<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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
===============================================================================
PHONE.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3219054
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
800 Chesapeake Drive
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 562-0200
(Registrant's telephone number, including area code)
===============================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No [_]
As of January 31, 2000, there were 68,875,556 shares of the registrant's
Common Stock outstanding.
1
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INDEX
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed consolidated balance sheets at December 31, 1999 and 3
June 30, 1999
Condensed consolidated statements of operations for the three 4
and six month periods ended December 31, 1999 and 1998
Condensed consolidated statements of cash flows for the three 5
and six month periods ended December 31, 1999 and 1998
Notes to condensed consolidated financial statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K. 29
SIGNATURES 30
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHONE.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................................. $ 276,976 $ 79,803
Short-term investments .................................................... 228,543 33,283
Accounts receivable ....................................................... 11,564 20,474
Prepaid expenses and other current assets ................................. 2,703 865
--------- ---------
Total current assets ............................................. 519,786 134,425
Property and equipment, net .................................................... 9,672 3,014
Deposits and other assets ...................................................... 1,789 1,494
Goodwill and intangible assets, net ............................................ 231,852 --
--------- ---------
$ 763,099 $ 138,933
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of equipment loan
and capital lease obligations .......................................... $ 424 $ 424
Accounts payable .......................................................... 3,047 1,749
Accrued liabilities ....................................................... 16,939 7,173
Deferred revenue .......................................................... 46,581 36,797
--------- ---------
Total current liabilities ........................................ 66,991 46,143
Equipment loan and capital lease obligations,
less current portion ........................................................ 272 498
--------- ---------
Total liabilities ................................................ 67,263 46,641
--------- ---------
Stockholders' equity:
Common stock .............................................................. 68 62
Additional paid-in capital ................................................ 772,522 136,178
Deferred stock-based compensation ......................................... (9,183) (1,318)
Treasury stock ............................................................ (196) (196)
Notes receivable from stockholders ........................................ (484) (484)
Accumulated deficit ....................................................... (66,891) (41,950)
--------- ---------
Total stockholders' equity ....................................... 695,836 92,292
--------- ---------
$ 763,099 $ 138,933
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
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PHONE.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License .............................................................. $ 7,656 $ 64 $ 12,918 $ 266
Maintenance and support services ..................................... 3,044 1,327 5,509 2,332
Consulting services .................................................. 2,082 426 2,902 587
-------- -------- -------- --------
Total revenues ................................................. 12,782 1,817 21,329 3,185
-------- -------- -------- --------
Cost of revenues:
License .............................................................. 291 26 519 88
Maintenance and support services ..................................... 2,664 676 4,249 1,109
Consulting services .................................................. 1,207 77 1,744 135
-------- -------- -------- --------
Total cost of revenues ......................................... 4,162 779 6,512 1,332
-------- -------- -------- --------
Gross profit ................................................... 8,620 1,038 14,817 1,853
-------- -------- -------- --------
Operating expenses:
Research and development ............................................. 8,231 2,492 13,700 4,938
Sales and marketing .................................................. 5,615 2,074 10,540 3,875
General and administrative ........................................... 2,775 955 4,713 1,639
Stock-based compensation ............................................. 1,508 255 1,720 504
Amortization of goodwill and
intangible assets ................................................. 13,752 -- 13,752 -
-------- -------- -------- --------
Total operating expenses ....................................... 31,881 5,776 44,425 10,956
-------- -------- -------- --------
Operating loss ................................................. (23,261) (4,738) (29,608) (9,103)
Interest and other income, net ............................................ 4,094 365 5,592 780
-------- -------- -------- --------
Loss before income taxes ....................................... (19,167) (4,373) (24,016) (8,323)
Income taxes .............................................................. 836 -- 925 --
-------- -------- -------- --------
Net loss ....................................................... ($20,003) ($ 4,373) ($24,941) ($ 8,323)
======== ======== ======== ========
Basic and diluted net loss per share ...................................... ($ 0.31) ($ 0.39) ($ 0.39) ($ 0.75)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share ........................................... 65,127 11,234 63,530 11,156
======== ======== ======== ========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
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PHONE.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss .............................................................................. ($ 24,941) ($ 8,323)
