbox diverse alert types,
including email and voice mail, as well as Web-based content such as stock
quotes, traffic alerts and flight information.
Local Application Allows access to important information when out of network coverage.
Environment Increases efficiency of applications and minimizes perceived delay when used
over bandwidth-constrained networks.
Security UP.Browser employs the same encryption technology used by many
commercial Web sites. Consequently, all interaction between the wireless
telephone and a Web site can be authenticated and encrypted.
</TABLE>
UP.Smart
UP.Smart is a suite of software applications that augments UP.Browser with a
set of popular functions commonly found on personal digital assistants.
UP.Smart includes address book, calendar, to-do list and memo functions.
UP.Smart also utilizes Puma Technology's synchronization software to enable a
user to synchronize UP.Smart with PC-based personal information management
applications by connecting the UP.Smart-equipped wireless telephone to a
personal computer through a serial cable. The information is stored both on the
wireless telephone and personal computer, making it accessible even when the
wireless telephone is not connected to the network.
UP.SDK
Our software development kit, known as UP.SDK, provides tools and
documentation for Internet content providers and developers to create and
maintain WML-based Internet services. UP.SDK consists of the following
components:
. The UP.Simulator, a Windows-based application that simulates the behavior
of UP.Browser-equipped wireless telephones, allowing developers to more
easily test WML services.
. Specialized functions and libraries that simplify the process of
generating WML applications.
. Tools for establishing secure communications between WML applications and
UP.Link Servers.
. Sample WML files and application source code.
Services
We offer consulting services to network operators and wireless telephone
manufacturers. Our consulting services help us to shorten our software license
sales cycle, accelerate deployment of our technology and
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deepen our understanding of our customers' networks. We also provide both
customer support and custom software development services for network
operators, as well as software consulting services to wireless telephone
manufacturers that license UP.Browser.
New Services and Products under Development
MyPhone
In September 1999, we announced the MyPhone service, our mobile portal
platform that is complementary to our existing business. The MyPhone service
enables network operators to rapidly deploy branded portal sites for their
wireless subscribers. With MyPhone, network operators can provide their
subscribers with a customized set of information services and applications that
are optimized for the mobile user, thereby enhancing subscriber loyalty and
capturing new revenue opportunities. MyPhone offers a framework for the
delivery of Internet applications, content and services optimized for wireless
telephones. Initial information services available through MyPhone will include
news feeds and financial information, as well as email, address book and
calendar functionality. The MyPhone service can be customized to enable network
operators to offer their wireless subscribers a branded portal with a
differentiated look and feel, content, customer care functionality and other
unique features. Wireless subscribers will also be able to access the
information services and applications available on MyPhone through a standard
PC web browser. MyPhone's extensible architecture is designed to facilitate the
development of new applications and services. MyPhone will be hosted by
Phone.com, and we expect to operate all back-end systems involved in offering
this service.
Over-the-Air Provisioning
In July 1999, we announced a collaborative effort with Bell Atlantic Mobile
and Motorola to develop WAP-based over-the-air provisioning technology. Through
this collaboration, we are designing a system capable of delivering
provisioning information as well as electronic customer care to Bell Atlantic
Mobile's subscribers via CDMA wireless telephones. The system is being designed
to automatically update wireless telephones with current versions of network
information such as roaming lists, area code information, and other data
parameters. In addition, the system is being designed to enable subscribers to
check their bill and interactively manage their individual account features
directly from their wireless telephones.
Customers
Wireless Network Operators
We sell our UP.Link Server Suite and related technical support to network
operators worldwide to enable them to offer a variety of wireless Internet
services to their subscribers. These network operators have licensed our
software and have either announced a commercial service launch or are in a
market or laboratory trial phase.
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As of August 1999, 31 network operators, including the following companies,
have licensed our software:
<TABLE>
<CAPTION>
Name Stage Technology Country
- ---- ----- ---------- -------
<S> <C> <C> <C>
AT&T Wireless Services Deployed in July 1996 CDPD USA
Bell Atlantic Mobile Deployed in September 1996 CDPD USA
GTE Wireless Deployed in May 1997 CDPD USA
SFR/CEGETEL Deployed in March 1999 GSM France
DDI Corporation Deployed in April 1999 CDMA Japan
IDO Corporation Deployed in April 1999 CDMA Japan
Bell Mobility Deployed in May 1999 CDMA Canada
LG Telecom Deployed in June 1999 CDMA South Korea
Omnitel Deployed in June 1999 GSM Italy
Sprint PCS Announced Commercial Launch CDMA USA
(expected fall 1999)
Mannesmann Mobilfunk (D2) Announced Commercial Launch GSM Germany
(expected fall 1999)
Nextel Communications Announced Commercial Launch iDEN USA
(expected fall 1999)
Southern LINC Announced Commercial Launch iDEN USA
(expected fall 1999)
Shinsegi Telecom Announced Commercial License CDMA Korea
US West Announced Commercial License CDMA USA
Telstra Corporation Announced Commercial License GSM Australia
Deutsche Telekom Mobilnet Trial GSM Germany
GmbH (T-Mobile)
France Telecom Mobile Trial GSM France
Telecom Italia Mobile Trial GSM Italy
</TABLE>
We also provide our network operator customers with consulting services
that enable them to rapidly adopt our technology and bring wireless Internet-
based services to market. Our consulting services focus on those areas where
our products interface with the network operators' internal systems such as
billing, provisioning and customer care. We also provide our network operator
customers with assistance in choosing the appropriate content and applications
for their subscribers and creating the promotion and pricing strategies for
their service.
Our agreements with network operators provide these customers with a non-
exclusive license to use our UP.Link Server Suite software in connection with
providing Internet-based services to their subscribers. Pricing and payment
terms for these licenses are negotiated with the customer based on the number
of subscriber licenses purchased by the network operator, and the licenses can
be purchased on an as-deployed basis or on a prepaid basis. While these
agreements do not provide for a right of return, these agreements typically
provide for a six-month warranty, indemnification against intellectual
property infringement claims, a commitment to provide standards-compliant
products, and a source code escrow. In addition, we typically provide fee-
based maintenance and support services to these customers, under which they
receive error corrections and remote support. They can also elect to receive
new releases of UP.Link Server Suite for an additional fee.
Wireless Telephone Manufacturers
We license our UP.Browser software to wireless telephone manufacturers, who
embed UP.Browser into their products. In order to encourage these
manufacturers to include UP.Browser in their wireless telephone models, no
per-unit royalty is charged. In addition, we provide engineering and support
services to accelerate the introduction of new wireless telephone models that
contain UP.Browser. These services are provided to manufacturers on an annual
flat-fee basis per digital wireless telephony standard.
12
<PAGE>
As of September 1999, 25 wireless telephone manufacturers have licensed
UP.Browser, and the following manufacturers have publicly announced products
that will include UP.Browser:
<TABLE>
<S> <C>
. Alcatel .Nokia
. Bosch .Panasonic (Matsushita)
. Casio .Philips
. Hitachi .Qualcomm
. Hyundai Electronics .Sagem
. IGS .Samsung Electronics
. Kyocera .Sharp
. LG Information & Communications .Siemens
. Mitsubishi .Sony
. Motorola .Toshiba
. NEC .3Com (Palm Computing division)
. Neopoint
</TABLE>
Additionally, Ericsson has announced that it will introduce wireless
telephones that will be compatible with our UP.Link Server Suite. As of
September 1999, ten wireless telephone manufacturer customers had made
commercial shipments of telephones with the UP.Browser embedded. In addition,
we are currently providing engineering support services in connection with 60
browser integration projects.
Our agreements with wireless telephone manufacturers generally provide these
customers with a non-exclusive, royalty-free license to sell wireless
telephones containing UP.Browser. These agreements typically provide for a 90-
day warranty, indemnification against intellectual property infringement claims
and a source code escrow. In addition, customers can elect to receive varying
levels of maintenance and support services for a fee.
For the year ended June 30, 1999, AT&T Wireless Services and DDI Corporation
accounted for approximately 17% and 14%, respectively, of our total revenues.
For the year ended June 30, 1998, AT&T Wireless Services and Matsushita
Communication Industrial accounted for approximately 22% and 18%, respectively,
of our total revenues. The foregoing calculations are based on revenues derived
from direct and indirect sales to these customers.
Research and Product Development
We continue to enhance the features and performance of our existing products
and introduce new products. For example, we have recently released in beta
version the fourth generation of our UP.Link Server Suite and UP.Browser
products. These products are expected to be compliant with version 1.1 of the
specifications promulgated by the WAP Forum. We are currently developing other
applications, including a secure provisioning server, which enables network
operators to automate customer provisioning, and compatibility with two-way
short messaging service systems. In addition, we continue to develop the
MyPhone service to provide outsourced application development and services to
our network operator customers.
Our success depends on a number of factors, which include our ability to
identify and respond to emerging technological trends in our target markets,
develop and maintain competitive products, enhance our existing products by
adding features and functionality that differentiate them from those of our
competitors and bring products to market on a timely basis and at competitive
prices. As a result, we have made, and we intend to continue to make,
significant investments in research and product development. Our research and
development expenses were $4.0 million, $5.7 million and $13.1 million for the
years ended June 30, 1997, 1998 and 1999, respectively. As of August 31, 1999,
we had 129 employees engaged in research and product development activities. We
are recruiting additional skilled engineers for research and product
development, and our business could be adversely affected if we are unable to
hire these engineers on a timely basis.
13
<PAGE>
Technology
Our technology has contributed both to driving open standards for the
delivery of Internet-based services to mass-market wireless telephones and to
providing network operators and wireless telephone manufacturers with software
solutions that are robust and scalable, and take into account the specific
characteristics of wireless telephony networks and telephones.
Wireless Application Protocol and Wireless Markup Language
Phone.com, along with Ericsson, Motorola and Nokia, founded the WAP Forum in
1997, and published open standards-based technical specifications for
application and content development, as well as product interoperability based
on Internet technology and standards. Leading network operators,
telecommunications device and equipment manufacturers, and software companies
worldwide have joined the WAP Forum, which has grown to over 150 members as of
September 1999.
The WAP specifications consist of the following components:
. A Transport Specification, which defines the way in which data is
exchanged between the network operator's server and the wireless
telephone. The WAP Transport Specification mirrors the Internet-standard
secure HTTP protocol, but is optimized for wireless telephone networks.
For example, on a typical PC-based Internet connection, all functions
such as security provisioning and application downloading and
interaction are performed on the PC. In the WAP Transport Specification,
functions are divided between the wireless telephone and the network
operator's server because of the bandwidth constraints over the wireless
network and the wireless telephone's limited processing power.
. A Wireless Markup Language (WML), which optimizes the display of and
interaction with Web-based content on wireless telephones and allows
Internet applications to take advantage of the voice capabilities of the
wireless telephony network. WML is compliant with the Extensible Markup
Language, or XML, specification published by the World Wide Web
Consortium.
. WML Script, which enables a developer to add procedural logic to WML
pages.
In order to implement interoperability with Internet-based content, the WAP
Transport Specification and WML use the open standards-based Internet model of
interaction, in which content and applications reside on Web servers that are
physically distributed, and requests for the data on these servers are sent via
open-standard Internet addresses, commonly known as URLs.
On standard Internet Web servers, content typically resides in databases,
but is provided to users via a number of content formats, including HTML and
Java. WML and WML Script function as standard content formats, so Internet
content providers can add WML and WML Script access to their servers without
having to change the underlying data. WML and WML Script applications deliver
content in a format that is optimized for wireless telephone interfaces.
Components of UP.Link Technology
Our UP.Link Server Suite is designed to be modular, expandable, flexible,
scalable and reliable. Using an architecture based on scalable, object-oriented
technology, the UP.Link Server Suite typically runs on a large, distributed set
of servers. The UP.Link Server Suite, which runs on Sun Microsystems' Solaris
operating system, is designed to meet the stringent performance, scalability
and reliability requirements of network operators.
Server Side Agents. Since wireless networks have limited bandwidth and
wireless telephones have limited processing power and memory, programs called
agents that reside on the server are used to provide processing power and other
computing resources to UP.Browser-enabled wireless telephones. These agents
14
<PAGE>
allow some operations to be offloaded from the wireless telephone to the
UP.Link server. This means that the duties that are typically performed by the
Web browser on standard personal computers can be divided between the browser
on the wireless telephone and a "proxy" running in the agent. The exact split
of functionality can vary depending on the particular capabilities of the
wireless telephone. The agent can perform many functions, including translating
wireline Internet protocols such as HTTP to wireless Internet protocols such as
WAP, as well as compiling Internet content so that it is more compact to
transmit and easier to display on the wireless telephone.
Dispatcher. At the core of our scalable server architecture is a dispatcher
that dynamically load balances user proxies between a number of agents. The
dispatcher is much like the line at a bank that funnels a queue of customers to
the next available teller. The dispatcher also provides a basic level of
protection against faults by automatically rerouting subscriber requests if a
proxy server malfunctions.
Messenger. The UP.Link messenger server provides store-and-forward messaging
capabilities from Web servers to UP.Browser-enabled wireless telephones over a
wide range of wireless protocols such as Short Message Service and Cellular
Digital Packet Data. Store-and-forward means that if a wireless telephone is
turned off or out of its coverage area, the message will be stored and
delivered once the wireless telephone is connected to the network. The
messenger accepts data through standard Web interfaces such as HTTP and
converts the data for transmittal over the wireless network without requiring
modifications to the Web server.
Narrow Band Router. The Narrow Band Router provides a common interface to a
wide range of narrow band, or low-bandwidth, wireless networks. This feature
makes the protocol-specific components of message addressing, routing and
delivery transparent to Internet applications, enabling developers to easily
create applications for wireless networks without customizing their
applications to work with each individual protocol. Thus the same application
can work across a number of wireless data networks and protocols in a
transparent manner.
Translation Framework. Wireless telephones are different than personal
computers in that they are mass-market consumer devices with software that is
embedded in the wireless telephone at the factory and very difficult and costly
to modify in the field. The WML specification, however, is regularly evolving
as features and functionality are introduced and refined. To address this
issue, the translation framework enables the translation of content in real-
time. Software translators can be implemented that transparently translate
content based on newer versions of WML to make it compatible with wireless
telephones that contain older versions of UP.Browser, or vice versa.
Sales and Marketing
We sell our products through both a direct sales force and third-party
resellers, currently Alcatel, Itochu Techno Science Corporation, Sema Group and
Siemens. In addition, we have a joint sales and marketing relationship with
Lucent Technologies. As of August 31, 1999, we had 47 persons in sales and
marketing serving the United States market, and 20 persons in sales and
marketing outside the United States. We plan to significantly expand this group
over the next 12 months. In addition, we have offices in London and Tokyo. Our
direct sales force focuses on selling products and consulting services and
assists our indirect channel partners in selling our products and services.
International sales of products and services accounted for 44% and 66% of our
total revenues for the years ended June 30, 1998 and 1999, respectively. We
expect international revenues to continue to account for a significant portion
of our revenues, although the percentage of our total revenues derived from
international sales may vary. Our international sales strategy is to partner
with leading distributors and systems integrators that have strong industry
backgrounds and market presence in their respective markets and geographic
regions.
Our success depends in part on our ability to increase sales of our products
and services through value-added resellers and to expand our indirect
distribution channels. Under the arrangements that we make with our value-added
resellers, a value-added reseller sells, installs and services our products to
wireless network
15
<PAGE>
operators. These agreements are not exclusive and do not have territorial
restrictions. Our value-added resellers generally are not restricted from
selling products that are competitive with our products, and each of our
partners can cease marketing our products and services at their option.
We believe that customer service and ongoing technical support is an
essential part of the sales process in the wireless communications industry. In
order to provide high levels of customer service, senior management and
assigned account managers play a role in ongoing account management and
relationships. We believe these customer relationships enable us to improve
customer satisfaction and develop products to meet specific customer needs. Our
agreements with our network operator customers provide for 24 hour per day
support seven days per week.
We actively recruit content and application developers to our platform and
provide to them free of charge our software developer's kit, UP.SDK. We also
provide them with free membership in our Developer Program, free email-based
support and the opportunity to participate in our Alliances Program. As of
August 1999, approximately 10,700 registered developers in our Developer
Program have downloaded UP.SDK, including:
<TABLE>
<S> <C>
. 724 Solutions .Lotus
. biztravel.com .Mapquest.com
. BroadVision .NewsAlert
. CableData .Reuters
. Comverse Network Systems .SmartServOnline
. Data Broadcasting Corporation .Sportsfeed.com
. eDispatch.com .StockTips
. InfoSpace.com .Vantive
. Internet Travel Network .The Weather Underground
. KLELine .Webraska Mobile Technologies
. Lightbridge
</TABLE>
Our Alliances Program is comprised of a select group of our content and
application developers. We screen applications to our Alliances Program based
on the availability and quality of the content or applications produced by the
partner. We perform joint marketing activities with the partner, as well as
provide introductions between our wireless network operators and our Alliances
Program members.
Competition
The market for our products and services is becoming increasingly
competitive. The widespread adoption of open industry standards such as the WAP
specifications may make it easier for new market entrants and existing
competitors to introduce products that compete with our software products. In
addition, a number of our competitors, including Nokia, have announced or are
expected to announce enhanced features and functionality as proprietary
extensions to the WAP protocol. Furthermore, some of our competitors have
introduced or may introduce services based on proprietary wireless protocols
that are not compliant with the WAP specifications.
We expect that we will compete primarily on the basis of price, time-to-
market, functionality, quality and breadth of product and service offerings.
Our current and potential competitors include the following:
. Wireless equipment manufacturers, such as Ericsson and Nokia, which are
developing and marketing competitive server, browser and application
software products. These companies already sell billions of dollars of
wireless telephones and other telecommunications products to network
operators which are our existing and potential customers.