Adjustments to reconcile net loss to net cash
(used for) provided by operating activities:
Depreciation and amortization .................................................... 15,448 449
Amortization of deferred stock-based compensation ................................ 1,720 504
Changes in operating assets and liabilities:
Accounts receivable .......................................................... 13,793 633
Prepaid expenses and other assets ............................................ (1,046) (138)
Accounts payable ............................................................. 113 (62)
Accrued liabilities .......................................................... 6,161 987
Deferred revenue ............................................................. 8,482 2,559
--------- ---------
Net cash provided by (used for) operating
activities .............................................................. 19,730 (3,391)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net .............................................. (7,847) (630)
Businesses acquired, net of cash received ............................................. (10,228) --
Purchases of short-term investments ................................................... (211,270) (14,681)
Proceeds from sales and maturities
of short-term investments .......................................................... 16,010 11,085
--------- ---------
Net cash used for investing activities ..................................... (213,335) (4,226)
--------- ---------
Cash flows from financing activities:
Issuance of common stock .............................................................. 391,004 21
Repayment of equipment loan and capital lease
obligations ........................................................................ (226) (203)
--------- ---------
Net cash provided by (used for) financing
activities .............................................................. 390,778 (182)
--------- ---------
Net increase (decrease) in cash and cash equivalents ....................................... 197,173 (7,799)
Cash and cash equivalents at beginning of period ........................................... 79,803 12,677
--------- ---------
Cash and cash equivalents at end of period ................................................. $ 276,976 $ 4,878
========= =========
Supplemental disclosures of cash flow information:
Common stock issued to officers and employees for
notes receivable ................................................................... -- $ 223
========= =========
Deferred stock-based compensation ..................................................... $ 9,585 $ 108
========= =========
Businesses acquired for common stock .................................................. $ 235,761 --
========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
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PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
Company's financial position as of December 31, 1999, and the results of its
operations and cash flows for the three and six month periods ended December 31,
1999 and 1998. These financial statements should be read in conjunction with the
Company's audited financial statements as of June 30, 1999 and 1998 and for each
of the years in the three-year period ended June 30, 1999, including notes
thereto, included in the Company's 1999 Annual Report on Form 10-K. Operating
results for the three and six month periods ended December 31, 1999, are not
necessarily indicative of the results that may be expected for the year ending
June 30, 2000.
On November 15, 1999, the Company completed a two-for-one stock split of its
common stock for stockholders of record as of October 29, 1999. The accompanying
unaudited condensed consolidated financial statements have been retroactively
restated to give effect to the stock split.
NOTE 2 - Revenue Recognition
Effective July 1, 1998, the Company adopted SOP 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and SOP 98-9. SOP 97-2, as amended,
generally requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative fair value of the
elements.
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.
NOTE 3 - Comprehensive Income
The Company has no material components of other comprehensive income (loss)
for all periods presented.
6
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NOTE 4 - Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock excluding shares of restricted stock subject
to repurchase summarized below. Diluted net loss per share is computed using the
weighted-average number of shares of common stock outstanding and, when
dilutive, potential shares of restricted common stock subject to repurchase,
common stock from exercise of options and warrants to purchase common stock,
using the treasury stock method, and from convertible securities on an "as if
converted" basis. The following potential shares of common stock have been
excluded from the computation of diluted net loss per share for all periods
presented because the effect would have been antidilutive (in thousands):
Three and Six Months
Ended
December 31,
---------------------------
1999 1998
---------- -----------
Shares issuable under stock options..... 11,424 6,132
Shares of restricted stock subject
to repurchase...................... 403 1,342
Shares issuable pursuant to
warrants to purchase common stock.. - 62
Shares of convertible preferred
stock on an "as if converted"
basis.............................. - 35,432
The weighted-average exercise price of stock options outstanding was $21.44
and $0.58 as of December 31, 1999 and 1998, respectively. The weighted-average
purchase price of restricted stock subject to repurchase was $0.40 and $0.29 as
of December 31, 1999 and 1998, respectively. The weighted-average exercise price
of outstanding warrants was $1.91 as of December 30, 1998. 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.
NOTE 5 - Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standard
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133, as amended by SFAS No. 137, establishes accounting and reporting
standards for derivative financial instruments 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.
NOTE 6 - Geographic, Segment, and Significant Customer Information
During 1999, the Company adopted the provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operational decisions and assessments of financial
performance.
The Company's chief operating decision maker is considered to be the Company's
Chief Executive Officer (CEO). The CEO reviews financial information presented
on a consolidated basis accompanied by disaggregated information about revenues
by geographic region and by product for purposes of making operating decisions
and assessing financial performance. Therefore, the Company operates in a single
operating segment: software that enables the delivery of Internet-based services
to mass-market wireless telephones and related
7
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services. The disaggregated information reviewed on a product basis by the CEO
is as follows (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
------------------ -------------------
1999 1998 1999 1998
------- ------ --------- --------
Revenue:
UP.Link Server Suite........ $8,121 $ 534 $13,921 $ 958
UP.Browser.................. 2,579 857 4,506 1,640
Consulting services......... 2,082 426 2,902 587
------- ------ ------- ------
Total revenues......... $12,782 $1,817 $21,329 $3,185
======= ====== ======= ======
The Company markets its products primarily from its operations in the United
States. International sales are primarily to customers in Asia Pacific and
Europe. Information regarding the Company's revenues in different geographic
regions is as follows (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
------------------- --------------------
1999 1998 1999 1998
-------- ----- -------- -------
Revenue:
North America........... $ 4,232 $ 708 $6,714 $1,070
Europe.................. 2,628 504 4,524 1,152
Asia Pacific............ 5,922 605 10,091 963
-------- -------- -------- --------
Total revenues........ $12,782 $1,817 $21,329 $3,185
======== ======== ======== ========
Significant customer information is as follows:
<TABLE>
<CAPTION>
% of Total
% of Total Revenue Accounts
------------------------------------------------- Receivable
Three Months Ended Six Months Ended -------------
December 31, December 31, December 31,
-------------------- ----------------------
1999 1998 1999 1998 1999
--------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Customer A 10% 8% 12% 7% 1%
Customer B 23% - 25% 1% 6%
Customer C 6% 10% 7% 6% -
Customer D 2% 12% 2% 14% -
Customer E 9% 10% 6% 8% 1%
Customer F 2% 11% 2% 16% -
</TABLE>
Note 7 - Acquisitions
On October 26, 1999, the Company acquired all of the outstanding capital stock
of APiON Telecom Limited ("APiON") in exchange for 2,393,026 shares of its
common stock. In addition, the Company also agreed to issue cash and common
stock with an aggregate value of up to approximately $14,100,000 to current and
former employees of APiON. APiON is a provider of WAP software products to GSM
network operators in Europe and has expertise in GSM Intelligent Networks,
wireless data and WAP technology. Former employees of APiON will receive
consideration totaling up to approximately $6.5 million of which one third was
paid in cash (approximately $2.2 million) upon the closing of the Company's
secondary offering
8
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in November 1999 and two thirds is payable in common stock of the Company on the
one year anniversary of the closing of the acquisition of APiON and is subject
to forfeiture upon the occurrence of certain events. Current employees of APiON
will receive consideration totaling up to approximately $7.6 million of which
one third was paid in cash upon the closing of the Company's secondary offering
and one third is payable in common stock of the Company on each of the first two
anniversaries of the closing of the acquisition of APiON contingent upon
continued employment. The actual number of Phone.com shares to be issued to
current and former employees of APiON will depend upon the fair value of
Phone.com common stock on the distribution date.
Common stock issued to former shareholders and cash paid to current and former
employees of APiON at the closing of the acquisition was included in the
purchase price. Contingent common stock issuable in the future to former
employees of APiON has been treated as contingent consideration. The then fair
value of the common stock that is issued to the former employees of APiON upon
the satisfaction of certain future events will be added to goodwill and
amortized over the remaining useful life. Common stock issuable in the future to
current employees of APiON has been recorded as deferred stock-based
compensation.
Total consideration given, including direct acquisition costs, aggregated
approximately $245.9 million. The acquisition was accounted for as a purchase
with the results of APiON included from the acquisition date. The excess of the
purchase price over the fair value of tangible net assets acquired amounted to
approximately $243.6 million, with $241.6 million attributable to goodwill, $1.7
million attributable to assembled workforce, $170,000 attributable to developed
technology and $110,000 attributable to in-process research and development. The
in-process research and development has been expensed on the acquisition date,
and the intangible assets are being amortized on a straight-line basis over an
estimated life of 3 years. In connection with the acquisition, the Company
recorded deferred stock-based compensation in the amount of $5.1 million, which
is being amortized on an accelerated basis over the vesting period of 24 months,
consistent with the method described in FASB Interpretation No. 28.
On October 27, 1999, the Company acquired substantially all of the assets of
Angelica Wireless ApS ("Angelica"), including all software technology,
intellectual property and certain customer agreements, and excluding the
assumption of liabilities. Angelica is a developer of WAP software products
complementary to the Company's MyPhone mobile internet portal software, targeted
for customers in Europe. Total consideration paid, including direct acquisition
costs, aggregated $2.0 million. In addition, the Company also agreed to issue
16,000 shares of common stock with an aggregate value of approximately $1.7
million to employees of Angelica, subject to certain forfeiture conditions
dependent on continued employment. The acquisition was accounted for as a
purchase with the results of Angelica included from the acquisition date. The
excess of the purchase price over the fair value of tangible net assets acquired
in the amount of $2.0 million has been attributed to goodwill and is being
amortized on a straight-line basis over an estimated life of 3 years. In
connection with the acquisition, the Company recorded deferred stock-based
compensation in the amount of $1.7 million, which is being amortized on an
accelerated basis over the vesting period of 36 months, consistent with the
method described in FASB Interpretation No. 28.
The following summary, prepared on an unaudited pro forma basis, reflects the
condensed consolidated results of operations for the three and six month periods
ended December 31, 1999 and 1998 assuming APiON and Angelica had been acquired
on July 1, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -------------------------
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues................................................. $12,964 $1,858 $22,076 $3,281
Net loss attributable to common stockholders............. ($26,314) ($26,442) ($53,424) ($52,414)
Basic and diluted net loss per share..................... ($0.40) ($1.94) ($0.82) ($3.86)
Shares used in pro forma per share computation........... 65,859 13,643 65,101 13,565
</TABLE>
9
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On December 21, 1999, the Company signed a definitive agreement to acquire
AtMotion Inc. ("AtMotion"), an emerging provider of Voice Portal technology. In
connection with the acquisition, which was completed on February 8, 2000, the
Company agreed to a valuation for AtMotion of $286 million, to be associated
with the issuance of up to approximately 2,348,000 shares of the Company's
common stock in exchange for all of the outstanding common stock and preferred
stock of AtMotion, and the assumption of options and warrants. The stock-for-
stock transaction will be accounted for using purchase accounting and is subject
to customary closing conditions.