. Microsoft, which recently announced plans to deliver a wireless portal
designed to work with handheld devices, wireless telephones and
interactive pagers via Microsoft's MSN network of Internet services.
Nextel is Microsoft's first customer for these services. Nextel plans to
use a co-branded version of
16
<PAGE>
Microsoft's MSN portal to enable Nextel customers to access a customized
set of Internet services. This arrangement also provides for Microsoft to
invest $600 million in Nextel to support Nextel's development of wireless
Internet services. In addition, Microsoft has announced that it intends to
enable its Windows CE operating system to run on wireless handheld
devices, including wireless telephones, and to develop and market its own
browser for these devices.
. Wireless Knowledge, a joint venture of Microsoft and Qualcomm, which has
announced its intention to introduce products and services that may
compete directly with our UP.Link and UP.Browser products, as well as our
UP.Applications.
. Systems integrators, such as CMG and APiON, and software companies, such
as Oracle Corporation, which are developing and marketing server software
that is compliant with the specifications promulgated by the WAP Forum.
. Providers of Internet software applications and content, electronic
messaging applications and personal information management software
solutions, any of whom could offer products and services that compete
with ours.
As we enter new markets and introduce new services, such as the MyPhone
service, we will face additional competitors. These competitors may include
telecommunications companies such as Lucent Technologies, traditional Internet
portals such as AOL, InfoSpace, Microsoft and Yahoo!, Internet infrastructure
software companies and several private mobile Internet portal companies.
Many of our existing competitors as well as potential competitors have
substantially greater financial, technical, marketing and distribution
resources than we do. Several of these companies also have greater name
recognition and more well-established relationships with our target customers.
Furthermore, these competitors may be able to adopt more aggressive pricing
policies and offer more attractive terms to customers than we can. We may face
increasing price pressure from our network operator customers. In addition,
current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to compete
more effectively. Finally, existing and potential competitors may develop
enhancements to, or future generations of, competitive products that will have
better performance features than our products.
Intellectual Property Rights
Our performance depends significantly on our ability to protect our
proprietary rights to the technologies used in our products. If we are not
adequately protected, our competitors could use the intellectual property that
we have developed to enhance their products and services, which could harm our
business. As of August 1999, we had three issued United States patents. We
also had one United States patent application with allowed claims and 73
pending United States patent applications, as well as foreign counterparts
with respect to many of these applications. In addition, we rely on a
combination of copyright and trademark laws, trade secrets, confidentiality
provisions and other contractual provisions to protect our proprietary rights,
but these legal means afford only limited protection. Despite any measures
taken to protect our intellectual property, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information that we
regard as proprietary. In addition, the laws of some foreign countries may not
protect our proprietary rights as fully as do the laws of the United States.
Thus, the measures we are taking to protect our proprietary rights in the
United States and abroad may not be adequate. Finally, our competitors may
independently develop similar technologies.
The telecommunications and Internet software industries are characterized
by the existence of a large number of patents and frequent litigation based on
allegations of patent infringement. As the number of entrants into our market
increases, the possibility of an infringement claim against us grows. For
example, we may be
17
<PAGE>
inadvertently infringing a patent of which we are unaware. In addition, because
patent applications can take many years to issue, there may be a patent
application now pending of which we are unaware, which will cause us to be
infringing when it issues in the future. To address any patent infringement
claims, we may have to enter into royalty or licensing agreements on
disadvantageous commercial terms. A successful claim of product infringement
against us, and our failure to license the infringed or similar technology,
would harm our business. In addition, any infringement claims, with or without
merit, would be time-consuming and expensive to litigate or settle and could
divert management attention from administering our core business.
We rely on a license of encryption technology from RSA Data Security, Inc.
The license from RSA is perpetual unless terminated by either party as the
result of a material breach or insolvency or, at our election, for convenience.
As a member of the WAP Forum, we have agreed to license our intellectual
property to other WAP members on fair and reasonable terms to the extent that
the license is required to develop noninfringing products under the
specifications promulgated by the WAP Forum. Each other member of the WAP Forum
has entered into a reciprocal agreement.
Employees
As of August 31, 1999, we had a total of 233 employees. None of our
employees is covered by any collective bargaining agreements. We believe that
our relations with our employees are good.
Item 2. Properties.
Our principal offices are located in Redwood City, California in two
buildings aggregating 65,000 square feet under a lease expiring in May 2006,
with a renewal option for an additional five-year term. We also lease space for
our offices in London and Tokyo.
Item 3. Legal Proceedings.
We are not currently subject to any material legal proceedings; however, we
may from time to time become a party to various legal proceedings arising in
the ordinary course of our business.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 19, 1999, we held our 1999 annual meeting of stockholders. The
following summarizes the matters submitted to a vote of our stockholders:
1. The election of the following nominees to serve as members of the Board
of Directors:
<TABLE>
<CAPTION>
Nominee In Favor Withheld
- ------- ---------- --------
<S> <C> <C>
Alain Rossmann.............................................. 20,963,836 --
Charles Parrish............................................. 20,963,836 --
Roger Evans................................................. 20,963,836 --
Reed Hundt.................................................. 20,963,836 --
David Kronfeld.............................................. 20,963,836 --
Andrew Verhalen............................................. 20,963,836 --
</TABLE>
2. The amendment of our amended and restated certificate of incorporation to
effect a two-for-three reverse split of our outstanding Common Stock:
<TABLE>
<CAPTION>
In Favor Opposed
-------- -------
<S> <C>
20,940,487......................................................... 23,349
</TABLE>
18
<PAGE>
3. The approval of our amended and restated certificate of incorporation and
amended and restated bylaws, effective upon completion of our initial public
offering
<TABLE>
<CAPTION>
In Favor Opposed
-------- -------
<S> <C>
20,963,836......................................................... --
</TABLE>
4. The amendment of our 1996 Stock Plan to increase the number of shares
reserved for issuance thereunder by 4,250,000 shares and to provide for
automatic annual increases, beginning on July 1, 2000, to the number of shares
reserved for issuance thereunder by the lesser of (a) 1,500,000 shares, (b) 4%
of the total shares outstanding on the last day of the preceding fiscal year,
or (c) such lesser number of shares as is determined by the Board of Directors:
<TABLE>
<CAPTION>
In Favor Opposed
-------- -------
<S> <C>
20,803,421......................................................... 160,415
</TABLE>
5. The adoption of the 1999 Directors' Stock Option Plan and the reservation
of 600,000 shares of Common Stock for issuance thereunder:
<TABLE>
<CAPTION>
In Favor Opposed
-------- -------
<S> <C>
20,386,380......................................................... 577,456
</TABLE>
6. The adoption of the 1999 Employee Stock Purchase Plan and the reservation
of 600,000 shares of Common Stock for issuance thereunder, as well as automatic
annual increases on the first day of each of the fiscal years beginning in
2000, 2001, 2002, 2003 and 2004 equal to the lesser of (a) 500,000 shares or
(b) 1% of the total shares outstanding on the last day of the preceding fiscal
year:
<TABLE>
<CAPTION>
In Favor Opposed
-------- -------
<S> <C>
20,952,674......................................................... 11,162
</TABLE>
7. The ratification of the appointment of KPMG LLP as the Company's
independent auditors for the fiscal years ending June 30, 1999 and June 30,
2000:
<TABLE>
<CAPTION>
In Favor Opposed
-------- -------
<S> <C>
20,936,836......................................................... --
</TABLE>
The above share amounts have been adjusted to reflect our two-for-three
reverse stock split and the conversion of the outstanding Preferred Stock into
Common Stock upon completion of the initial public offering in June 1999.
19
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Price Range of Common Stock
Our Common Stock has been listed for quotation on the Nasdaq National Market
under the symbol "PHCM" since our initial public offering on June 11, 1999. The
following table shows the high and low sales prices of our Common Stock as
reported by the Nasdaq National Market for the period indicated.
<TABLE>
<CAPTION>
1999 High Low
---- -------- ------
<S> <C> <C>
Quarter ended June 30, 1999 (from June 11, 1999)............ $65.5625 $16.00
</TABLE>
The closing sale price of the Common Stock as reported on the Nasdaq
National Market on September 22, 1999 was $160.875 per share. As of that date
there were 146 holders of record of the Common Stock. This does not include the
number of persons whose stock is in nominee or "street name" accounts through
brokers.
The market price of the Common Stock has been and may continue to be subject
to wide fluctuations in response to a number of events and factors, such as
quarterly variations in our operating results, announcements of technological
innovations or new products by us or its competitors, changes in financial
estimates and recommendations by securities analysts, the operating and stock
performance of other companies that investors may deem comparable to us, and
news reports relating to trends in our markets. In addition, the stock market
in recent years has experienced extreme price and volume fluctuations that have
particularly affected the market prices of many high technology and Internet-
related companies that have often been unrelated or disproportionate to the
operating performance of companies. These fluctuations, as well as general
economic and market conditions, may adversely affect the market price for the
Common Stock.
Dividend Policy
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends
in the foreseeable future. In addition, the terms of our current equipment loan
prohibit us from paying dividends without our lender's consent.
Use of Proceeds
On June 10, 1999, in connection with the Company's initial public offering,
a Registration Statement on Form S-1 (No. 333-75219) was declared effective by
the Securities and Exchange Commission, pursuant to which 4,600,000 shares of
the Company's Common Stock were offered and sold for the account of the Company
at a price of $16.00 per share, generating aggregate gross proceeds of $73.6
million. The managing underwriters were Credit Suisse First Boston Corporation,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp
Piper Jaffray Inc. After deducting approximately $6.8 million in underwriting
discounts and other related expenses, the net proceeds of the offering were
approximately $66.8 million. As of June 30, 1999, the Company has not used any
of the net proceeds. The net proceeds of the offering have been invested in
short-term, investment grade, interest bearing securities. The Company intends
to use such proceeds for capital expenditures, and for general corporate
purposes, including working capital to fund anticipated operating losses.
20
<PAGE>
Item 6. Selected Consolidated Financial Data.
The tables that follow present portions of our consolidated financial
statements and are not complete. You should read the following selected
consolidated financial data in conjunction with our consolidated financial
statements and related notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Form 10-K. The consolidated statements of operations data for the years
ended June 30, 1997, 1998 and 1999, and the consolidated balance sheet data as
of June 30, 1998 and 1999 are derived from our consolidated financial
statements that have been audited by KPMG LLP, independent auditors, which are
included elsewhere in this Form 10-K. The consolidated statements of operations
data for the period from December 16, 1994 (inception) to June 30, 1995 and for
the year ended June 30, 1996, and the consolidated balance sheet data as of
June 30, 1995, 1996 and 1997 are derived from audited consolidated financial
statements that are not included in this Form 10-K. The historical results
presented below are not necessarily indicative of the results to be expected
for any future fiscal year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
December 16, Year Ended June 30,
1994 (Inception) ------------------------------------
to June 30, 1995 1996 1997 1998 1999
---------------- ------- ------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
License................ $ -- $ -- $ 80 $ 522 $ 5,229
Maintenance and
support services...... -- -- 212 1,683 5,921
Consulting services.... -- -- -- -- 2,292
------ ------- ------- -------- --------
Total revenues....... -- -- 292 2,205 13,442
------ ------- ------- -------- --------
Cost of revenues:
License................ -- -- 87 95 371
Maintenance and
support services...... -- -- 266 1,063 3,022
Consulting services.... -- -- -- -- 1,146
------ ------- ------- -------- --------
Total cost of
revenues............ -- -- 353 1,158 4,539
------ ------- ------- -------- --------
Gross profit (loss).. -- -- (61) 1,047 8,903
------ ------- ------- -------- --------
Operating expenses:
Research and
development........... 92 1,387 3,959 5,732 13,082
Sales and marketing.... 6 757 3,198 5,011 10,840
General and
administrative........ 5 522 1,237 1,801 4,432
Stock-based
compensation.......... -- -- -- 108 1,011
------ ------- ------- -------- --------
Total operating
expenses............ 103 2,666 8,394 12,652 29,365
------ ------- ------- -------- --------
Operating loss....... (103) (2,666) (8,455) (11,605) (20,462)
Interest income, net.... -- 196 464 982 1,803
------ ------- ------- -------- --------
Loss before income
taxes............... (103) (2,470) (7,991) (10,623) (18,659)
Income taxes............ -- -- -- -- 2,104
------ ------- ------- -------- --------
Net loss............. $ (103) $(2,470) $(7,991) $(10,623) $(20,763)
====== ======= ======= ======== ========
Basic and diluted net
loss per share......... $(0.02) $ (0.53) $ (1.67) $ (2.03) $ (2.98)
====== ======= ======= ======== ========
Shares used in computing
basic and diluted net
loss per share......... 4,671 4,704 4,776 5,221 6,966
====== ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
-------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments............................ $2,300 $5,848 $8,014 $33,464 $113,086
Total assets............................ 2,315 6,767 9,759 39,144 138,933
Equipment loan and capital lease
obligations, less current portion...... -- -- -- 915 498
Total stockholders' equity.............. 2,243 6,464 8,125 28,393 92,292
</TABLE>
21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This section of this Form 10-K includes a number of forward-looking
statements that reflect our current views with respect to future events and
financial performance. We use words such as "anticipates," "believes,"
"expects," "future," and "intends," and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-K.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from historical results or our
predictions. These risks are described in "Risk Factors" and elsewhere in this
Form 10-K.
Overview
We were incorporated in December 1994 and, from inception until June 1996,
our operations consisted primarily of various start-up activities, including
development of technologies central to our business, recruiting personnel and
raising capital. In 1995, we developed our initial technology, which enables
the delivery of Internet-based services to wireless telephones. In 1996, we
introduced and deployed our first products based on this technology. We first
recognized license revenues in August 1996, and generated license revenues of
approximately $80,000, $522,000 and $5.2 million for the fiscal years ended
June 30, 1997, 1998 and 1999, respectively. We incurred net losses of
approximately $8.0 million, $10.6 million and $20.8 million for the fiscal
years ended June 30, 1997, 1998 and 1999, respectively. As of June 30, 1999, we
had an accumulated deficit of approximately $42.0 million.
To provide a worldwide standard for the delivery of Internet-based services
over mass-market wireless telephones, we formed the WAP Forum in close
cooperation with Ericsson, Motorola and Nokia, the world's three largest
manufacturers of wireless telephones. In February 1998, the WAP Forum published
technical specifications for application development and product
interoperability based substantially on Phone.com's technology and on Internet
standards. Leading network operators, telecommunications device and equipment
manufacturers and software companies worldwide have sanctioned the
specifications promulgated by the WAP Forum.
We generate revenues from licenses, maintenance and support services and
consulting services. We receive license revenues from licensing our UP.Link
Server Suite software directly to network operators and indirectly through
value-added resellers. From our inception through June 30, 1999, cumulative
revenues from licensing our UP.Link Server Suite software represented 51% of
total cumulative revenues, inclusive of installation, training and support
services provided to network operators. Maintenance and support services
revenues also include engineering and support services provided to wireless
telephone manufacturers. Cumulative engineering and support services fees from
UP.Browser agreements with wireless telephone manufacturers represented 34% of
our total cumulative revenues from inception through June 30, 1999. Consulting
services revenues are derived from consulting services provided to network
operator customers either directly by us or indirectly through resellers.
In September 1999, we announced MyPhone, our mobile Internet portal
platform. We expect to incur significant additional expenses in developing and
commercializing the MyPhone service, including costs relating to operating the
portal, as well as sales and marketing and research and development expenses.
We expect to incur these costs and expenses in advance of generating revenues
from this service and cannot be certain that our business model for the MyPhone
service will result in significant revenues or profitability.
Our future success depends on our ability to increase revenues from sales of
products and services to new and existing network operator customers. If the
market for Internet-based services via wireless telephones fails to develop or
develops more slowly than expected, then our business would be materially and
adversely affected. In addition, because there is a relatively small number of
network operators worldwide, any failure to sell our products to network
operator customers successfully could result in a shortfall in revenues that
could not be readily offset by other revenue sources. We also anticipate that
network operators may defer commercial launches of services based on our
product and services as they divert their resources and efforts to ensure year
2000 compliance.
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Our business strategy also relies to a significant extent on the widespread
propagation of UP.Browser-enabled telephones through our relationships with
network operators and wireless telephone manufacturers. In order to encourage
adoption of UP.Browser-enabled wireless telephones, we license our UP.Browser
software to wireless telephone manufacturers free of per-unit royalties and
other license fees and provide maintenance and support services for an annual
flat fee. As of September 1999, we had licensed UP.Browser to 25 wireless
telephone manufacturers. As of September 1999, 10 wireless telephone
manufacturer customers had made commercial shipments of telephones with the
UP.Browser embedded. In addition, as of September 1999, we are currently
providing engineering support services in connection with 60 browser
integration projects.
During the year ended June 30, 1998, AT&T Wireless Services, which owned
approximately 2.5% of our common stock as of June 30, 1999, and Matsushita
Communication Industrial accounted for approximately 22% and 18%, respectively,
of our total revenues. For the year ended June 30, 1999, AT&T Wireless Services
accounted for approximately 17% of our total revenues, and DDI Corporation,
which owned approximately 0.6% of our common stock as of June 30, 1999,
accounted for approximately 14% of our total revenues. The foregoing
calculations are based on revenues derived from direct and indirect sales to
these customers.
For agreements entered into prior to July 1, 1998, we recognized revenues in
accordance with the provisions of the American Institute of Certified Public
Accountants' Statement of Position No. 91-1, Software Revenue Recognition.
Effective July 1, 1998, we adopted SOP 97-2, Software Revenue Recognition, as
amended. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair value of the elements.