Note 8 - Subsequent Event
On February 8, 2000, the Company signed a definitive agreement to acquire
Paragon Software Ltd ("Paragon"), a leading provider of synchronization
technology allowing PC-based personal information to be easily transferred to
mobile devices. In connection with the acquisition, Paragon's shareholders will
receive approximately 3.6 million shares of Phone.com common stock, cash
payments totaling $7.5 million, and the Company will assume outstanding stock
options, with total consideration valued at approximately $500 million. The
stock-for-stock transaction will be accounted for using purchase accounting and
closing is anticipated to occur in the first calendar quarter of 2000. The
acquisition is subject to customary closing conditions.
10
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions identify such forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
expressed or forecasted. Factors that might cause such a difference include, but
are not limited to, those discussed in the section entitled "Factors That May
Affect Future Results" and those appearing elsewhere in this Form 10-Q. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The Company
assumes no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting such forward-
looking statements.
Overview
We were incorporated in December 1994 and, from inception until June 1996, our
operations consisted primarily of various start-up activities, including
development of technologies central to our business, recruiting personnel and
raising capital. In 1995, we developed our initial technology, which enables the
delivery of Internet-based services to wireless telephones. In 1996, we
introduced and deployed our first products based on this technology. We first
recognized license revenues in August 1996, and generated license revenues of
approximately $80,000, $522,000 and $5.2 million for the fiscal years ended June
30, 1997, 1998 and 1999, respectively, and $12.9 million for the six months
ended December 31, 1999. We incurred net losses of approximately $24.9 million
for the six months ended December 31, 1999 and $8.0 million, $10.6 million and
$20.8 million for the fiscal years ended June 30, 1997, 1998 and 1999,
respectively. As of December 31, 1999, we had an accumulated deficit of
approximately $66.9 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 primarily from licensing our
UP.Link Server Suite software directly to network operators and indirectly
through value-added resellers. From our inception through December 31, 1999,
cumulative revenues from licensing our UP.Link Server Suite software represented
59% 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 and
licensing fees from UP.Browser agreements with wireless telephone manufacturers
represented 27% of our total cumulative revenues from inception through December
31, 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 introduced MyPhone, our mobile Internet portal platform.
We continue to 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.
In October 1999, we completed the acquisition of the outstanding share capital
of APiON Telecoms Ltd. ("APiON"), a company based in Belfast, Northern Ireland.
APiON is a provider of WAP software products to GSM network operators in Europe
and has expertise in GSM Intelligent Networks, wireless data and WAP technology.
In connection with this transaction, we acquired all of the outstanding shares
of capital stock of APiON in
11
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exchange for an aggregate of approximately 2,393,026 shares of our common stock.
A portion of these shares are held in escrow for a period of one year to
indemnify us against potential liabilities of APiON and its former shareholders.
In addition, we also agreed to issue cash and common stock to current and
former employees of APiON. Current employees of APiON received cash in the
aggregate amount of approximately $2.5 million, less applicable withholdings for
taxes and insurance, upon the closing of the Company's secondary offering in
November 1999, and will receive shares of common stock equal in value to
approximately $2.5 million, less applicable withholdings for taxes and
insurance, on each of the first two anniversaries of the closing of the APiON
acquisition, subject to their continued employment. Former employees of APiON
who were engaged in APiON's services business, which we did not acquire in the
transaction, received cash in the aggregate amount of approximately $2.2
million, less applicable withholdings for taxes and insurance, upon the closing
of the Company's secondary offering in November 1999, and will receive shares of
common stock equal in value to approximately $4.3 million, less applicable
withholdings for taxes and insurance, on the anniversary of the closing of the
APiON acquisition, subject to forfeiture upon the occurrence of certain events.
In connection with the APiON acquisition, we recorded goodwill and other
intangible assets of approximately $243.6 million and deferred stock-based
compensation of approximately $5.1 million, to be amortized over a three-year
period and a two-year period, respectively, which will significantly increase
our net loss for the foreseeable future. We also recorded expense of $110,000
relating to in-process research and development in connection with the
acquisition. In addition, we expect that operating expenses will increase as a
result of the acquisition, due primarily to the additional personnel and the
costs of operating a European subsidiary. For example, as a result of the
addition of APiON's technical, sales and customer engineering personnel, we
expect that research and development expenses and sales and marketing expenses
may increase by as much as $5 million in the aggregate for the fiscal year ended
June 30, 2000.
In October 1999 we also acquired substantially all of the assets of Angelica
Wireless ApS ("Angelica"), including all software technology, intellectual
property and certain customer agreements, and excluding the assumption of
liabilities. Angelica is a developer of WAP software products targeted for
customers in Europe which are complementary to our MyPhone mobile internet
portal software. Total consideration paid, including direct acquisition costs,
aggregated $2.0 million. In addition, we also agreed to issue 16,000 shares of
common stock with an aggregate value of approximately $1.7 million to employees
of Angelica, subject to certain forfeiture conditions dependent on continued
employment. The acquisition was accounted for as a purchase with the results of
Angelica included from the acquisition date. The excess of the purchase price
over the fair value of tangible net assets acquired in the amount of $2.0
million has been attributed to goodwill and is being amortized on a straight-
line basis over 3 years. In connection with the acquisition, the Company
recorded deferred stock-based compensation in the amount of $1.7 million, which
is being amortized on an accelerated basis over the vesting period of 36 months,
consistent with the method described in FASB Interpretation No. 28.
On December 21, 1999, we signed a definitive agreement to acquire AtMotion
Inc. ("AtMotion"), an emerging provider of Voice Portal technology. Our
intention is to integrate AtMotion's technology to voice-enable both our MyPhone
mobile portal and our UP.Link Server Suite. In connection with the acquisition,
which was completed February 8, 2000, we agreed to a valuation for AtMotion of
$286 million, to be associated with the issuance of up to approximately
2,348,000 shares of the Company's common stock in exchange for all of the
outstanding common stock and preferred stock of AtMotion, and the assumption of
options and warrants. The stock-for-stock transaction will be accounted for
using purchase accounting and is subject to customary closing conditions.
Amortization of goodwill and other intangible assets is expected to
significantly increase our net loss for the foreseeable future. We expect to
incur significant additional expenses in developing, integrating and
commercializing the acquired technology, as well as sales and marketing and
research and development expenses. We expect to incur these costs and expenses
in advance of generating revenues and cannot be certain that our business model
for the incorporation of the AtMotion technology will result in significant
revenues or profitability.
On February 8, 2000, we signed a definitive agreement to acquire Paragon
Software Ltd ("Paragon"), a leading provider of synchronization technology
allowing PC-based personal information to be easily transferred to mobile
devices. We plan to extend the Paragon technology to WAP-based over-the-air
synchronization to meet phone users needs for touch-of-a-button information
management between the mobile phone, PC applications, and Internet
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information services, whether or not the phone users are on-line. In connection
with the acquisition, Paragon's shareholders will receive approximately 3.6
million shares of Phone.com common stock, cash payments totaling $7.5 million,
and we will assume outstanding stock options, with total consideration valued at
approximately $500 million. The stock-for-stock transaction will be accounted
for using purchase accounting and closing is anticipated to occur in the first
calendar quarter of 2000. The acquisition is subject to customary closing
conditions. Amortization of goodwill and other intangible assets is expected to
significantly increase our net loss for the foreseeable future. We expect to
incur significant additional expenses in developing, integrating and
commercializing the acquired technology, as well as sales and marketing and
research and development expenses. We expect to incur these costs and expenses
in advance of generating revenues and cannot be certain that our business model
for the incorporation of the Paragon technology 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.
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.
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 $46.6 million as of December 31, 1999, comprised of $41.1
million in prepaid fees charged to wireless network operators and $5.5 million
in prepaid maintenance and other service fees charged to wireless telephone
manufacturers. Although deferred revenues increased from $38.4 million as of
September 30, 1999, largely as a result of contractual billings of approximately
$7.9 million attributable to DDI Corporation, we expect that deferred revenue
will decline in the long term as network operators deploy services based on our
products. Deferred revenues relating to prepayments by wireless network
operators as of December 31, 1999 in the amount of approximately $17 million
will be recognized over the next fifteen months. The remainder of deferred
revenues
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relating to wireless network operators will generally be recognized over the
next twelve to thirty months.
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 67% and 61% of our
total revenues for the quarters ended December 31, 1999 and 1998, 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.
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.
RESULTS OF OPERATIONS
License Revenues
License revenues increased from $64,000 for the three months ended December
31, 1998 to $7.7 million for the three months ended December 31, 1999, and
increased from $266,000 for the six months ended December 31, 1998 to $12.9
million for the six months ended December 31, 1999. The increase in license
revenues was primarily due to the recognition of revenues associated with the
licensing of our products to AT&T Wireless Services and Sprint in the United
States, DDI and IDO in Japan, Shinsegi Telecom in Korea, Cegetel/SFR in France
and Omnitel in Italy.
Maintenance and Support Services Revenues
Maintenance and support services revenues increased from $1.3 million for the
three months ended December 31, 1998 to $3.0 million for the three months ended
December 31, 1999, and increased from $2.3 million for the six months ended
December 31, 1998 to $5.5 million for the six months ended December 31, 1999.
The increase in maintenance and support services revenues was attributable
primarily to increased demand for maintenance and engineering support services
by an increased number of wireless telephone manufacturers,
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and to a lesser extent from increased maintenance and support services provided
to wireless network operators.