We license our UP.Link Server Suite products to network operators through
our direct sales force and indirectly through our channel partners. Our license
agreements do not provide for a right of return. Allowances for future
estimated warranty costs are provided at the time revenue is recognized.
Licenses can be purchased on an as-deployed basis or on a prepaid basis. For
licenses purchased on an as-deployed basis, license revenue is recognized as
subscribers are activated to use the services that are based on our UP.Link
Server Suite products. We have no obligation to provide standards-compliant
products once a subscriber has been activated. For licenses purchased on a
prepaid basis, prepaid license fees are recognized under subscription
accounting due to our commitment to provide standards-compliant products for
each license covered by the prepaid arrangement. This subscription revenue is
recognized ratably over the contractual term of the prepaid arrangement (i.e.,
the date the prepaid licenses expire if not used), commencing at the beginning
of the month in which delivery and acceptance occur by the network operator.
The prepaid license period is generally twelve to thirty months. Licenses
expire if not activated prior to the end of the prepaid license term. We
recognize revenues from maintenance and support services provided to network
operators ratably over the term of the agreement, generally one year, and
recognize revenues from consulting services provided to network operators as
the services are performed.
We recognize revenues from UP.Browser agreements with wireless telephone
manufacturers ratably over the period during which the services are performed,
generally one year. We provide our wireless telephone manufacturer customers
with support associated with their efforts to port our UP.Browser software to
their wireless telephones, software error corrections and new releases as they
become commercially available.
Deferred revenue was $36.8 million as of June 30, 1999, comprised of $33.6
million in prepaid fees charged to wireless network operators and $3.2 million
in prepaid maintenance and other service fees charged to wireless telephone
manufacturers. We expect that deferred revenue will decline in the long term as
network operators deploy services based on our products. In particular, we
began recognizing license revenue in the third quarter of fiscal 1999 in
connection with the launch by CEGETEL/SFR of commercial services based on our
products and the acceptance of our products by DDI Corporation. Relating to our
sales to CEGETEL/SFR, we recognized previously deferred license revenues of
$541,000 for the year ended June 30, 1999 and will recognize approximately
$400,000 in each of the quarters ending September 30, 1999, December 31, 1999
and March 31, 2000. With regard to sales to DDI Corporation, we recognized
license revenues of $1.5 million for
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the year ended June 30, 1999, and will recognize approximately $2.4 million in
each of the quarters ending September 30, 1999 and December 31, 1999, and $1.6
million in each of the quarters ending March 31, 2000 through March 31, 2001,
and $1.1 million in the quarter ending June 30, 2001. The revenues recognized
and deferred for DDI Corporation include direct sales and sales through an
indirect channel partner, Itochu Techno Science Corporation. We also began
recognizing license revenue in the fourth quarter of fiscal 1999 in connection
with the launches by two other wireless network operator customers. With
respect to these customers, we recognized license revenue of $441,000 in the
fourth quarter of fiscal 1999, and will recognize substantially all of the
remaining deferred revenue by September 30, 2001.
Under an agreement with AT&T Wireless Services, initially entered into in
May 1996, AT&T Wireless Services prepaid $4.7 million for the right to deploy
up to a fixed number of licenses through December 1999. Due to the early nature
of the commercial deployments of our products by network operators and because
we believed we would assume additional obligations to assist AT&T Wireless
Services in deploying the software licenses if difficulties were encountered
during the deployment, the license portion of the prepaid fee was recognized as
licenses were deployed. Between August 1997 and December 1998, $484,000 was
recognized relating to this prepayment. In connection with an amendment to the
agreement entered into in March 1999, AT&T Wireless Services agreed that we
would not be further obligated to assist them in the deployment of the prepaid
licenses discussed above. Therefore, the remaining deferred revenue of
approximately $4.2 million as of the date of the contract amendment in March
1999 that related to the prepayment is being recognized as revenue ratably over
the remaining contractual term of the prepaid arrangement. Accordingly, we
recognized revenue of $1.9 million for the year ending June 30, 1999 and will
recognize approximately $1.25 million in each of the quarters ending September
30, 1999, and December 31, 1999, associated with the prepayment.
We expect that our gross profit on revenues derived from sales through
indirect channel partners will be less than the gross profit on revenues from
direct sales. Our success, in particular in international markets, depends in
part on our ability to increase sales of our products and services through
value-added resellers and to expand our indirect distribution channels. In
addition, our agreements with our distribution partners generally do not
restrict the sale of products that are competitive with our products and
services, and each of our partners can cease marketing our products and
services at their option.
International sales of products and services accounted for 7%, 44% and 66%
of our total revenues in the years ended June 30, 1997, 1998 and 1999,
respectively. We expect international sales to continue to account for a
significant portion of our revenues, although the percentage of our total
revenues derived from international sales may vary. In particular, a number of
manufacturers have delayed commercial release of WAP-compliant wireless
telephones, particularly affecting European and other markets based on the GSM
standard. Risks inherent in our international business activities, include:
. failure by us and/or third parties to develop localized content and
applications that are used with our products;
. costs of localizing our products for foreign markets;
. difficulties in staffing and managing foreign operations;
. longer accounts receivable collection time;
. political and economic instability;
. fluctuations in foreign currency exchange rates;
. reduced protection of intellectual property rights in some foreign
countries;
. contractual provisions governed by foreign laws;
. export restrictions on encryption and other technologies;
. potentially adverse tax consequences; and
. the burden of complying with complex and changing regulatory
requirements.
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Since early 1997, we have invested substantially in research and
development, marketing, domestic and international sales channels, professional
services and our general and administrative infrastructure. These investments
have significantly increased our operating expenses, contributing to net losses
in each fiscal quarter since our inception. Our limited operating history makes
it difficult to forecast future operating results. Although our revenues have
grown in recent quarters, our revenues may not increase at a rate sufficient to
achieve and maintain profitability, if at all. We anticipate that our operating
expenses will increase substantially in absolute dollars for the foreseeable
future as we expand our product development, sales and marketing, professional
services and administrative staff. Even if we were to achieve profitability in
any period, we may not sustain or increase profitability on a quarterly or
annual basis.
Fiscal Years Ended June 30, 1997, 1998 and 1999
License Revenues
License revenues increased from $80,000 in the fiscal year ended June 30,
1997 to $522,000 in the fiscal year ended June 30, 1998, and $5.2 million in
the fiscal year ended June 30, 1999. The increase in license revenues was due
primarily to the launch of wireless Internet-based services by network
operators. The increase in license revenues in fiscal 1999 was due primarily to
the launch by CEGETEL/SFR, DDI and other network operators of commercial
services based on our products and the satisfaction of our deployment
obligations related to AT&T. License revenues recognized in fiscal 1999 with
respect to these three customers were $709,000, $1.5 million and $1.6 million,
respectively.
Maintenance and Support Services Revenues
Maintenance and support services revenues increased from $212,000 in the
fiscal year ended June 30, 1997 to $1.7 million in the fiscal year ended June
30, 1998, and $5.9 million in the fiscal year ended June 30, 1999. The increase
in maintenance and support services revenues reflects an increase in services
provided to wireless telephone manufacturers and increased installation and
support fees from network operators. Of the increase from fiscal 1998 to fiscal
1999, approximately $3.1 million was attributable primarily to increased demand
for maintenance and engineering support services by wireless telephone
manufacturers, and approximately $1.1 million was attributable to trials of our
UP.Link Server Suite software by wireless network operators.
Consulting Services Revenues
Consulting services revenues were $2.3 million for the fiscal year ended
June 30, 1999. No consulting services were performed in fiscal 1997 or fiscal
1998.
Cost of License Revenues
Cost of license revenues consists primarily of third-party license and
support fees. Cost of license revenues increased from $87,000 in the fiscal
year ended June 30, 1997 to $95,000 in the fiscal year ended June 30, 1998, and
$371,000 in the fiscal year ended June 30, 1999. As a percentage of license
revenues, cost of license revenues in the fiscal years ended June 30, 1997,
1998 and 1999 was 109%, 18% and 7%, respectively. Costs of license revenues in
the fiscal year ended June 30, 1997 included $74,000 attributable to non-
recurring third-party software license and software customization fees. The
decrease as a percentage of license revenues for fiscal 1999 was attributable
primarily to higher license revenues for fiscal 1999 and to the amortization of
fixed maintenance fees relating to third party software licenses. We expect
that cost of license revenues will vary as a percentage of license revenues
from period to period.
Cost of Maintenance and Support Services Revenues
Cost of maintenance and support services revenues consists of compensation
and related overhead costs for personnel engaged in the delivery of
installation, training and support services to network operators and
engineering and support services to wireless telephone manufacturers. The
engineering and support services
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performed for wireless telephone manufacturers include assistance relating to
integrating our UP.Browser software into the manufacturers' wireless
telephones. Cost of maintenance and support services revenues increased from
$266,000 in the fiscal year ended June 30, 1997 to $1.1 million in the fiscal
year ended June 30, 1998, and $3.0 million in the fiscal year ended June 30,
1999. As a percentage of maintenance and support services revenues, cost of
maintenance and support services revenues in the fiscal years ended June 30,
1997, 1998 and 1999 was 125%, 63% and 51%, respectively. The growth in cost of
maintenance and support services revenues was attributable primarily to an
increase in personnel dedicated to support a larger number of wireless
telephone manufacturer customers, which increased costs by approximately $1.1
million from fiscal 1998 to fiscal 1999, and increased staffing in anticipation
of growth in the number of network operator customers, which increased costs by
approximately $824,000 during the same period. Gross profit on maintenance and
support services increased from fiscal 1998 to fiscal 1999 due to the increase
in the number of browser integration assignments for wireless telephone
manufacturers, which had the effect of spreading our costs over a greater
revenue base. In addition, the number of trials in progress by network
operators increased during this period. We anticipate that the cost of
maintenance and support services revenues will increase in absolute dollars in
future operating periods.
Cost of Consulting Services Revenues
Cost of consulting services revenues consists of compensation and
independent consultant costs for personnel engaged in our consulting services
operations and related overhead. We commenced our consulting operations in
fiscal 1999. Cost of consulting services revenues for the fiscal year ended
June 30, 1999 was $1.1 million. No consulting services were performed in fiscal
1997 or fiscal 1998. As a percentage of consulting services revenues, cost of
consulting services revenues for the fiscal year ended June 30, 1999 was 50%.
Gross profit on consulting services revenues is impacted by the mix of company
personnel and independent consultants assigned to projects. The gross profit we
achieve is also impacted by the contractual terms of the consulting assignments
we undertake, and the gross profit on fixed price contracts typically is more
susceptible to fluctuation than contracts performed on a time-and-materials
basis. We anticipate that the cost of consulting services revenues will
increase in absolute dollars as we continue to invest in the growth of our
consulting services operations.
Research and Development Expenses
Research and development expenses consist primarily of compensation and
related costs for research and development personnel. Research and development
expenses increased 45% from $4.0 million in the fiscal year ended June 30, 1997
to $5.7 million in the fiscal year ended June 30, 1998 and increased 128% to
$13.1 million in the fiscal year ended June 30, 1999. The increases were
attributable primarily to the addition of personnel in our research and
development organization associated with product development. We expect to
continue to make substantial investments in research and development and
anticipate that research expenses will continue to increase in absolute
dollars.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of compensation and related
costs for sales and marketing personnel, sales commissions, marketing programs,
public relations, promotional materials, travel expenses and trade show exhibit
expenses. Sales and marketing expenses increased 57% from $3.2 million in the
fiscal year ended June 30, 1997 to $5.0 million in the fiscal year ended June
30, 1998 and increased 116% to $10.8 million in the fiscal year ended June 30,
1999. The increases reflected the addition of personnel in our sales and
marketing organizations, as well as costs associated with increased selling
efforts to develop market awareness of our products and services. We anticipate
that sales and marketing expenses will increase in absolute dollars as we
increase our investment in these areas.
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General and Administrative Expenses
General and administrative expenses consist primarily of salaries and
related expenses, accounting, legal and administrative expenses, professional
service fees and other general corporate expenses. General and administrative
expenses increased 46% from $1.2 million in the fiscal year ended June 30, 1997
to $1.8 million in the fiscal year ended June 30, 1998 and increased 146% to
$4.4 million in the fiscal year ended June 30, 1999. The increases were due
primarily to the addition of personnel performing general and administrative
functions and, to a lesser extent, legal expenses associated with increased
product licensing and patent activity. We expect general and administrative
expenses to increase in absolute dollars as we add personnel and incur
additional expenses related to the anticipated growth of our business and
operation as a public company.
Stock-Based Compensation
Some stock options granted and restricted stock sold during the fiscal years
ended June 30, 1998 and 1999 have been deemed to be compensatory. Total
deferred stock-based compensation associated with these equity arrangements
through June 30, 1999 amounted to $2.4 million related to stock options granted
and restricted stock issued from October 1997 through March 1999. These amounts
are being amortized over the respective vesting periods of these equity
arrangements in a manner consistent with Financial Accounting Standards Board
Interpretation No. 28. Of the total deferred stock-based compensation, $108,000
and $1.0 million was amortized in the fiscal years ended June 30, 1998 and
1999, respectively. We expect amortization of approximately $696,000, $375,000,
$185,000 and $62,000 in the fiscal years ending June 30, 2000, 2001, 2002 and
2003, respectively. We anticipate that we may issue stock options with exercise
prices below the then fair market value, which would increase deferred stock-
based compensation in the future. We recorded no deferred stock based
compensation for the fiscal year ended June 30, 1997.
Interest Income, Net
Net interest income was $464,000, $982,000 and $1.8 million in the fiscal
years ended June 30, 1997, 1998 and 1999, respectively. The year-to-year
increases resulted primarily from earnings on rising cash, cash equivalent and
short-term investment balances as a result of our private placement financings
in February 1998 and March 1999 and our initial public offering in June 1999,
partially offset in the fiscal years ended June 30, 1998 and 1999 by interest
expense related to obligations under capital leases and our equipment loan.
Income Taxes
Income tax expense of $2.1 million for the fiscal year ended June 30, 1999,
consisted of foreign withholding taxes. Since inception, we have incurred net
losses for federal and state tax purposes and have not recognized any tax
provision or benefit. As of June 30, 1999, we had net operating loss
carryforwards of approximately $36.0 million, for both federal and California
income tax purposes. These carryforwards, if not utilized, expire beginning in
the year 2004 through 2019. We also had research and development credit
carryforwards of approximately $400,000 and $303,000 for federal and California
income tax purposes, respectively. We also have a foreign tax credit
carryforward of $2.0 million, which expires in 2004. Federal and California tax
laws impose significant restrictions on the utilization of net operating loss
carryforwards in the event of a shift in our ownership that constitutes an
"ownership change," as defined in Section 382 of the Internal Revenue Code. If
we have an ownership change, the ability to utilize the stated carryforwards
could be significantly reduced. See Note 6 of Notes to Consolidated Financial
Statements.
As of June 30, 1999, we had deferred tax assets of $19.2 million, which were
fully offset by a valuation allowance. Deferred tax assets consist principally
of the federal and state net operating loss carryforwards, capitalized start-up
expenditures, accruals and reserves not currently deductible for tax purposes,
research and development credits and foreign tax credit carryforwards. We have
provided a valuation allowance due to the uncertainty of generating future
profits that would allow for the realization of these deferred tax assets.
Accordingly, no tax benefit was recorded in the accompanying consolidated
statements of operations.
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Liquidity and Capital Resources
Since inception, we have financed our operations through private sales of
convertible preferred stock which totaled $66.0 million in aggregate net
proceeds through March 31, 1999, through our initial public offering in June
1999 which generated net proceeds of $66.8 million, and through an equipment
loan and a capitalized lease, which totaled $922,000 in principal amount
outstanding at June 30, 1999. As of June 30, 1999, we had $79.8 million of cash
and cash equivalents and $33.3 million of short-term investments, and working
capital of $88.3 million.
Net cash used for operating activities was $6.6 million, $5.1 million and
$917,000 for the fiscal years ended June 30, 1997, 1998 and 1999, respectively.
For each of the fiscal years ended June 30, 1997, 1998 and 1999, cash used for
operating activities was attributable primarily to net losses and an increase
in accounts receivable offset in part by depreciation and amortization,
increases in accounts payable and accrued liabilities, and increases in
deferred revenue. For the fiscal year ended June 30, 1999, accounts receivable
increased by approximately $17.8 million. This increase was due to increased
sales to both wireless telephone manufacturers and network operators. To date,
we have had no write-offs of accounts receivable and we have not recorded any
allowance for doubtful accounts. Accrued liabilities increased by approximately
$5.3 million for the fiscal year ended June 30, 1999, which was primarily due
to an increase of $1.3 million in accruals of incentive compensation for sales
personnel reflective of the increased billings of license prepayments from
network operators and increased fees from wireless telephone manufacturers in
the quarter ended June 30, 1999, the accrual of approximately $471,000 of costs
associated with the initial public offering completed in June 1999 and an
increase in accrued consulting costs of approximately $1.0 million. Deferred
revenue increased by approximately $29.8 million for the fiscal year ended June
30, 1999, as a result of increased deferred license prepayments by network
operators of approximately $27.5 million and increased deferred fees from
wireless telephone manufacturers of approximately $2.3 million.
Net cash used for investing activities was $4.8 million, $18.0 million and
$15.2 million for the fiscal years ended June 30, 1997, 1998 and 1999,
respectively. For each of the fiscal years, cash used in investing activities
reflects purchases of property and equipment, with increased purchases of
short-term investments in the fiscal years ended June 30, 1997, 1998 and 1999.
Net cash provided by financing activities was $9.7 million, $31.7 million
and $83.2 million for the fiscal years ended June 30, 1997, 1998 and 1999,
respectively. Cash provided by financing activities in fiscal 1997 and 1998 was
attributable to proceeds from the issuance of preferred stock, and for the
fiscal year ended June 30, 1998, cash provided by financing activities also was
attributable in part to proceeds from our equipment loan. In March 1999 we
completed the sale of 2,458,543 shares of Series E convertible preferred stock
at a purchase price of $7.24 per share, which resulted in net proceeds to us of
approximately $16.7 million. In June 1999, we completed an initial public
offering of 4,600,000 shares of our common stock at a public offering price of
$16.00 per share, which resulted in net proceeds to us of approximately
$66.8 million. All of the outstanding shares of convertible preferred stock
were automatically converted into shares of common stock upon the closing of
the initial public offering in June 1999.
As of June 30, 1999, our principal commitments consisted of obligations
outstanding under operating leases, our equipment loan and capitalized lease
obligations. Although we have no material commitments for capital expenditures,
we expect to increase capital expenditures and lease commitments consistent
with our anticipated growth in operations, infrastructure and personnel. We
also may increase our capital expenditures as we expand into additional
international markets. See Notes 3, 4 and 5 of Notes to Consolidated Financial
Statements.
We believe that our current cash, cash equivalents and short-term
investments, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next twelve months. If cash
generated from operations is insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities or to
obtain a credit facility. If additional funds are raised through the
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issuance of debt securities, these securities could have rights, preferences
and privileges senior to holders of common stock, and the terms of any debt
could impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders, and additional financing may not be available in amounts or on
terms acceptable to us, if at all. If we are unable to obtain this additional
financing, we may be required to reduce the scope of our planned product
development and marketing efforts, which could harm our business, financial
condition and operating results.
Year 2000 Readiness Disclosure
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These systems and
software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. This problem may result in software
failures or the creation of erroneous results.
We have conducted a year 2000 readiness review for the current versions of
our products. The review includes assessment, implementation (including
remediation, upgrading and replacement of some product versions), validation
testing, and contingency planning.We have largely completed all phases of this
plan, except for contingency planning, for the current versions of our
products. As a result, we believe all current versions of our products are
capable of properly distinguishing between 20th and 21st century dates, when
configured and used in accordance with the related documentation, and provided
that the underlying operating system of the host machine and any other software
used with our products are also capable of properly distinguishing between 20th
and 21st century dates. We have not tested all noncurrent versions of our
products and do not intend to do so. However, we have delivered software
releases containing corrections to all identified year 2000 errors in our
UP.Link Server Suite software to our network operator customers with our
software in production and expect that those releases will be implemented by
our customers prior to December 31, 1999.
We are testing software obtained from third parties (licensed software,
shareware, and freeware) that is incorporated into our products, and we have
contacted our vendors to confirm that licensed software is capable of properly
distinguishing between 20th and 21st century dates. We have been informed by
many of our vendors that their products that we use are capable of properly
distinguishing between 20th and 21st century dates. Despite testing by us and
by current and potential customers, and assurances from developers of products
incorporated into our products, our products may contain undetected errors or
defects associated with year 2000 date functions. Known or unknown errors or
defects in our products could result in delay or loss of revenues, diversion of
development resources, damage to our reputation, or increased service and
warranty costs, any of which could materially and adversely affect our
business, operating results or financial condition. Some commentators have
predicted significant litigation regarding year 2000 compliance issues, and we
are aware of lawsuits against other software vendors. Because of the
unprecedented nature of this litigation, it is uncertain whether or to what
extent we may be affected by it.
Our internal systems include our information technology, or IT, non-IT
systems and embedded systems. We have completed an assessment of our material
internal IT, non-IT and embedded systems, including both our own software
products and third-party software and hardware technology. We expect to
complete validation testing of our IT systems and related contingency planning
by October 1999. To the extent that we are not able to test the technology
provided by third-party vendors, we are seeking assurances from vendors that
their systems are year 2000 compliant. We are not currently aware of any
material operational issues associated with preparing our internal IT, non-IT
and embedded systems for the year 2000. However, we may experience material
unanticipated problems or additional costs caused by undetected errors or
defects in the technology used in our internal IT, non-IT and embedded systems.
We do not currently have any information concerning the year 2000 compliance
status of our customers. Our network operator customers face implementation and
support challenges in introducing Internet-based services via wireless
telephones. Historically, network operators have been relatively slow to
implement new complex services, such as Internet-based services, and year 2000
compliance issues could slow adoption or implementation of our products. If our
current or future customers fail to achieve year 2000 compliance or if they
divert technology expenditures, especially technology expenditures that were
earmarked for our products, to address year 2000 compliance problems, our
business could suffer.
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We have funded our year 2000 plan from available cash and have not
separately accounted for these expenses in the past. To date, these expenses
have not been material. Most of our expenses have related to, and are expected
to continue to relate to, the operating costs associated with time spent by
employees and management consultants in the evaluation process and year 2000
compliance matters generally. We expect to incur approximately $500,000 to
verify that our IT, non-IT and embedded systems are capable of properly
distinguishing between 20th century and 21st century dates. In addition, we may
experience material problems and expenses associated with year 2000 compliance
that could adversely affect our business, results of operations, and financial
condition. Finally, we are also subject to external forces that might generally
affect industry and commerce, such as year 2000 compliance failures by utility
or transportation companies and related service interruptions.
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RISK FACTORS
In addition to the other information in this Report, the following factors
should be considered carefully in evaluating the Company's business and
prospects:
Our future profitability is uncertain because we have a limited operating
history.
Because we commenced operations in December 1994 and commercially released
our first products in June 1996, we only have a limited operating history on
which you can base your evaluation of our business. We may not continue to grow
or achieve profitability. We face a number of risks encountered by early stage
companies in the wireless telecommunications and Internet software industries,
including:
. our need for network operators to launch and maintain commercial services
utilizing our products;
. the uncertainty of market acceptance of commercial services utilizing our
products;
. our substantial dependence on products with only limited market
acceptance to date;
. our need to introduce reliable and robust products that meet the
demanding needs of network operators and wireless telephone
manufacturers;
. our need to expand our marketing, sales, consulting and support
organizations, as well as our distribution channels;
. our ability to anticipate and respond to market competition;
. our need to manage expanding operations; and
. our dependence upon key personnel.
Our business strategy may not be successful, and we may not successfully
address these risks. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
We may not achieve or sustain our revenue or profit goals.
Because we expect to continue to incur significant product development,
sales and marketing, and administrative expenses, we will need to generate
significant revenues to become profitable and sustain profitability on a
quarterly or annual basis. We may not achieve or sustain our revenue or profit
goals, and our ability to do so depends on a number of factors outside of our
control, including the extent to which:
. there is market acceptance of commercial services utilizing our products;
. our competitors announce and develop, or lower the prices of, competing
products; and
. our strategic partners dedicate resources to selling our products and
services.
As a result, we may not be able to increase revenue or achieve profitability
on a quarterly or annual basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
Our quarterly operating results are subject to significant fluctuations, and
our stock price may decline if we do not meet expectations of investors and
analysts.
Our quarterly revenues and operating results are difficult to predict and
may fluctuate significantly from quarter to quarter due to a number of factors,
some of which are outside of our control. These factors include, but are not
limited to:
. delays in market acceptance or implementation by our customers of our
products and services;
. changes in demand by our customers for additional products and services;
31
<PAGE>
. our lengthy sales cycle, our concentrated target market and the
potentially substantial effect on total revenues that may result from the
gain or loss of business from each incremental network operator customer;
. introduction of new products or services by us or our competitors;
. delays in developing and introducing new products and services;
. changes in our pricing policies or those of our competitors or customers;
. changes in our mix of domestic and international sales;
. risks inherent in international operations;
. changes in our mix of license, consulting and maintenance and support
services revenues;
. changes in accounting standards, including standards relating to revenue
recognition, business combinations and stock-based compensation; and
. the impact of year 2000 concerns on the timing of capital expenditures by
network operators and their launches of commercial services utilizing our
products and services.
Our sales cycle, which is lengthy--typically between nine and twelve
months--contributes to fluctuations in our quarterly operating results. Many
factors outside our control add to the lengthy education and customer approval
process for our products. For example, many of our prospective customers have
neither budgeted expenses for the provision of Internet-based services to
wireless subscribers nor specifically dedicated personnel for the procurement
and implementation of our products and services. Further, the emerging and
evolving nature of the market for Internet-based services via wireless
telephones may lead prospective customers to postpone their purchasing
decisions. In addition, general concerns regarding year 2000 compliance may
further delay purchase decisions by prospective customers.
Most of our expenses, such as employee compensation and lease payments for
facilities and equipment, are relatively fixed. In addition, our expense levels
are based, in part, on our expectations regarding future revenues. As a result,
any shortfall in revenues relative to our expectations could cause significant
changes in our operating results from quarter to quarter. Due to the foregoing
factors, we believe period to period comparisons of our revenue levels and
operating results are not meaningful. You should not rely on our quarterly
revenues and operating results to predict our future performance.
Our sales cycle is long, and our stock price could decline if sales are delayed
or cancelled.
Quarterly fluctuations in our operating performance are exacerbated by our
sales cycle, which is lengthy, typically between nine and twelve months, and
unpredictable. Because our products represent a significant capital investment
for our customers, we spend a substantial amount of time educating customers
regarding the use and benefits of our products and they in turn spend a
substantial amount of time performing internal reviews and obtaining capital
expenditure approvals before purchasing our products. Any delay in sales of our
products could cause our quarterly operating results to vary significantly from
projected results, which could cause our stock price to decline. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations."
Our success depends on acceptance of our products and services by network
operators and their subscribers.
From inception through June 30, 1999, 34% of our total cumulative revenues
have come from fees paid to us by wireless telephone manufacturers that embed
our browser in their wireless telephones. However, our future success depends
on our ability to increase revenues from sales of our UP.Link Server Suite
software and related services to new and existing network operator customers
and on market acceptance of new products and
32
<PAGE>
services, and we may not be able to achieve widespread adoption by these
customers. This dependence is exacerbated by the relatively small number of
network operators worldwide. To date, we currently have only a limited number
of network operator customers that have implemented and deployed services based
on our products. We cannot assure you that network operators will widely deploy
or aggressively market services based on our products, or that large numbers of
subscribers will use these services. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview."
The market for the delivery of Internet-based services through wireless
telephones is rapidly evolving, and we may not be able to adequately address
this market.
The market for the delivery of Internet-based services through wireless
telephones is rapidly evolving and is characterized by an increasing number of
market entrants that have introduced or developed, or are in the process of
introducing or developing, products that facilitate the delivery of Internet-
based services through wireless telephones. As a result, the life cycle of our
products is difficult to estimate. We may not be able to develop and introduce
new products, services and enhancements that respond to technological changes
or evolving industry standards on a timely basis, in which case our business
would suffer. In addition, we cannot predict the rate of adoption by wireless
subscribers of these services or the price they will be willing to pay for
these services. As a result, it is extremely difficult to predict the pricing
of these services and the future size and growth rate of this market.
Our network operator customers face implementation and support challenges in
introducing Internet-based services via wireless telephones, which may slow
their rate of adoption or implementation of the services our products enable.
Historically, network operators have been relatively slow to implement new
complex services such as Internet-based services. In addition, network
operators may encounter greater customer service demands to support Internet-
based services via wireless telephones than they do for their traditional voice
services. We have limited or no control over the pace at which network
operators implement these new services. The failure of network operators to
introduce and support services utilizing our products in a timely and effective
manner could harm our business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
To date, we have relied on sales to a small number of customers, some of whom
are our stockholders, and the failure to retain these customers or add new
customers may harm our business.
To date, a significant portion of our revenues in any particular period has
been attributable to a limited number of customers, comprised primarily of
network operators and wireless telephone manufacturers, some of whom are our
stockholders. We believe that we will continue to depend upon a limited number
of customers for a significant portion of our revenues for each quarter for the
foreseeable future. Any failure by us to capture a significant share of those
customers could materially harm our business. For example, during the fiscal
year ended June 30, 1998, AT&T Wireless Services, which owned approximately
2.5% of our common stock as of June 30, 1999, and Matsushita Communication
Industrial accounted for approximately 22% and 18%, respectively, of our total
revenues. For the fiscal year ended June 30, 1999, AT&T Wireless Services
accounted for approximately 17% of our total revenues, and DDI Corporation,
which owned approximately 0.6% of our common stock as of June 30, 1999,
accounted for approximately 14% of our total revenues. The foregoing
calculations are based on revenues derived from direct and indirect sales to
these customers.
If wireless telephones are not widely adopted for mobile delivery of Internet-
based services, our business could suffer.
We have focused our efforts on mass-market wireless telephones as the
principal means of delivery of Internet-based services using our products. If
wireless telephones are not widely adopted for mobile delivery of Internet-
based services, our business would suffer materially. Mobile individuals
currently use many competing products, such as portable computers, to remotely
access the Internet and email. These products generally are
33
<PAGE>
designed for the visual presentation of data, while wireless telephones
historically have been limited in this regard. If mobile individuals do not
adopt wireless telephones as a means of accessing Internet-based services, our
business would suffer. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
If widespread integration of browser technology does not occur in wireless
telephones, our business could suffer.
Because our current UP.Link Server Suite software offers enhanced features
and functionality that are not currently covered by the specifications
promulgated by the WAP Forum, subscribers currently must use UP.Browser-enabled
wireless telephones in order to fully utilize these features and functionality.
Additionally, we expect that future versions of our UP.Link Server Suite
software will offer features and functionality that are compatible with the
specifications promulgated by the WAP Forum. Our business could suffer
materially if widespread integration of UP.Browser or WAP-compliant third party
browser software in wireless telephones does not occur. Recently, a number of
manufacturers have delayed commercial release of WAP-compliant wireless
telephones, particularly affecting European and other markets based on the GSM
standard. All of our agreements with wireless telephone manufacturers are
nonexclusive, so they may choose to embed a browser other than ours in their
wireless telephones. We may not succeed in maintaining and developing
relationships with telephone manufacturers, and any arrangements may be
terminated early or not renewed at expiration. In addition, wireless telephone
manufacturers may not produce products using UP.Browser in a timely manner and
in sufficient quantities, if at all. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview."
Our strategy for the MyPhone service is subject to uncertainties, and we may
not be able to achieve market acceptance of the service.
In September 1999, we announced our MyPhone service. The MyPhone service
will be used by network operator customers on a trial basis beginning in late
1999. We intend to offer MyPhone as an OEM service to enable network operators
to create branded mobile Internet portals for their subscribers, and we do not
currently intend to develop our own branded portal site. We have limited
experience in developing mobile Internet portals, and we may not be successful
in executing our business strategy for the MyPhone service. The success of
MyPhone will depend on a number of factors, including the adoption of MyPhone
by network operators, our ability to establish strong relationships with
content and information service providers, our ability to provide compelling
applications and services through MyPhone and the acceptance by wireless
subscribers of the MyPhone service. Developing these capabilities and
commercializing this service will require us to incur significant additional
expenses, including costs relating to operating the portal, as well as sales
and marketing and research and development expenses. We expect to incur these
costs and expenses in advance of generating revenues from this service.
Furthermore, our business model for MyPhone is new and evolving. Even if we are
successful in executing this strategy, we cannot be certain that our business
model for the MyPhone service will result in significant revenues or
profitability.
The market for our products and services is highly competitive.
The market for our products and services is becoming increasingly
competitive. The widespread adoption of open industry standards such as the WAP
specifications may make it easier for new market entrants and existing
competitors to introduce products that compete with our software products. In
addition, a number of our competitors, including Nokia, have announced or are
expected to announce enhanced features and functionality as proprietary
extensions to the WAP protocol. Furthermore, some of our competitors have
introduced or may introduce services based on proprietary wireless protocols
that are not compliant with the WAP specifications.
34
<PAGE>
We expect that we will compete primarily on the basis of price, time to
market, functionality, quality and breadth of product and service offerings.
Our current and potential competitors include the following:
. Wireless equipment manufacturers, such as Ericsson and Nokia;
. Microsoft;
. Wireless Knowledge, a joint venture of Microsoft and Qualcomm;
. Systems integrators, such as CMG plc and APiON Ltd., and software
companies, such as Oracle Corporation;
. Wireless network operators, such as NTT DoCoMo; and
. Providers of Internet software applications and content, electronic
messaging applications and personal information management software
solutions.
In particular, Microsoft Corporation has announced its intention to
introduce products and services that may compete directly with our UP.Link,
UP.Browser and UP.Application products. In addition, Microsoft has announced
that it intends to enable its Windows CE operating system to run on wireless
handheld devices, including wireless telephones, and to develop and market its
own browser for these devices. Many of our existing competitors, as well as
potential competitors, have substantially greater financial, technical,
marketing and distribution resources than we do.
As we enter new markets and introduce new services, such as the MyPhone
service, we will face additional competitors. These competitors may include
telecommunications companies such as Lucent Technologies, traditional Internet
portals such as AOL, InfoSpace, Microsoft and Yahoo!, Internet infrastructure
software companies and several private mobile Internet portal companies. See
"Business--Competition."
Our software products may contain defects or errors, and shipments of our
software may be delayed.
The software we develop is complex and must meet the stringent technical
requirements of our customers. We must develop our products quickly to keep
pace with the rapidly changing Internet software and telecommunications
markets. Software products and services as complex as ours are likely to
contain undetected errors or defects, especially when first introduced or when
new versions are released. We have in the past experienced delays in releasing
some versions of our products until software problems were corrected. Our
products may not be free from errors or defects after commercial shipments have
begun, which could result in the rejection of our products and damage to our
reputation, as well as lost revenues, diverted development resources, and
increased service and warranty costs, any of which could harm our business. See
"Business--Research and Product Development."