Consulting Services Revenues
Consulting services revenues increased from $426,000 for the three months
ended December 31, 1998 to $2.1 million for the three months ended December 31,
1999, and increased from $587,000 for the six months ended December 31, 1998 to
$2.9 million for the six months ended December 31, 1999. The quarter ended
September 30, 1998 was the first period in which we recognized consulting
services revenue. The increase in consulting services revenue was primarily due
to the increased number of wireless network operators who have licensed our
technology and engaged us to perform integration services relating to their
commercial launches of our technology.
Cost of License Revenues
Cost of license revenues consists primarily of third-party license and support
fees. Cost of license revenues increased from $26,000 for the three months ended
December 31, 1998 to $291,000 for the three months ended December 31, 1999, and
increased from $88,000 for the six months ended December 31, 1998 to $519,000
for the six months ended December 31, 1999. The growth in cost of license
revenues was attributable primarily to the increase in license revenues. As a
percentage of license revenues, cost of license revenues for the three months
ended December 31, 1998 and 1999 was 41% and 4%, respectively. Cost of license
revenues as a percentage of license revenues for the six months ended December
31, 1998 and 1999 was 33% and 4%, respectively. The decrease as a percentage of
license revenues was attributable primarily to higher license revenues for the
three and six months ended December 31, 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 performed for wireless telephone manufacturers includes assistance
relating to integrating our UP.Browser software into the manufacturers' wireless
telephones. Cost of maintenance and support services revenues increased from
$676,000 for the three months ended December 31, 1998 to $2.7 million for the
three months ended December 31, 1999, and from $1.1 million for the six months
ended December 31, 1998 to $4.2 million for the six months ended December 31,
1999. As a percentage of maintenance and support service revenues, cost of
maintenance and support services revenues for the three months ended December
31, 1998 and 1999 was 51% and 88%, respectively. Cost of maintenance and support
services revenues as a percentage of the related revenues for the six months
ended December 31, 1998 and 1999 was 48% and 77%, respectively. The margin
decreases associated with the growth in cost of maintenance and support services
revenues were attributable primarily to an increase in personnel dedicated to
support a larger number of wireless telephone manufacturer customers and to
increased staffing in anticipation of growth in the number of network operator
customers. We anticipate that the cost of maintenance and support services
revenues will increase in absolute dollars in future operating periods.
Cost of Consulting Services Revenues
Cost of consulting services revenues consists of compensation and independent
consultant costs for personnel engaged in our consulting services operations and
related overhead. Cost of consulting services revenues increased from $77,000
for the three months ended December 31, 1998 to $1.2 million for the three
months ended December 31, 1999, and increased from $135,000 for the six months
ended December 31, 1998 to $1.7 million for the six months ended December 31,
1999. As a percentage of consulting services revenues, cost of consulting
services revenues for the three months ended December 31, 1998 and 1999 was 18%
and 58%, respectively. Cost of consulting services revenues as a percentage of
the related revenues for the six months ended December 31, 1998 and 1999 was 23%
and 60%, respectively. The decrease in margins reflects a higher mix of
consulting services performed on a time and materials basis during the three-
and six-month periods ended December 31, 1999. Gross profit on consulting
services revenues is impacted by the mix of company personnel and independent
consultants assigned to projects. The gross profit we
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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 230% from $2.5 million, or 137% of revenues, for the three
months ended December 31, 1998, to $8.2 million, or 64% of revenues, for the
three months ended December 31, 1999. Research and development expenses
increased 177% from $4.9 million, or 155% of revenues, for the six months ended
December 31, 1998, to $13.7 million, or 64% of revenues, for the six months
ended December 31, 1999. These 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. In particular, we anticipate that research and
development expenses will increase significantly due to product development
efforts for the MyPhone service and the addition of research and development
personnel in connection with the acquisitions of APiON, AtMotion and Paragon.
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 171% from $2.1 million, or 114%
of revenues, for the three months ended December 31, 1998, to $5.6 million, or
44% of revenues, for the three months ended December 31, 1999. Sales and
marketing expenses increased 172% from $3.9 million, or 122% of revenues, for
the six months ended December 31, 1998, to $10.5 million, or 49% of revenues,
for the six months ended December 31, 1999. These increases resulted from the
addition of personnel in our sales and marketing organizations, reflecting our
increased selling effort to develop market awareness of our products and
services. We anticipate that sales and marketing expenses will increase in
absolute dollars as we increase our investment in these areas. In addition, we
expect that sales and marketing expenses will increase as a result of the
addition of sales and marketing personnel in connection with the acquisitions of
APiON, AtMotion and Paragon.
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 191% from $955,000, or 53% of revenues, for the three months ended
December 31, 1998, to $2.8 million, or 22% of revenues, for the three months
ended December 31, 1999. General and administrative expenses increased 188% from
$1.6 million, or 51% of revenues, for the six months ended December 31, 1998, to
$4.7 million, or 22% of revenues, for the six months ended December 31, 1999.