We depend on recruiting and retaining key management and technical personnel
with telecommunications and Internet software experience.
Because of the technical nature of our products and the dynamic market in
which we compete, our performance depends on attracting and retaining key
employees. In particular, our future success depends in part on the continued
services of each of our current executive officers. We currently maintain key
person life insurance policies for Alain Rossmann, our Chief Executive Officer,
and Charles Parrish, our Executive Vice President. We are seeking to hire a
Vice President of Worldwide Sales and a general manager of the MyPhone service.
Competition for qualified personnel in the telecommunications and Internet
software industries is intense, and finding qualified personnel with experience
in both industries is even more difficult. We believe that there are only a
limited number of persons with the requisite skills to serve in many key
positions, and it is becoming increasingly difficult to hire and retain these
persons. Competitors and others have in the past, and may in the future,
attempt to recruit our employees. See "Business--Employees."
35
<PAGE>
We may fail to support our anticipated growth in operations.
To succeed in the implementation of our business strategy, we must rapidly
execute our sales strategy and further develop products and expand service
capabilities, while managing anticipated growth by implementing effective
planning and operating processes. If we fail to manage our growth effectively,
our business could suffer materially. To manage anticipated growth, we must:
. continue to implement and improve our operational, financial and
management information systems;
. hire, train and retain additional qualified personnel;
. continue to expand and upgrade core technologies; and
. effectively manage multiple relationships with various network operators,
wireless telephone manufacturers, content providers, applications
developers and other third parties.
Our systems, procedures and controls may not be adequate to support our
operations, and our management may not be able to achieve the rapid execution
necessary to exploit the market for our products and services. See "Business--
Employees."
Our success, particularly in international markets, depends in part on our
ability to maintain and expand our distribution channels.
Our success depends in part on our ability to increase sales of our products
and services through value-added resellers and systems integrators and to
expand our indirect distribution channels. If we are unable to maintain the
relationships that we have with our existing distribution partners, increase
revenues derived from sales through our indirect distribution channels, or
increase the number of distribution partners with whom we have relationships,
then we may not be able to increase our revenues or achieve profitability.
To date, the majority of our revenues from international markets have
resulted from our direct sales efforts. We expect that network operators in
international markets generally will require that our products and support
services be supplied through value-added resellers and systems integrators.
Thus, we expect that a significant portion of international sales will be made
through value-added resellers and systems integrators, and the success of our
international operations will depend on our ability to maintain productive
relationships with value-added resellers and systems integrators.
In addition, our agreements with our distribution partners do not restrict
the sale by them of products and services that are competitive with our
products and services, and each of our partners generally can cease marketing
our products and services at their option and, in some circumstances, with
little notice and with little or no penalty. See "Business--Sales and
Marketing."
We depend on others to provide content and develop applications for wireless
telephones.
In order to increase the value to customers of our product platform and
encourage subscriber demand for Internet-based services via wireless
telephones, we must successfully promote the development of Internet-based
applications and content for this market. If content providers and application
developers fail to create sufficient applications and content for Internet-
based services via wireless telephones, our business could suffer materially.
Our success in motivating content providers and application developers to
create and support content and applications that subscribers find useful and
compelling will depend, in part, on our ability to develop a customer base of
network operators and wireless telephone manufacturers large enough to justify
significant and continued investments in these endeavors. See "Business--
Research and Product Development" and "--Sales and Marketing."
36
<PAGE>
If we are unable to integrate our products with third-party technology, such as
network operators' systems, our business may suffer.
Our products are integrated with network operators' systems and wireless
telephones. If we are unable to integrate our platform products with these
third-party technologies, our business could suffer materially. For example,
if, as a result of technology enhancements or upgrades of these systems or
telephones, we are unable to integrate our products with these systems or
telephones, we could be required to redesign our software products. Moreover,
many network operators use legacy, or custom-made, systems for their general
network management software. Legacy systems are typically very difficult to
integrate with new server software such as our UP.Link Server Suite. We may not
be able to redesign our products or develop redesigned products that achieve
market acceptance. See "Business--Research and Product Development."
An interruption in the supply of software that we license from third parties
could cause a decline in product sales.
We license technology that is incorporated into our products from third
parties, such as RSA Data Security, Inc. and other companies. Any significant
interruption in the supply of any licensed software could cause a decline in
product sales, unless and until we are able to replace the functionality
provided by this licensed software. We also depend on these third parties to
deliver and support reliable products, enhance their current products, develop
new products on a timely and cost-effective basis, and respond to emerging
industry standards and other technological changes. The failure of these third
parties to meet these criteria could materially harm our business. See
"Business--Research and Product Development."
We may be unable to adequately protect our proprietary rights.
Our success depends significantly on our ability to protect our proprietary
rights to the technologies used in our products. If we are not adequately
protected, our competitors could use the intellectual property that we have
developed to enhance their products and services, which could harm our
business. We rely on patent protection, as well as a combination of copyright
and trademark laws, trade secrets, confidentiality provisions and other
contractual provisions, to protect our proprietary rights, but these legal
means afford only limited protection. See "Business--Intellectual Property
Rights."
We may be sued by third parties for infringement of their proprietary rights.
The telecommunications and Internet software industries are characterized by
the existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of entrants into our market increases, the possibility of
an intellectual property claim against us grows. Any intellectual property
claims, with or without merit, could be time-consuming and expensive to
litigate or settle and could divert management attention from administering our
core business. See "Business--Intellectual Property Rights."
International expansion is an important part of our strategy, and this
expansion carries specific risks.
International sales of products and services accounted for 7%, 44% and 66%
of our total revenues in the years ended June 30, 1997, 1998 and 1999,
respectively. We expect international sales to continue to account for a
significant portion of our revenues, although the percentage of our total
revenues derived from international sales may vary. Risks inherent in our
international business activities include business risks, economic and
political risks, and legal risks. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview" and "Business--Sales
and Marketing."
37
<PAGE>
Our year 2000 compliance efforts may involve significant time and expense, and
uncorrected problems could harm our business.
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January
1, 2000, computer systems and software used by many companies in a wide variety
of industries, including technology, transportation, utilities, finance and
telecommunications, will produce erroneous results or fail unless they have
been modified or upgraded to process date information correctly. Year 2000
compliance efforts may involve significant time and expense, and uncorrected
problems could materially and adversely affect our business. We may face claims
based on year 2000 issues arising from the integration of multiple products,
including ours, within an overall system. Network operators may also cease or
delay purchase and installation of new complex systems, such as our server
software products, as a result of, and during, their own internal year 2000
testing. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Readiness Disclosure."
We may acquire technologies or companies in the future, and these acquisitions
could result in the dilution of our stockholders and disruption of our
business.
We may acquire technologies or companies in the future. Entering into an
acquisition entails many risks, any of which could materially harm our
business, including:
. diversion of management's attention from other business concerns;
. failure to assimilate the acquired company with our pre-existing
business;
. potential loss of key employees from either our pre-existing business or
the acquired business;
. dilution of our existing stockholders as a result of issuing equity
securities; and
. assumption of liabilities of the acquired company.
Our stock price, like that of many companies in the Internet and
telecommunications software industries, may be volatile.
We expect that the market price of our common stock will fluctuate as a
result of variations in our quarterly operating results. These fluctuations may
be exaggerated if the trading volume of our common stock is low. In addition,
due to the technology-intensive and emerging nature of our business, the market
price of our common stock may rise and fall in response to:
. announcements of technological or competitive developments;
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant customer or order; and
. changes in estimates of our financial performance or changes in
recommendations by securities analysts.
Our executive officers and directors own a large percentage of our voting stock
and could exert significant influence over matters requiring stockholder
approval.
Our executive officers and directors and their respective affiliates,
currently own approximately 39% of our outstanding common stock, based on
shares outstanding as of June 30, 1999. Accordingly, these stockholders may, as
a practical matter, be able to exert significant influence over matters
requiring approval by our stockholders, including the election of directors and
the approval of mergers or other business combinations. This concentration
could have the effect of delaying or preventing a change in control.
38
<PAGE>
Our certificate of incorporation and bylaws and Delaware law contain provisions
that could discourage a takeover.
Provisions of our certificate of incorporation and bylaws and Delaware law
may discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These provisions include the following:
. establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
. authorizing the board to issue preferred stock;
. prohibiting cumulative voting in the election of directors;
. limiting the persons who may call special meetings of stockholders;
. prohibiting stockholder action by written consent; and
. establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Hedging Instruments
We transact business in various foreign currencies and, accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
To date, the effect of changes in foreign currency exchange rates on revenues
and operating expenses have not been material. Substantially all of our
revenues are earned in U.S. dollars. Operating expenses incurred by our
European and Japanese subsidiaries are denominated primarily in U.K. pounds
sterling and Japanese yen, respectively.
We currently do not use financial instruments to hedge operating expenses in
the U.K. or Japan denominated in their respective local currency. We intend to
assess the need to utilize financial instruments to hedge currency exposures on
an ongoing basis.
We do not use derivative financial instruments for speculative trading
purposes, nor do we currently hedge our foreign currency exposure to offset the
effects of changes in foreign exchange rates.
Fixed Income Investments
Our exposure to market risks for changes in interest rates relates primarily
to corporate debt securities. We place our investments with high credit quality
issuers and, by policy, limit the amount of the credit exposure to any one
issuer.
Our general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. All highly liquid
investments with a maturity of less than three months at the date of purchase
are considered to be cash equivalents; all investments with maturities of three
months or greater are classified as available-for-sale and considered to be
short-term investments.
Item 8. Financial Statements and Supplementary Data.
See Part IV, Item 14 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
39
<PAGE>
PART III
The Company's Proxy Statement for its 1999 Annual Meeting of Stockholders,
which, when filed pursuant to Regulation 14A under the Securities Exchange Act
of 1934, will be incorporated by reference in this Annual Report on Form 10-K
pursuant to General Instruction G(3) of Form 10-K and will provide the
information required under Part III (Items 10, 11, 12 and 13).
40
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements and Report of KPMG LLP, which are set
forth in the Index to Consolidated Financial Statements at page F-1.
(2) Financial Statement Schedules.
Financial statement schedules are omitted because the information is not
required or is shown either in the consolidated financial statements or
notes thereto.
(3) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.3* Amended and Restated Bylaws of the Registrant.
3.5* Amended and Restated Certificate of Incorporation of Registrant.
4.1* Form of the Registrant's Common Stock Certificate.
10.1* Form of Indemnification Agreement.
10.2* 1995 Stock Plan, as amended, and form of stock option agreement and
restricted stock purchase agreement.
10.3* 1996 Stock Plan and form of stock option agreement and restricted
stock purchase agreement.
10.4* 1999 Employee Stock Purchase Plan and form of subscription agreement.
10.5* 1999 Directors' Stock Option Plan and form of stock option agreement.
10.6* Fourth Amended and Restated Investor Rights Agreement dated March 12,
1999.
10.7* Voting Agreement dated January 23, 1998 and amendment thereto.
10.8* Lease Agreement dated March 10, 1998 for offices at 800 Chesapeake by
and between Registrant and Seaport Centre Associates, LLC.
10.9* Form of Change of Control Severance Agreement between the Registrant
and the Registrant's Named Executive Officers.
10.10* Relocation Agreement dated December 23, 1996 between the Registrant
and Charles Parrish.
10.11* Warrant Agreements to Purchase Series C Preferred Stock dated May 29,
1997 and July 17, 1997 by and between the Registrant and Comdisco,
Inc.
10.12* Letter Agreement dated August 18, 1997 with Malcolm Bird.
10.13* Incentive Compensation Plan for Malcolm Bird dated January 27, 1999.
10.14*+ OEM Master License Agreement with RSA Data Security dated December 2,
1996.
10.15* Incentive Compensation Plan for Maurice Jeffery dated March 19, 1999.
10.16*+ Software License and Support Agreement dated as of May 1, 1996, with
AT&T Wireless Services, Inc., as amended.
10.17*+ Client License Agreement dated as of January 1, 1999, with Matsushita
Communication Industrial Co., Ltd.
10.18 First Amendment to Lease Agreement dated June 17, 1999 by and between
Registrant and Seaport Centre Associates, LLC.
21* Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 43).
27.1 Financial Data Schedule.
</TABLE>
41
<PAGE>
- --------
* Incorporated herein by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (Commission File No. 333-75219).
+ Confidential treatment has been granted by the Securities and Exchange
Commission with respect to certain information in these exhibits.
(b) Reports on Form 8-K
None.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: September 24, 1999 PHONE.COM, INC.
/s/ Alan Black
By: _________________________________
Alan Black
Vice President, Finance and
Administration,
Chief Financial Officer and
Treasurer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Alain Rossmann and Alan Black, jointly and
severally, his or her attorneys-in-fact, each with the power of substitution,
for him or her in any and all capacities, to sign any amendments to this Report
on Form 10-K, and to file the same, with exhibits thereto and other documents
in connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his or her
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Alain Rossmann Chairman and Chief Executive September 24, 1999
____________________________________ Officer (Principal
Alain Rossmann Executive Officer)
/s/ Alan Black Vice President, Finance and September 24, 1999
____________________________________ Administration, Chief
Alan Black Financial Officer and
Treasurer (Principal
Financial and Accounting
Officer)
/s/ Roger Evans Director September 24, 1999
____________________________________
Roger Evans
/s/ Charles Parrish Executive Vice President and September 24, 1999
____________________________________ Director
Charles Parrish
/s/ Reed Hundt Director September 24, 1999
____________________________________
Reed Hundt
/s/ David Kronfeld Director September 24, 1999
____________________________________
David Kronfeld
/s/ Andrew Verhalen Director September 24, 1999
____________________________________
Andrew Verhalen
</TABLE>
43
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of June 30, 1998 and 1999................. F-3
Consolidated Statements of Operations for the years ended June 30, 1997,
1998, and 1999.......................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended June
30, 1997, 1998, and 1999................................................ F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1997,
1998, and 1999.......................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Phone.com, Inc.:
We have audited the accompanying consolidated balance sheets of Phone.com,
Inc. and subsidiaries (the Company) as of June 30, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Phone.com,
Inc. and subsidiaries as of June 30, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Mountain View, California
July 19, 1999
F-2
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 12,677 $ 79,803
Short-term investments................................... 20,787 33,283
Accounts receivable...................................... 2,724 20,474
Prepaid expenses and other current assets................ 352 865
-------- --------
Total current assets................................... 36,540 134,425
Property and equipment, net................................ 1,336 3,014
Deposits and other assets.................................. 1,268 1,494
-------- --------
$ 39,144 $138,933
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of equipment loan and capital lease
obligations............................................. $ 424 $ 424
Accounts payable......................................... 532 1,749
Accrued liabilities...................................... 1,877 7,173
Deferred revenue......................................... 7,003 36,797
-------- --------
Total current liabilities.............................. 9,836 46,143
Equipment loan and capital lease obligations, less current
portion................................................... 915 498
-------- --------
Total liabilities...................................... 10,751 46,641
-------- --------
Commitments
Stockholders' equity:
Convertible preferred stock, $0.001 par value; 17,843,550
and 5,000,000 shares authorized as of June 30, 1998 and
1999, respectively; 17,715,627 and no shares issued and
outstanding as of June 30, 1998 and 1999, respectively;
aggregate liquidation preference of $51,299 and $-0- as
of June 30, 1998 and 1999, respectively................. 18 --
Common stock, $0.001 par value; 32,000,000 and
100,000,000 shares authorized as of June 30, 1998 and
1999, respectively; 6,542,398 and 31,667,261 shares
issued and 6,192,398 and 31,213,094 shares outstanding
as of June 30, 1998 and 1999, respectively.............. 6 31
Additional paid-in capital............................... 51,611 136,209
Deferred stock-based compensation........................ (1,786) (1,318)
Treasury stock, 350,000 and 454,167 shares as of June 30,
1998 and 1999, respectively............................. (72) (196)
Notes receivable from stockholders....................... (197) (484)
Accumulated deficit...................................... (21,187) (41,950)
-------- --------
Total stockholders' equity............................. 28,393 92,292
-------- --------
$ 39,144 $138,933
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Revenues:
License........................................ $ 80 $ 522 $ 5,229
Maintenance and support services............... 212 1,683 5,921
Consulting services............................ -- -- 2,292
------- -------- --------
Total revenues............................... 292 2,205 13,442
------- -------- --------
Cost of revenues:
License........................................ 87 95 371
Maintenance and support services............... 266 1,063 3,022
Consulting services............................ -- -- 1,146
------- -------- --------
Total cost of revenues....................... 353 1,158 4,539
------- -------- --------
Gross (loss) profit.......................... (61) 1,047 8,903
------- -------- --------
Operating expenses:
Research and development....................... 3,959 5,732 13,082
Sales and marketing............................ 3,198 5,011 10,840
General and administrative..................... 1,237 1,801 4,432
Stock-based compensation....................... -- 108 1,011
------- -------- --------
Total operating expenses..................... 8,394 12,652 29,365
------- -------- --------
Operating loss............................... (8,455) (11,605) (20,462)
Interest income, net............................. 464 982 1,803
------- -------- --------
Loss before income taxes..................... (7,991) (10,623) (18,659)
Income taxes..................................... -- -- 2,104
------- -------- --------
Net loss..................................... $(7,991) $(10,623) $(20,763)
======= ======== ========
Basic and diluted net loss per share............. $ (1.67) $ (2.03) $ (2.98)
======= ======== ========
Shares used in computing basic and diluted net
loss per share.................................. 4,776 5,221 6,966
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year ended June 30, 1997, 1998, and 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
Convertible Notes
preferred stock Common stock Additional Deferred receivable
------------------- ------------------ paid-in stock-based Treasury from Accumulated
Shares Amount Shares Amount capital compensation stock stockholders deficit
----------- ------ ---------- ------ ---------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
June 30, 1996.... 8,731,984 $ 9 4,743,806 $ 5 $ 9,023 $ -- $ -- $ -- $ (2,573)
Issuance of
common stock to
officers and
employees for
notes
receivable...... -- -- 1,065,000 1 192 -- -- (193) --
Issuance of
common stock to
consultant...... -- -- 10,360 -- 2 -- -- -- --
Stock options
exercised....... -- -- 93,084 -- 9 -- -- -- --
Issuance of
Series C
convertible
preferred stock,
net of $32
issuance costs.. 2,538,766 3 -- -- 9,638 -- -- -- --
Repurchase of
common stock in
settlement of
notes receivable
from
stockholders.... -- -- (200,000) -- -- -- (46) 46 --
Net loss........ -- -- -- -- -- -- -- -- (7,991)
----------- --- ---------- --- -------- ------- ----- ----- --------
Balances as of
June 30, 1997.... 11,270,750 12 5,712,250 6 18,864 -- (46) (147) (10,564)
Issuance of
common stock to
officers and
employees for
notes
receivable...... -- -- 226,667 -- 88 -- -- (88) --
Repayment of
notes receivable
from
stockholders.... -- -- -- -- -- -- -- 12 --
Stock options
exercised....... -- -- 403,481 -- 87 -- -- -- --
Issuance of
Series D
convertible
preferred stock,
net of $2,056
issuance costs.. 6,444,877 6 -- -- 30,678 -- -- -- --
Repurchase of
common stock in
settlement of
notes receivable
from
stockholders.... -- -- (150,000) -- -- -- (26) 26 --
Deferred
compensation
related to stock
option grants... -- -- -- -- 1,894 (1,894) -- -- --
Amortization of
stock-based
compensation.... -- -- -- -- -- 108 -- -- --
Net loss........ -- -- -- -- -- -- -- -- (10,623)
----------- --- ---------- --- -------- ------- ----- ----- --------
Balances as of
June 30, 1998.... 17,715,627 18 6,192,398 6 51,611 (1,786) (72) (197) (21,187)
Issuance of
common stock to
officers and
employees for
notes
receivable...... -- -- 106,667 -- 422 -- -- (422) --
Stock options
exercised....... -- -- 244,026 -- 131 -- -- -- --
Issuance of
Series E
convertible
preferred stock,
net of $1,100
issuance costs.. 2,458,543 2 -- -- 16,698 -- -- -- --
Issuance of
common stock in
initial public
offering, net of
offering costs
of $6,791....... -- -- 4,600,000 5 66,804 -- -- -- --
Conversion of
convertible
preferred stock
into common
stock........... (20,174,170) (20) 20,174,170 20 -- -- -- -- --
Repurchase of
common stock in
settlement of
notes receivable
from
stockholders.... -- -- (104,167) -- -- -- (124) 124 --
Repayment of
notes receivable
from
stockholders.... -- -- -- -- -- -- -- 11 --
Deferred
compensation
related to stock
option grants... -- -- -- -- 543 (543) -- -- --
Amortization of
stock-based
compensation.... -- -- -- -- -- 1,011 -- -- --
Net loss........ -- -- -- -- -- -- -- -- (20,763)
----------- --- ---------- --- -------- ------- ----- ----- --------
Balances as of
June 30, 1999.... -- $-- 31,213,094 $31 $136,209 $(1,318) $(196) $(484) $(41,950)
=========== === ========== === ======== ======= ===== ===== ========
<CAPTION>
Total
stockholders'
equity
--------------
<S> <C> <C>
Balances as of
June 30, 1996.... $ 6,464
Issuance of
common stock to
officers and
employees for
notes
receivable...... --
Issuance of
common stock to
consultant...... 2
Stock options
exercised....... 9
Issuance of
Series C
convertible
preferred stock,
net of $32
issuance costs.. 9,641
Repurchase of
common stock in
settlement of
notes receivable
from
stockholders.... --
Net loss........ (7,991)
--------------
Balances as of
June 30, 1997.... 8,125
Issuance of
common stock to
officers and
employees for
notes
receivable...... --
Repayment of
notes receivable
from
stockholders.... 12
Stock options
exercised....... 87
Issuance of
Series D
convertible
preferred stock,
net of $2,056
issuance costs.. 30,684
Repurchase of
common stock in
settlement of
notes receivable
from
stockholders.... --
Deferred
compensation
related to stock
option grants... --
Amortization of
stock-based
compensation.... 108
Net loss........ (10,623)
--------------
Balances as of
June 30, 1998.... 28,393
Issuance of
common stock to
officers and
employees for
notes
receivable...... --
Stock options
exercised....... 131
Issuance of
Series E
convertible
preferred stock,
net of $1,100
issuance costs.. 16,700
Issuance of
common stock in
initial public
offering, net of
offering costs
of $6,791....... 66,809
Conversion of
convertible
preferred stock
into common
stock........... --
Repurchase of
common stock in
settlement of
notes receivable
from
stockholders.... --
Repayment of
notes receivable
from
stockholders.... 11
Deferred
compensation
related to stock
option grants... --
Amortization of
stock-based
compensation.... 1,011
Net loss........ (20,763)
--------------
Balances as of
June 30, 1999.... $92,292
============== ===
</TABLE>
See acccompanying notes to consolidated financial statements.
F-5
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(7,991) $(10,623) $(20,763)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization................. 447 630 1,017
Amortization of deferred stock-based
compensation................................. -- 108 1,011
Changes in operating assets and liabilities:
Accounts receivable......................... (126) (2,598) (17,750)
Prepaid expenses and other assets........... (233) (427) (739)
Accounts payable............................ 38 319 1,217
Accrued liabilities......................... 462 1,312 5,296
Deferred revenue............................ 831 6,147 29,794
------- -------- --------
Net cash used for operating activities.... (6,572) (5,132) (917)
------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment, net........ (914) (367) (2,695)
Purchases of short-term investments............. (3,924) (32,338) (54,125)
Proceeds from sales and maturities of short-term
investments.................................... -- 15,475 41,629
Other assets.................................... -- (800) --
------- -------- --------
Net cash used for investing activities.... (4,838) (18,030) (15,191)
------- -------- --------
Cash flows from financing activities:
Net proceeds from sale of convertible preferred
stock.......................................... 9,641 30,684 16,700
Issuance of common stock........................ 11 87 66,940
Repayment of notes receivable from
stockholders................................... -- 12 11
Proceeds from equipment loan.................... -- 1,300 --
Repayment of equipment loan and capital lease
obligations.................................... -- (334) (417)
------- -------- --------
Net cash provided by financing
activities............................... 9,652 31,749 83,234
------- -------- --------
Net (decrease) increase in cash and cash
equivalents...................................... (1,758) 8,587 67,126
Cash and cash equivalents at beginning of year.... 5,848 4,090 12,677
------- -------- --------
Cash and cash equivalents at end of year.......... $ 4,090 $ 12,677 $ 79,803
======= ======== ========
Supplemental disclosures of cash flow information:
Property and equipment acquired under capital
lease obligations.............................. $ -- $ 373 $ --
======= ======== ========
Common stock issued to officers and employees
for notes receivable........................... $ 193 $ 88 $ 422
======= ======== ========
Repurchase of common stock in settlement of
notes receivable from stockholders............. $ 46 $ 26 $ 124
======= ======== ========
Deferred stock-based compensation............... $ -- $ 1,894 $ 543
======= ======== ========
Conversion of convertible preferred stock into
common stock................................... $ -- $ -- $ 20
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1998, and 1999
1. Organization and Significant Accounting Policies
(a) Organization
Phone.com, Inc. (the Company) was incorporated in Delaware in 1994 to
develop and market software that enables the delivery of Internet-based
services to mass-market wireless telephones. The Company was formerly known as
Unwired Planet, Inc., but changed its name to Phone.com, Inc. effective April
1999.
(b) Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Phone.com Japan, K.K. and
Phone.com (Europe) Limited. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(c) Revenue Recognition
For agreements entered into prior to July 1, 1998, the Company recognized
revenues in accordance with the provisions of the American Institute of
Certified Public Accountants' Statement of Position (SOP) No. 91-1, Software
Revenue Recognition. Effective July 1, 1998, the Company adopted SOP 97-2,
Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9. SOP 97-2, as
amended, generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
value of the elements.
The Company licenses its UP.Link Server Suite products to network operators
through its direct sales force and indirectly through its channel partners. The
Company's license agreements do not provide for a right of return. Allowances
for future estimated warranty costs are provided at the time revenue is
recognized. Licenses can be purchased on an as-deployed basis or on a prepaid
basis. For licenses purchased on an as-deployed basis, license revenue is
recognized as subscribers are activated to use the services that are based on
the Company's UP.Link Server Suite products. The Company has no obligation to
provide standards-compliant products once a subscriber has been activated. For
licenses purchased on a prepaid basis, prepaid license fees are recognized
under subscription accounting due to the Company's commitment to provide
standards-compliant products for each license covered by the prepaid
arrangement. This subscription revenue is recognized ratably over the
contractual term of the prepaid arrangement (i.e., the date the prepaid
licenses expire if not used), commencing at the beginning of the month delivery
and acceptance occur by the network operator. The prepaid license period is
generally 12 to 30 months. Licenses expire if not activated prior to the end of
the prepaid license term. The Company recognizes revenues from maintenance and
support services provided to network operators ratably over the term of the
agreement, generally one year, and recognizes revenues from consulting services
provided to network operators as the services are performed.
The Company recognizes revenues from UP.Browser agreements with wireless
telephone manufacturers ratably over the period during which the services are
performed, generally one year. The Company provides its wireless telephone
manufacturer customers with support associated with their efforts to port its
UP.Browser software to their wireless telephones, software error corrections,
and new releases as they become commercially available.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
remaining maturities of less than 90 days at the date of purchase. The Company
is exposed to credit risk in the event of default by the
F-7
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1997, 1998, and 1999
financial institutions or the issuers of these investments to the extent of the
amounts recorded on the balance sheet in excess of amounts that are insured by
the FDIC. As of June 30, 1998 and 1999, and cash equivalents consisted
principally of money market funds and commercial paper.
(e) Accounting for Certain Investments in Debt and Equity Securities
The Company classifies its investments in debt securities as available-for-
sale. Available-for-sale securities are carried at fair value, which
approximates amortized cost.
(f) Financial Instruments and Concentration of Credit Risk
The carrying value of the Company's financial instruments, including cash
and cash equivalents, short-term investments, accounts receivable, and
equipment loans approximates fair value. Financial instruments that subject the
Company to concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable.
The Company sells its products and services principally to leading wireless
network operators and prominent wireless telephone manufacturers. Credit risk
is concentrated in North America and Japan. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company has had no write-offs of accounts
receivable and, based on an ongoing evaluation of its accounts receivable
collectibility and customer creditworthiness, has recorded no allowance for
doubtful accounts receivable to date.
(g) Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method
over the estimated useful lives of the respective assets, generally three to
five years. Leasehold improvements are amortized over the shorter of the
estimated useful lives of the assets or the lease term.
(h) Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of any asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(i) Research and Development
Research and development costs are expensed as incurred until technological
feasibility has been established. To date, the Company's software has been
available for general release concurrent with the establishment of
technological feasibility and, accordingly, no development costs have been
capitalized.
(j) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets
F-8
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1997, 1998, and 1999
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(k) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be recovered.
(l) Accounting for Stock-Based Compensation Plans
The Company uses the intrinsic-value method to account for all of its
employee stock-based compensation plans. Expense associated with stock-based
compensation is being amortized on an accelerated basis over the vesting
period of the individual award consistent with the method described in
Financial Accounting Standards Board (FASB) Interpretation No. 28.
(m) Foreign Currency Transactions
The functional currency for the Company's foreign subsidiaries is the U.S.
dollar. Accordingly, such entities remeasure monetary assets and liabilities
at exchange rates in effect as of each reporting date while nonmonetary items
are remeasured at historical rates. Income and expense accounts are remeasured
at the average rates in effect during each such period, except for
depreciation which is remeasured at historical rates. Remeasurement
adjustments and transaction gains and losses are recognized in income in the
period of occurrence and have not been significant to date.
(n) Comprehensive Income
The Company has no material components of other comprehensive income (loss)
for all periods presented.
F-9
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1997, 1998, and 1999
(o) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock excluding shares of restricted stock subject
to repurchase summarized below. Diluted net loss per share is computed using
the weighted-average number of shares of common stock outstanding and, when
dilutive, potential shares of restricted common stock subject to repurchase,
common stock from options, and warrants to purchase common stock using the
treasury stock method and from convertible securities using the "as if
converted" basis. The following potential shares of common stock have been
excluded from the computation of diluted net loss per share for all periods
presented because the effect would have been antidilutive (in thousands):
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Shares issuable under stock options....................... 2,071 2,877 4,751
Shares of restricted stock subject to repurchase.......... 715 670 353
Shares issuable pursuant to warrants to purchase common
stock.................................................... -- 31 31
Shares of convertible preferred stock on an "as if
converted" basis......................................... 11,271 17,716 --
</TABLE>
The weighted-average exercise price of stock options was $0.28, $1.00, and
$6.35 for the years ended June 30, 1997, 1998, and 1999, respectively. The
weighted-average purchase price of restricted stock was $0.26, $0.30, and $0.59
for the years ended June 30, 1997, 1998, and 1999, respectively. The weighted-
average exercise price of warrants was $3.81 for both the fiscal years ended
June 30, 1998 and 1999. In June 1999, all outstanding shares of the Company's
convertible preferred stock were automatically converted into common stock upon
completion of the Company's initial public offering (see Note 4a).
(p) Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133, as amended by SFAS No. 137, establishes accounting and reporting
standards for derivative financial instruments and hedging activities related
to those instruments, as well as other hedging activities. Because the Company
does not currently hold any derivative instruments and does not engage in
hedging activities, the Company expects that the adoption of SFAS No. 133, as
amended, will not have a material impact on its consolidated financial
position, results of operations, or cash flows. The Company will be required to
adopt SFAS No. 133 in fiscal 2001.
2. Balance Sheet Components
(a) Short-Term Investments
All of the Company's investments are considered available-for-sale
securities and consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
---------------
1998 1999
-------- ------
<S> <C> <C>
Commercial paper............................................. $ 13,594 7,982
Corporate bonds.............................................. 9,213 30,299
Certificates of deposit...................................... 7,238 --
-------- ------
$ 30,045 38,281
======== ======
</TABLE>
As of June 30, 1998 and 1999, $9,258,000 and $4,998,000, respectively, of
the Company's investments are included in cash and cash equivalents.
F-10
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1997, 1998, and 1999
All short-term investments as of June 30, 1999, contractually mature within
one year.
(b) Property and Equipment
Property and equipment, consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
--------------
1998 1999
------ ------
<S> <C> <C>
Computer equipment and software.............................. $2,214 4,785
Furniture and equipment...................................... 213 314
Leasehold improvements....................................... 95 118
------ ------
2,522 5,217
Accumulated depreciation and amortization.................... (1,186) (2,203)
------ ------
$1,336 3,014
====== ======
</TABLE>
Equipment under capital leases aggregated $373,000 as of June 30, 1998 and
1999. Accumulated amortization on the assets under capital leases aggregated
$42,000 and $167,000 as of June 30, 1998 and 1999, respectively.
3. Equipment Loan and Capital Lease Obligations
In May 1997, the Company entered into a $2,000,000 credit facility with a
business credit corporation that consisted of a $1,300,000 equipment term loan
and a $700,000 lease line of credit. The equipment loan bears interest at 7.5%,
is collateralized by equipment, and is payable in 42 monthly installments of
$35,000 through January 2001. As of June 30, 1998 and 1999, $1,000,000 and
$712,000, respectively, was outstanding under the term loan. During fiscal
1998, the Company borrowed approximately $400,000 under the lease line of
credit with $339,000 and $210,000 outstanding as of June 30, 1998 and 1999,
respectively, bearing interest at an effective interest rate of 11.8%, and
payable in 42 monthly installments of $11,000 through December 2001. The unused
portion of the lease line of credit expired in July 1998.
As of June 30, 1999, aggregate maturities for the equipment loan and capital
lease obligations for fiscal 2000, 2001, and 2002 are $424,000, $471,000, and
$27,000, respectively.
In conjunction with the equipment loan and lease line of credit, the Company
issued warrants to purchase 20,466 and 11,020 shares, respectively, of the
Company's common stock at an exercise price of $3.81 per share. These warrants
expire in June 2004. The fair value of the warrants issued, calculated using
the Black-Scholes option pricing model, using the following assumptions: no
dividends; contractual life of 10 years; risk-free interest rate of 6.33%;
expected volatility of 60%, was not material.
4. Stockholders' Equity
(a) Initial Public Offering
On June 11, 1999, the Company completed an initial public offering (IPO) of
4,600,000 shares of its common stock at a price of $16.00 per share and
received net proceeds of approximately $66,809,000. At the IPO date, all
outstanding shares of the Company's convertible preferred stock were
automatically converted into common stock on a one-for-one basis.
F-11
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1997, 1998, and 1999
(b) Reverse Stock Split
On June 7, 1999, the Company effected a two-for-three reverse stock split of
its convertible preferred stock and common stock. The accompanying consolidated
financial statements have been retroactively restated to give effect to the
reverse stock split.
(c) Stock Plans
The Company is authorized to issue up to 9,383,887 shares of common stock in
connection with its 1995 and 1996 stock option plans (the Plans) to directors,
employees, and consultants. The Plans provide for the issuance of stock
purchase rights, incentive stock options, or nonstatutory stock options.