These increases were due primarily to the addition of personnel performing
general and administrative functions, additional expenses in connection with our
operation as a public company and, to a lesser extent, legal expenses associated
with increased product licensing and patent activity. We expect general and
administrative expenses to increase in absolute dollars as we add personnel and
incur additional expenses related to the anticipated growth of our business, the
management of our international operations and our operation as a public
company.
Stock-Based Compensation
Stock-based compensation expense totaled $255,000 and $1.5 million for the
three months ended December 31, 1998 and 1999, respectively, and totaled
$504,000 and $1.7 million for the six months ended December 31, 1998 and 1999,
respectively. Some stock options granted and restricted stock sold during the
fiscal years ended June 30, 1998 and June 30, 1999 have been deemed to be
compensatory. Total deferred stock-based compensation associated with these
equity arrangements amounted to $2.4 million related to stock options granted
and restricted stock issued from October 1997 through March 1999. These amounts
are being amortized over the respective vesting periods of these equity
arrangements in a manner
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consistent with Financial Accounting Standards Board Interpretation No. 28. The
amortization of deferred stock-based compensation for these equity arrangements
was $255,000 and $212,000 for the three months ended December 31, 1998 and 1999,
respectively, and $504,000 and $424,000 for the six months ended December 31,
1998 and 1999, respectively. We expect amortization in the remainder of fiscal
2000 of approximately $272,000, and $375,000, $185,000 and $62,000 in the fiscal
years ending June 30, 2001, 2002 and 2003, respectively, relating to the
amortization of the deferred stock-based compensation associated with stock
options granted and restricted stock issued from October 1997 through March
1999. In connection with our acquisition of APiON in October 1999, we recorded
additional deferred stock-based compensation of approximately $5.1 million,
which is being amortized over two years in a manner consistent with Financial
Accounting Standards Board Interpretation No. 28. For the three months ended
December 31, 1999 we recognized stock-based compensation expense related to
APiON in the amount of $637,000, and we expect amortization in the remainder of
fiscal 2000 of approximately $1.9 million, and $2.1 million and $0.4 million in
the fiscal years ending June 30, 2001 and 2002, respectively. In connection with
our acquisition of Angelica in October 1999, we recorded additional deferred
stock-based compensation of approximately $1.7 million, which is being amortized
over three years in a manner consistent with Financial Accounting Standards
Board Interpretation No. 28. For the three months ended December 31, 1999 we
recognized stock-based compensation expense related to Angelica in the amount of
$204,000, and we expect amortization in the remainder of fiscal 2000 of
approximately $0.6 million, and $0.7 million and $0.2 million in the fiscal
years ending June 30, 2001 and 2002, respectively. In November 1999 a stock
option award was made to a new employee at a price discounted from the then-
current fair market value of our stock, giving rise to deferred stock-based
compensation in the amount of $2.8 million, which is being amortized over four
years in a manner consistent with Financial Accounting Standards Board
Interpretation No. 28. For the three months ended December 31, 1999 we
recognized stock-based compensation expense related to this award in the amount
of $455,000, and we expect amortization in the remainder of fiscal 2000 of
approximately $0.8 million, and $0.9 million, $0.4 million and $0.2 million in
the fiscal years ending June 30, 2001, 2002 and 2003, respectively.
Amortization of Goodwill and Intangible Assets
Amortization of goodwill and intangible assets relating to our October 1999
acquisitions of APiON and Angelica aggregated $13.8 million for the three- and
six-month periods ended December 31, 1999. In connection with the APiON
acquisition, we recorded goodwill and other intangible assets of approximately
$243.6 million which is being amortized on a straight-line basis over a three-
year period. We also recorded an immediate expense of $110,000 relating to in-
process research and development in connection with the APiON acquisition. In
connection with the Angelica acquisition, we recorded goodwill of $2.0 million,
which is being amortized on a straight-line basis over a three-year period. We
anticipate that the amortization of goodwill and intangible assets will increase
significantly due to the acquisitions of AtMotion, which was completed February
8, 2000, and Paragon, which is expected to close during the first calendar
quarter of 2000.
Interest and Other Income, Net
Net interest and other income is comprised primarily of interest earned on
cash and cash equivalents and short-term investments, offset by interest expense
related to obligations under capital leases and our equipment loan. Net interest
and other income increased from $365,000 to $4.1 million for the three months
ended December 31, 1998 and 1999, respectively, and increased from $780,000 to
$5.6 million for the six months ended December 31, 1998 and 1999, respectively.
The increases were due primarily to increased cash balances as a result of our
secondary public offering in November 1999, our initial public offering in June
1999 and our private placement financing in March 1999.
Income Taxes
Income tax expense was $-0- and $836,000 for the three months ended December
31, 1998 and 1999, respectively, and $-0- and $925,000 for the six months ended
December 31, 1998 and 1999, respectively. Income tax expense for the three and
six months ended December 31, 1999 consisted primarily of foreign withholding
taxes.