The stock purchase rights are subject to a restricted stock purchase
agreement whereby the Company has the right to repurchase the stock upon the
voluntary or involuntary termination of the purchaser's employment with the
Company at the original issuance cost. The Company's repurchase right lapses at
a rate determined by the stock plan administrator, but at a minimum rate of 20%
per year. Through June 30, 1999, the Company has issued 1,381,667 shares under
restricted stock purchase agreements, of which 454,167 shares have been
repurchased and 352,778 are subject to repurchase at a weighted-average price
of $0.59 per share. Certain of these restricted shares were issued to officers
of the Company for full recourse promissory notes with interest rates ranging
from 5.49% to 6.48% and terms of four to five years.
Under the Plans, the exercise price for incentive stock options is at least
100% of the stock's fair value on the date of grant for employees owning less
than 10% of the voting power of all classes of stock, and at least 110% of the
fair value on the date of grant for employees owning more than 10% of the
voting power of all classes of stock. For nonstatutory stock options, the
exercise price is also at least 110% of the fair value on the date of grant for
employees owning more than 10% of the voting power of all classes of stock and
no less than 85% for employees owning less than 10% of the voting power of all
classes of stock.
Under the Plans, options generally expire in 10 years. However, the term of
the options may be limited to 5 years if the optionee owns stock representing
more than 10% of the voting power of all classes of stock. Vesting periods are
determined by the Company's Board of Directors and generally provide for shares
to vest ratably over a 4- to 5-year period.
As of June 30, 1999, there were -0- and 2,936,826 additional shares
available for grant under the 1995 and 1996 stock option plans, respectively.
On March 26, 1999, the Company adopted the 1999 Employee Stock Purchase Plan
(the Purchase Plan) and reserved a total of 600,000 shares of the Company's
common stock for issuance thereunder plus an automatic annual increase for
fiscal 2000 through 2004 equal to the lesser of 500,000 shares or 1% of the
Company's outstanding common stock on the last day of the immediately preceding
fiscal year. The Purchase Plan permits eligible employees to purchase common
stock through payroll deductions at a purchase price of 85% of the lower of the
fair value of the common stock at the beginning or end of each offering period,
generally 24 months in length.
On March 26, 1999, the Company adopted the 1999 Directors Stock Option Plan
(the Directors Plan) and reserved a total of 600,000 shares of the Company's
common stock for issuance thereunder. Each nonemployee director who becomes a
member of the Board of Directors will initially be granted an option for 33,333
shares of the Company's common stock and, thereafter, an option to purchase an
additional 2,500 shares of the
F-12
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1997, 1998, and 1999
Company's common stock quarterly commencing in the fiscal quarter ending
September 30, 2000. Options granted under the Directors Plan vest immediately.
The exercise price of the options granted under the Directors Plan is equal to
the fair value of the Company's common stock on the date of grant.
(d) Stock-Based Compensation
The Company uses the intrinsic-value method in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for any of its stock options granted or restricted stock sold
because the exercise price of each option or purchase price of each share of
restricted stock equaled or exceeded the fair value of the underlying common
stock as of the grant date for each stock option or purchase date of each
restricted stock share, except for stock options granted and restricted stock
sold from October 1997 through March 1999. With respect to the stock options
granted and restricted stock sold from October 1997 to March 1999, the Company
recorded deferred stock compensation of $2,437,000 for the difference at the
grant or issuance date between the exercise price of each stock option granted
or purchase price of each restricted share sold and the fair value of the
underlying common stock. This amount is being amortized on an accelerated basis
over the vesting period, generally four to five years, consistent with the
method described in FASB Interpretation No. 28. Had compensation costs been
determined in accordance with SFAS No. 123 for all of the Company's stock-based
compensation plans, net loss and basic and diluted net loss per share would
have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Net loss:
As reported.................................. $ (7,991) $ (10,623) $ (20,763)
Pro forma.................................... $ (8,003) $ (10,656) $ (22,139)
Basic and diluted net loss per share:
As reported.................................. $ (1.67) $ (2.03) $ (2.98)
Pro forma.................................... $ (1.68) $ (2.04) $ (3.18)
</TABLE>
The fair value of each option was estimated on the date of grant using the
minimum value method prior to the IPO and the Black-Scholes option pricing
model after the IPO, with no expected dividends and the following weighted-
average assumptions:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Expected life............................... 3.84 years 3.23 years 3.17 years
Risk-free interest rate..................... 6.50% 5.55% 5.38%
Volatility.................................. -- -- 54%
</TABLE>
The fair value of purchase rights granted under the Purchase Plan is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for grants in the year ended
June 30, 1999: no expected dividends; expected volatility of 80%; risk-free
interest rate of 5.26%; and expected life of 1.25 years. The weighted-average
fair value of purchase rights granted under the Purchase Plan during 1999 was
$6.24 per share.
F-13
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1997, 1998, and 1999
A summary of the status of the Company's options under the Plans, is as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year....................... 646 $0.11 2,071 $0.28 2,877 $ 1.00
Granted..................... 1,630 0.34 1,422 1.73 2,338 11.89
Forfeited................... (112) 0.26 (213) 0.30 (220) 1.72
Exercised................... (93) 0.13 (403) 0.22 (244) 1.16
----- ----- -----
Outstanding at end of year.. 2,071 0.28 2,877 1.00 4,751 6.35
===== ===== =====
Options exercisable at end
of year.................... 235 0.15 385 0.28 1,009 1.58
===== ===== =====
Weighted-average fair value
of options granted during
the year with exercise
prices equal to fair value
at date of grant........... 0.07 0.06 7.77
Weighted-average fair value
of options granted during
the year with exercise
prices less than fair value
at date of grant........... -- 1.82 0.32
</TABLE>
As of June 30, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options were as follows (number of
options in thousands):
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------- ---------------------
Weighted-
average
remaining Weighted- Weighted-
Range of contractual average Number of average
exercise Number life exercise shares exercise
prices outstanding (years) price exercisable price
----------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.05-0.60 1,614 7.70 $ 0.34 783 $ 0.32
1.20-2.10 64 8.81 1.76 14 1.57
2.48-3.38 1,227 9.14 2.63 78 2.48
7.25 242 9.68 7.25 101 7.25
12.00 281 9.81 12.00 33 12.00
16.00 1,323 9.95 16.00 -- --
----- -----
4,751 8.94 6.35 1,009 1.58
===== =====
</TABLE>
5. Leases
In fiscal 1998, the Company entered into a noncancelable operating lease for
its facilities expiring in June 2005. As of June 30, 1999, the Company has a
letter of credit collateralized by a certificate of deposit in the amount of
$686,000, included in deposits and other assets in the accompanying
consolidated balance sheet as of June 30, 1999, related to the new facility
lease. The Company has an additional noncancelable operating lease for its
previous facility, which expires in April 2001. However, the Company has
entered into a sublease for this facility, which also expires in April 2001.
F-14
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1997, 1998, and 1999
In June 1999, the Company entered into an amendment to its noncancelable
operating lease for its facilities to add additional facilities and extend the
expiration date to May 2006.
Future minimum lease payments under noncancelable operating leases, net of
sublease payments, as of June 30, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Net
Minimum Minimum minimum
Year ending lease sublease lease
June 30, payments payments payments
----------- -------- -------- --------
<S> <C> <C> <C>
2000.............................................. $ 2,736 (722) 2,014
2001.............................................. 2,926 (401) 2,525
2002.............................................. 2,613 -- 2,613
2003.............................................. 2,686 -- 2,686
2004.............................................. 2,758 -- 2,758
Thereafter........................................ 3,599 -- 3,599
-------- ------ ------
$ 17,318 (1,123) 16,195
======== ====== ======
</TABLE>
Rent expense for the years ended June 30, 1997, 1998, and 1999, was
approximately $451,000, $307,000, and $1,212,000, respectively.
6. Income Taxes
The differences between the income tax expense computed at the federal
statutory rate and the Company's tax provision for all periods presented
primarily relate to net operating losses not benefited. Income tax expense for
the year ended June 30, 1999, relates to foreign withholding taxes.
The individual components of the Company's deferred tax assets are as
follows (in thousands):
<TABLE>
<CAPTION>
Years ended June
30,
-----------------
1998 1999
------- --------
<S> <C> <C>
Accruals and reserves not deductible for tax purposes... $ 146 497
Property and equipment.................................. 15 103
Capitalized start-up expenditures for tax purposes...... 406 274
Net operating loss carryovers........................... 7,600 15,598
Research and development credit carryforwards........... 666 702
Foreign tax credit carryforward......................... -- 2,011
------- --------
Total deferred tax assets............................. 8,833 19,185
Valuation allowance..................................... (8,833) (19,185)
------- --------
Net deferred tax assets............................... $ -- --
======= ========
</TABLE>
In light of the Company's recent history of operating losses, the Company
has provided a valuation allowance for all of its deferred tax assets as it is
presently unable to conclude that it is more likely than not that the deferred
tax assets will be realized.
As of June 30, 1999, the Company has a net operating loss carryover for
federal and California income tax purposes of approximately $36,000,000. In
addition, the Company had federal and California research and
F-15
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1997, 1998, and 1999
development credit carryforwards of approximately $400,000 and $303,000,
respectively. The Company's federal net operating loss and research and
development credit carryforwards will expire in the year 2011 through 2019 if
not utilized. The Company's California net operating loss carryforwards will
expire in the year 2004. The state research and development credit can be
carried forward indefinitely. The Company also has a foreign tax credit
carryforward of $2,011,000, which expires in the year 2004.
Federal and California tax laws impose substantial restrictions on the
utilization of net operating loss and tax credit carryforwards in the event of
an "ownership change" as defined in Internal Revenue Code, Section 382. If the
Company has an ownership change, the Company's ability to utilize the above
mentioned carryforwards could be significantly reduced.
7. Geographic, Segment, and Significant Customer Information
During 1999, the Company adopted the provision of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operational decisions and assessments of financial
performance.
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer (CEO). The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information
about revenues by geographic region and by product for purposes of making
operating decisions and assessing financial performance. Therefore, the Company
operates in a single operating segment: software that enables the delivery of
Internet-based services to mass-market wireless telephones and related
services. The disaggregated information reviewed on a product basis by the CEO
is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended June
30,
-------------------
1997 1998 1999
---- ------ -------
<S> <C> <C> <C>
Revenue:
UP.Link Server Suite................................... $ -- $1,335 $ 6,636
UP.Browser............................................. -- 870 4,514
Consulting services.................................... -- -- 2,292
---- ------ -------
$ -- $2,205 $13,442
==== ====== =======
</TABLE>
The Company markets its products primarily from its operations in the United
States. International sales are primarily to customers in Asia Pacific and
Europe. Information regarding the Company's revenues in different geographic
regions is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended June
30,
-------------------
1997 1998 1999
---- ------ -------
<S> <C> <C> <C>
North America............................................ $ -- $1,220 $ 4,515
Europe................................................... -- 513 4,317
Asia Pacific............................................. -- 472 4,610
---- ------ -------
$ -- $2,205 $13,442
==== ====== =======
</TABLE>
F-16
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1997, 1998, and 1999
Significant customer information is as follows:
<TABLE>
<CAPTION>
Percent of total revenue Percent of
-------------------------- total
Years ended June 30, accounts
-------------------------- receivable at
1997 1998 1999 June 30, 1999
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Customer A........... 20% 22% 17% --
Customer B........... -- 18% 6% --
Customer C........... 30% -- -- --
Customer D........... 19% 1% -- --
Customer E........... 10% 2% -- --
Customer F........... -- 2% 10% 2%
</TABLE>
Revenues aggregating 41%, 37%, and 43% of total revenues for the years ended
June 30, 1997, 1998, and 1999, respectively, were generated from customers who
are also stockholders of the Company, and whose ownership percentages ranged
from 0.6% to 3.3% as of June 30, 1999.
F-17
<PAGE>
Exhibit 10.18
FIRST AMENDMENT TO LEASE
------------------------
This First Amendment to Lease (the "Agreement") is made and entered into as
of June 17, 1999 by and between SEAPORT CENTRE ASSOCIATES, LLC, a California
limited liability company ("Landlord") and PHONE.COM, INC., a Delaware
corporation, formerly know as Unwired Planet, Inc. ("Tenant").
Recitals
--------
A. Landlord and Tenant entered into a Lease dated March 10, 1998 (the
"Lease") by which Tenant leases from Landlord Building 15 containing
approximately 40,795 rentable square feet (the "Existing Premises") located at
800 Chesapeake Drive, Redwood City, California in a project known as Seaport
Centre Phase Three (West) (the "Project"). Capitalized terms not otherwise
defined in this Agreement shall have the meaning given them in the Lease.
B. The Term of the Lease is scheduled to expire on May 31, 2006 (the
"Expiration Date").
C. Tenant desires to lease additional space in the Project. Landlord and
Tenant desire to amend the Lease to provide for Tenant to lease Building 16 (the
"Additional Building") containing approximately 24,600 rentable square feet (the
"Additional Space"), located at 600 Chesapeake Drive, Redwood City, California,
subject to the terms and conditions set forth in this Agreement. The
approximate configuration and location of the Additional Space is shown on
Exhibit A attached hereto.
NOW THEREFORE, in consideration of the mutual promises contained herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Leasing of Additional Space. Commencing upon the date of this Agreement,
---------------------------
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the
Additional Space, subject to the different rent commencement dates for
different portions of the Additional Space, as hereinafter provided. Tenant
is considering occupying the Additional Space in phases (the "Phase 1
Space") and (the "Phase 2 Space"). As of the date of this Agreement Tenant
has not made a final decision as to whether Tenant will in fact occupy (x)
different phases of the Additional Space at different times, or (y) the
entire Additional Space at one time. From and after the date of this
Agreement the parties agree that for all purposes under the Lease, the
"Premises" shall contain approximately 65,395 rentable square feet.
2. Term for Additional Space and Possession. If Tenant elects to occupy the
----------------------------------------
Additional Space in phases, then the configuration and location of the
Phase 1 and Phase 2 will
1
<PAGE>
be shown on the Construction Documents (as defined in the Construction
Rider attached as Exhibit B attached hereto). Tenant's obligation to pay
Base Rent and Additional Rent for the Phase 1 Space shall commence on the
Phase 1 Rent Commencement Date (as hereinafter defined), and shall continue
until the Expiration Date. Tenant's obligation to pay Base Rent and
Additional Rent for the for the Phase 2 Space shall commence on the Phase 2
Rent Commencement Date (as hereinafter defined), and shall continue until
the Expiration Date. The "Phase 1 Rent Commencement Date" shall be the date
on which Landlord tenders possession of the Phase 1 Space to Tenant with
all of Landlord's construction obligations, if any, "Substantially
Completed" in the Phase 1 Space, as provided in the Construction Rider
attached as Exhibit B (the "Construction Rider") or, in the event of any
"Tenant Delay," as defined in the Construction Rider, the date on which
Landlord could have done so had there been no such Tenant Delay. The "Phase
2 Rent Commencement Date" shall be the date on which Landlord tenders
possession of the Phase 2 Space to Tenant with all of Landlord's
construction obligations, if any, "Substantially Completed" in the Phase 2
Space, as provided in the Construction Rider or, in the event of any
"Tenant Delay" the date on which Landlord could have done so had there been
no such Tenant Delay. The date Tenant anticipates occupying the Phase 1
Space is on or about September 1, 1999 (the "Scheduled Phase 1 Rent
Commencement Date"). The date Tenant anticipates occupying the Phase 2
Space is on or about October 15, 1999 (the "Scheduled Phase 2 Rent
Commencement Date"). Provided that Tenant delivers the Space Plan and the
Final Construction Documents to Landlord within the times specified in the
Construction Rider, Landlord agrees to use reasonable due diligence to
deliver the Phase 1 Space and the Phase 2 Space to Tenant on the respective
Scheduled Rent Commencement Dates; provided, however, that Landlord shall
not be liable for any claims, damages or liabilities if the Phase 1 Space
and the Phase 2 Space are not ready for occupancy by their respective
Scheduled Rent Commencement Dates. When the Phase 1 Rent Commencement Date
has been established, Landlord and Tenant shall at the request of either
party confirm the Phase 1 Rent Commencement Date in writing. When the Phase
2 Rent Commencement Date has been established, Landlord and Tenant shall at
the request of either party confirm the Phase 2 Rent Commencement Date in
writing.
3. Existing Tenant. The Additional Space has been occupied by an existing
---------------
tenant ("Existing Tenant") which was in holdover beyond the expiration of
its lease. The Existing Tenant has vacated the Additional Space.
4. Base Rent and Additional Rent for the Additional Space. In addition to the
------------------------------------------------------
Base Rent payable by Tenant for the Existing Premises, Tenant shall pay
Base Rent for the Additional Space in accordance with the provisions of the
Lease and this Paragraph 4. Base Rent and Additional Rent for the Phase 1
Space shall commence on the Phase 1 Rent Commencement Date and shall
continue through the Expiration Date. Base Rent and Additional Rent for the
Phase 2 Space shall commence on the Phase 2 Rent Commencement Date and
shall continue through the Expiration Date. The following
2
<PAGE>
is the schedule of Base Rent for the Additional Space, which shall be
payable by Tenant in accordance with the provisions of the Lease:
Months following Phase 1 Monthly Base Rent per
------------------------ ---------------------
Rent Commencement Date: Rentable Square Foot:
----------------------- ---------------------
Months 01 -12: $2.45
Months 13 -24: $2.52
Months 25 -36: $2.60
Months 37 -48: $2.68
Months 49 _60: $2.76
Months 61 -72: $2.84
Months 73 -Expiration Date: $2.93
5. Tenant's Share. Tenant's Share with respect to the Phase 1 Space shall be
---------------
appropriately adjusted on the Phase 1 Rent Commencement Date. Effective on
the Phase 2 Rent Commencement Date, Tenant's Share is hereby changed to be
48.35%.
6. Building Systems in Additional Space. Prior to the Phase 1 Rent
-------------------------------------
Commencement Date Landlord shall (a) deliver the roof of the Additional
Building in good condition, and (b) cause the following systems
(collectively, the "Building Systems") in the Additional Building to be
inspected and placed in good working order and repair: (i) electrical, (ii)
plumbing, and (iii) heating, ventilating and air-conditioning. If, during
the thirty (30) days following the Phase 1 Rent Commencement Date, any of
the Building Systems in the Additional Building cease being in good working
order and repair, and Tenant gives Landlord written notice of such failure
within such thirty (30) days following the Phase 1 Rent Commencement Date,
then Landlord shall cause such Building System to be placed in good working
condition and repair, at no cost to Tenant. Except for any repairs and
maintenance which are the responsibility of Landlord pursuant to the
immediately preceding sentence, Tenant shall be responsible for all repairs
and maintenance of the Building System in the Additional Building commencing
on the thirty-first (31st) day following the Phase 1 Rent Commencement Date.
7. Security Deposit. Upon execution of this Agreement Tenant shall deliver to
-----------------
Landlord a cash Security Deposit in the amount of $60,270.00 to be held by
Landlord in accordance with the provisions of Section 4 of the Lease.
8. Short Term Subleases. Notwithstanding any provision contained in Section
---------------------
14.7 of the Lease to the contrary, Tenant shall have the right, subject to
the other provisions of Section 14 of the Lease, to sublease at any given
time (whether through one or more subleases) up to, but not more than, a
total of seventy-five percent (75%) of the entire Additional Space without
Landlord having the right to terminate the Lease as it relates to the space
proposed to be subleased by Tenant on the conditions that: (a) any such
sublease must be entered into during the three (3) year period following the
3
<PAGE>
Phase 2 Rent Commencement Date, (b) the term of each such sublease shall not
exceed three (3) years, and (c) the term of any such sublease shall expire
on or before the date which is twelve (12) months prior to the Expiration
Date.
9. Letter of Credit. Reference is hereby made to Section 35 of the Lease.
-----------------
Within fifteen (15) days after the date (the "Market Value Deficiency
Date"), if at all, during the Term, that Tenant's market capitalization
(determined by multiplying the then current price of the publicly traded
common stock as of any given date during the Term times the number of common
shares outstanding) is less than $200,000,000.00, in addition to the L/C
held by Landlord under Section 35 of the Lease, Tenant shall deliver to
Landlord, a second L/C ("L/C #2") with a Face Amount equal to the "Amount
Available Under the Letter of Credit" (as defined in the Lease) as of the
Market Value Deficiency Date. If Tenant does not deliver L/C # 2 to Landlord
within fifteen (15) days after the Market Value Deficiency Date, and such
failure continues for ten (10) days after written notice from Landlord to
Tenant, then such failure shall constitute an Event of Default under the
Lease. Landlord shall hold L/C #2 in accordance with the provisions of
Section 35 of the Lease. Subject to the provisions and conditions of Section
35 (c) of the Lease, the amount available to be drawn under L/C #2 shall be
equal to the amount available to be drawn under the L/C called for in
Section 35 (c) of the Lease, as such amount may from time-to-time decrease.
10. Environmental Claims with respect to Additional Space. The Existing Tenant
------------------------------------------------------
has been occupying the Additional Space under permits (the "Environmental
Permits") issued by governmental authorities which allow the Existing
Tenant to use certain Hazardous Materials (the "Existing Tenant's Hazardous
Materials") in the Additional Space. The Environmental Permits require the
Existing Tenant to remove the Existing Tenant's Hazardous Materials from
the Additional Space upon expiration or termination of the Existing
Tenant's lease. The Existing Tenant has been in the process of removing
such Existing Tenant's Hazardous Materials from the Additional Space in
accordance with the Environmental Permits. Landlord shall be responsible,
to the extent required by applicable Law, and without any cost to Tenant,
to remove the Existing Tenant's Hazardous Materials from the Additional
Space to the extent not Handled by Tenant.
11. Monument Sign. Tenant shall have the right, at Tenant's sole cost and
--------------
expense, to install a sign upon the existing monument which is located in
front of the Building, subject to Landlord's reasonable approval, and
subject to ordinances, regulations and any approval from the City of
Redwood City.
12. Broker. Landlord shall pay the fee or commission of the brokers, Cornish &
-------
Carey Commercial, and Wayne Mascia Associates (the "Brokers") in accordance
with Landlord's separate written agreement with the Brokers, if any. Tenant
warrants and represents to Landlord that in the negotiating or making of
this Agreement neither Tenant nor anyone acting on Tenant's behalf has
dealt with any broker or finder who might be entitled to a fee or
commission for this Agreement other than the Brokers.
4
<PAGE>
Tenant shall indemnify and hold Landlord harmless from any claim or claims,
including costs, expenses and attorney's fees incurred by Landlord asserted
by any other broker or finder for a fee or commission based upon any
dealings with or statements made by Tenant or Tenant's Representatives.
13. Ratification of Lease. The Lease, as modified by this Agreement, remains
----------------------
in full force and effect, and Landlord and Tenant ratify the same. This
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns.
If Tenant is a corporation or a partnership, each of the persons executing
this Agreement on behalf of Tenant warrants and represents that Tenant is a duly
authorized and existing entity that Tenant has full right and authority to enter
into this Agreement and that the persons signing on behalf of Tenant are
authorized to do so and have the power to bind Tenant to this Agreement. Tenant
shall provide Landlord, upon request, with evidence reasonably satisfactory to
Landlord confirming the foregoing representations.
Except as herein amended, the Lease remains unchanged and is in full force
and effect in accordance with the terms and provisions contained therein.
This First Amendment is hereby executed and delivered in multiple
counterparts, each of which shall have the force and effect of an original.
<TABLE>
<CAPTION>
TENANT: LANDLORD:
<S> <C>
PHONE.COM, INC., SEAPORT CENTRE ASSOCIATES, LLC
(formerly know as Unwired Planet, Inc.), a California limited liability company
a Delaware corporation
By: CORNERSTONE HOLDINGS, LLC,
a Delaware limited liability company
By: /s/ Phone.com, Inc. Manager
________________________________
Name: _______________________________
Title: _______________________________ By: /s/ Cornerstone Holdings, LLC
_____________________________
Name: _____________________________
Title: _____________________________
By: _______________________________
Name: _______________________________
Title: _______________________________
</TABLE>
5
<PAGE>
EXHIBIT A
---------
ATTACHED TO AND FORMING A PART OF
FIRST AMENDMENT TO LEASE
DATED AS OF JUNE 17, 1999
BETWEEN
SEAPORT CENTRE ASSOCIATES, LLC, AS LANDLORD,
AND
PHONE.COM, INC., AS TENANT ("AGREEMENT")
THE ADDITIONAL SPACE
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[Floor plan showing location
and configuration of Additional Space
to be inserted.]
INITIALS:
Landlord /s/
------
Tenant /s/
------
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EXHIBIT B
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ATTACHED TO AND FORMING A PART OF
FIRST AMENDMENT TO LEASE
DATED AS OF JUNE 17, 1999
BETWEEN
SEAPORT CENTRE ASSOCIATES, LLC, AS LANDLORD,
AND
PHONE.COM, INC., AS TENANT ("AGREEMENT")
CONSTRUCTION RIDER
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1. Tenant Improvements. Landlord shall with reasonable diligence through
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WCP Properties, Inc., dba Commercial Interior Contractors ("CIC") construct and
install in the Additional Space the improvements and fixtures provided for in
this Construction Rider ("Tenant Improvements"). Tenant acknowledges and agrees
that CIC is an affiliate of Landlord. CIC will complete the construction on an
open book basis and will competitively bid the major subcontracts (except for
those trades in which there will be design-build subcontracts). Upon request by
Landlord, Tenant shall designate in writing an individual authorized to act as
Tenant's Representative with respect to all approvals, directions and
authorizations pursuant to this Construction Rider.
1.1. Plans. The Tenant Improvements shall be constructed substantially
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as shown on the conceptual space plan ("Space Plan") for the Additional Space to
be prepared by the Space Planner who has been retained by Tenant as the space
planner for the Additional Space. The Space Planner shall be subject to
Landlord's prior approval, which approval shall not be unreasonably withheld.
Tenant shall cause the Space Planner to deliver the Space Plan to Landlord by
June 28, 1999 for Landlord's approval, which approval shall not be unreasonably
withheld. Landlord shall respond to the Space Plan within five (5) Business Days
after receipt thereof, specifying any changes or modifications Landlord
reasonably requires in the Space Plan. The Space Plan approved by Landlord is
the "Approved Space Plan."
On or before July 28, 1999, Tenant will cause the Space Planner to
prepare and deliver to Landlord and Tenant detailed plans and specifications,
consistent with the Approved Space Plan, sufficient to permit CIC to construct
the Tenant Improvements ("Construction Documents"). Landlord will cause CIC to
provide Tenant with a cost estimate (the "First Cost Estimate") for the work
shown in the Construction Documents (the "First Construction Documents"). Tenant
shall respond to the First Construction Documents and First Cost Estimate within
three (3) Business Days after receipt thereof, specifying in detail any changes
or modifications Tenant desires in the First Construction Documents. Any changes
requested by Tenant to the First Construction Documents must be consistent with
the Approved Space Plan. The Space Planner will then revise the First
Construction Documents and resubmit them (the "Revised
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Construction Documents") to Landlord and Tenant for their approval and Landlord
will cause CIC to provide Tenant with a revised cost estimate (the "Revised Cost
Estimate"). Tenant shall approve the same within three (3) days after receipt.
The Revised Construction Documents and Revised Cost Estimate, as approved by
Tenant and Landlord, are hereinafter referred to as the "Final Construction
Documents" and "Final Cost Estimate," respectively.
Additional interior decorating services and advice on the furnishing and
decoration of the Premises, such as the selection of fixtures, furnishings or
design of mill work, shall be provided by Tenant at its expense, but shall be
subject to the reasonable approval of Landlord.
1.2. Construction. Upon approval by Landlord and Tenant of the Final
------------
Construction Documents and the Final Cost Estimate, Landlord shall cause CIC to
proceed with reasonable diligence to Substantially Complete the Tenant
Improvements. The Tenant Improvements shall be deemed to be "Substantially
Complete" when they have been completed in accordance with the Final
Construction Documents except for finishing details, minor omissions,
decorations and mechanical adjustments of the type normally found on an
architectural "punch list". (The definition of Substantially Complete shall
also define the terms "Substantial Completion" and "Substantially Completed.")
Following Substantial Completion of the Tenant Improvements and before
Tenant takes possession of the Additional Space (or as soon thereafter as may be
reasonably practicable and in any event within 30 days after Substantial
Completion), Landlord and Tenant shall inspect the Additional Space and jointly
prepare a "punch list" of agreed items of construction remaining to be
completed. Landlord shall complete the items set forth in the punch list as
soon as reasonably possible. Tenant shall cooperate with and accommodate
Landlord and Landlord's contractor in completing the items on the punch list.
1.3. Cost of Tenant Improvements. Landlord shall contribute up to
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$20.00 per rentable square foot in the Additional Space toward the cost of the
design (including preparation of space plans and Construction Documents),
construction and installation of the Tenant Improvements in the Additional
Space. The balance, if any, of the cost of the Tenant Improvements ("Additional
Cost"), including, but not limited to, usual markups for overhead, supervision
and profit, shall be paid by Tenant. Other than any construction fee payable to
CIC, Landlord shall not be entitled to any fee for supervision of the
construction of Tenant Improvements in the Additional Space. Tenant shall pay
CIC 50% of the Additional Cost based upon the Final Cost Estimate prior to the
commencement of construction of the Tenant Improvements. The balance of the
actual Additional Cost shall be paid by Tenant to CIC upon Substantial
Completion of the Tenant Improvements, within thirty (30) days after receipt of
Landlord's invoice therefor. Tenant's failure to pay the applicable portions of
the Additional Cost to CIC within three (3) Business Days after written demand
therefor shall constitute an Event of Default under the Lease. Landlord will use
reasonable care in causing CIC to prepare the cost estimates, but they are
estimates only and do not limit Tenant's obligation to pay for the actual
Additional Cost of the Tenant Improvements, whether or not it exceeds the
estimated amounts.
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<PAGE>
1.4. Changes. If Tenant requests any change, addition or alteration in
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or to any Final Construction Documents ("Changes") Landlord shall cause the
Space Planner to prepare additional Plans implementing such Change. Tenant shall
pay the cost of preparing additional Plans. As soon as practicable after the
completion of such additional Construction Documents, Landlord shall notify
Tenant of the estimated cost of the Changes. Within three (3) working days after
receipt of such cost estimate, Tenant shall notify Landlord in writing whether
Tenant approves the Change. If Tenant approves the Change, Landlord shall
proceed with the Change and Tenant shall be liable for any Additional Cost
resulting from the Change. If Tenant fails to approve the Change within such
three (3) day period, construction of the Tenant Improvements shall proceed as
provided in accordance with the original Construction Documents.
1.5. Delays. Tenant shall be responsible for, and shall pay to
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Landlord, any and all costs and expenses incurred by Landlord in connection with
any delay in the commencement or completion of any Tenant Improvements and any
increase in the cost of Tenant Improvements caused by (i) Tenant's failure to
submit Space Plan or the First Construction Documents by the date specified
above, (ii) Tenant's making more than one (1) change to the Space Plan or First
Construction Documents, (iii) Tenant's failure to approve any cost estimates
within the time periods required herein, (iv) any delays in obtaining any items
or materials constituting part of the Tenant Improvements requested by Tenant,
(v) any Changes, or (vi) any other delay requested or caused by Tenant
(collectively, "Tenant Delays").
2. Delivery of Additional Space. Upon Substantial Completion of the Tenant
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Improvements, Landlord shall deliver possession of the Additional Space to
Tenant. If Landlord has not Substantially Completed the Tenant Improvements and
tendered possession of the Additional Space to Tenant on or before the Scheduled
Additional Space Commencement Date specified in the Agreement, or if Landlord is
unable for any other reason to deliver possession of the Additional Space to
Tenant on or before such date, neither Landlord nor its representatives shall be
liable to Tenant for any damage resulting from the delay in completing such
construction obligations and/or delivering possession to Tenant and this
Agreement shall remain in full force and effect unless and until it is
terminated under the express provisions of this Paragraph. If any delays in
Substantially Completing the Tenant Improvements are attributable to Tenant
Delays, then the Additional Space shall be deemed to have been Substantially
Completed and delivered to Tenant on the date on which Landlord could have
Substantially Completed the Additional Space and tendered the Additional Space
to Tenant but for such Tenant Delays.
Notwithstanding the foregoing, if the Phase 2 Commencement Date has not
occurred or been deemed to have occurred within six (6) months after the
Scheduled Phase 2 Commencement Date, Tenant, by written notice to Landlord given
within ten (10) days after the expiration of such six (6) month period, may
terminate this Agreement without any liability to either party; provided,
however, that if the delay in the Phase 2 Commencement Date is caused by delays
of the type described in Section 26 - Force Majeure of the Lease, and if Tenant
elects to terminate as provided above, then Tenant shall reimburse Landlord,
within thirty (30) days after receipt of notification from Landlord of the
amounts due, for any amounts expended or incurred by Landlord for the design,
construction and installation of the Tenant Improvements and for brokerage
commissions
9
<PAGE>
and legal fees in connection with the preparation and negotiation of this
Agreement. If Tenant fails to perform any of Tenant's obligations under this
Construction Rider within the time periods specified herein, Landlord may, in
lieu of terminating this Agreement under the foregoing provisions, treat such
failure of performance as an Event of Default under the Lease.
3. Access to Additional Space. Landlord shall allow Tenant and Tenant's
--------------------------
Representatives to enter the Additional Space prior to the Additional Space
Commencement Date to permit Tenant to make the Additional Space ready for its
use and occupancy; provided, however, that prior to such entry of the Additional
Space, Tenant shall provide evidence reasonably satisfactory to Landlord that
Tenant's insurance, as described in Section 11.1 - Tenant's Insurance of the
Lease, shall be in effect as of the time of such entry. Such permission may be
revoked at any time upon twenty-four (24) hours' notice, and Tenant and its
Representatives shall not interfere with Landlord or Landlord's contractor in
completing the Building or the Tenant Improvements.
Tenant agrees that Landlord shall not be liable in any way for any injury,
loss or damage which may occur to any of Tenant's property placed upon or
installed in the Additional Space prior to the Additional Space Commencement
Date, the same being at Tenant's sole risk, and Tenant shall be liable for all
injury, loss or damage to persons or property arising as a result of such entry
into the Additional Space by Tenant or its Representatives.
4. Ownership of Tenant Improvements. All Tenant Improvements, whether
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installed by Landlord or Tenant, shall become a part of the Premises, shall be
the property of Landlord and, subject to the provisions of the Lease, shall be
surrendered by Tenant with the Premises, without any compensation to Tenant, at
the expiration or termination of the Lease in accordance with the provisions of
the Lease.
INITIALS:
Landlord /s/
------
Tenant /s/
------
10
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Phone.com, Inc.:
We consent to the incorporation by reference in the registration statement
(No. 333-81215) on Form S-8 of Phone.com, Inc. of our report dated July 19,
1999, relating to the consolidated balance sheets of Phone.com, Inc. and
subsidiaries as of June 30, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended June 30, 1999, which report appears in the
June 30, 1999 annual report on Form 10-K of Phone.com.
KPMG LLP
Mountain View, California
September 24, 1999
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