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,
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1999, through our initial public offering in June 1999 which generated net
proceeds of $66.8 million, through our secondary public offering in November
1999 which generated net proceeds of approximately $390 million and through an
equipment loan and a capitalized lease, which totaled $696,000 in principal
amount outstanding at December 31, 1999. As of December 31, 1999, we had $505.5
million of cash, cash equivalents and short-term investments and working capital
of $452.8 million.
Net cash provided by operating activities was $19.7 million for the six months
ended December 31, 1999. The net cash provided by operating activities for the
six months ended December 31, 1999 was attributable primarily to a decrease in
accounts receivable and increases in accrued liabilities and deferred revenue of
$13.8 million, 6.2 million and $8.5 million, respectively, offset in part by the
net loss of $24.9 million and after consideration of non-cash amortization
expenses, principally relating to goodwill and other intangibles related to the
acquisitions of APiON and Angelica.
To date, we have had no write-offs of accounts receivable and we have not
recorded any allowance for doubtful accounts.
Net cash used for investing activities was $213.3 million for the six months
ended December 31, 1999, primarily reflecting net purchases of short-term
investments, and purchases of property and equipment.
Net cash provided by financing activities was $390.8 million for the six
months ended December 30, 1999, primarily reflecting the net proceeds from our
secondary public offering in November 1999.
As of December 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.
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 issuance of debt securities, these
securities could have rights, preferences and privileges senior to holders of
common stock, and terms of any debt could impose restrictions on our operations.
The sale of additional equity or convertible debt securities could result in
additional dilution to our stockholders, and additional financing may not be
available in amounts or on terms acceptable to us, if at all. If we are unable
to obtain this additional financing, we may be required to reduce the scope of
our planned product development and marketing efforts, which could harm our
business, financial condition and operating results.
Year 2000 Readiness Disclosure
With the changeover to the year 2000, the Company did not experience any
disruption to its operations, as a result of the issues associated with the
limitations of the programming code in many existing computer systems, whereby
the computer systems may not properly recognize or process date-sensitive
information. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail. There can be no assurance
that there will not be future complications arising from Year 2000 issues.
The Company's program for addressing Year 2000 concerns included an assessment
and evaluation of internal systems, which resulted in testing and remediation
efforts for Year 2000 compliance. In addition, the Company evaluated its
customers, vendors and service providers to determine the extent to which the
Company was vulnerable to any failure by these third-party providers and to
ascertain their readiness for the Year 2000.
The total estimated cost of assessing Year 2000 issues is difficult to
determine with accuracy, but total costs did not have a material adverse impact
on the Company's operating results or financial condition. Although the Company
believes that it has successfully addressed any significant disruption from Year
2000, it will continue to monitor all
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critical systems for the appearance of delayed complications or disruptions, as
well as continue to monitor its suppliers and customers.
Factors That May Affect Future Results
In addition to the other information in this report, the following factors
should be considered carefully in evaluating the Company's business and
prospects.
Our future profitability is uncertain because we have a limited operating
history.
Because we commenced 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;
. 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;
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. delays in developing and introducing new products and services;
. changes in our pricing policies or those of our competitors or customers;
. changes in our mix of domestic and international sales;
. risks inherent in international operations;
. changes in our mix of license, consulting and maintenance and support
services revenues; and
. changes in accounting standards, including standards relating to revenue
recognition, business combinations and stock-based compensation.
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.
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.
We may be unable to successfully integrate AtMotion or Paragon into our business
or achieve the expected benefits of the acquisitions.
Our acquisition of AtMotion, which was completed in February 2000, and our
prospective acquisition of Paragon, which we expect to complete in the first
calendar quarter of 2000, will require integrating the products, business and
operations of these companies with our company. We may not be able to
successfully assimilate the personnel, operations and customers of these
companies into our business. Additionally, we may fail to achieve the
anticipated synergies from the acquisitions, including product integration,
marketing, product development, distribution and other operational synergies.
The integration process may further strain our existing financial and
managerial controls and reporting systems and procedures. This may result in the
diversion of management and financial resources from our core business
objectives. In addition, we are not experienced in managing significant
facilities or operations in geographically distant areas. Finally, we cannot be
certain that we will be able to retain these companies' key employees.
Any future acquisitions of companies or technologies may result in disruptions
to our business and/or the distraction of our management.
To date we have completed acquisitions of three companies, APiON, Angelica
Wireless and AtMotion, and expect to complete the acquisition of Paragon in the
first calendar quarter of 2000. We may acquire or make investments in other
complementary businesses and technologies in the future. We may not be able to
identify other future suitable acquisition or investment candidates, and even if
we do identify suitable candidates, we may not be able to make these
acquisitions or investments on commercially acceptable terms, or at all. If we
do acquire or invest in other companies, we may not be able to realize the
benefits we expected to achieve at the time of entering into the transaction. In
any future acquisitions we will likely face the same risks as discussed above
with respect to the integration of the businesses of AtMotion and Paragon.
Further, we may have to incur debt or issue equity securities to pay for any
future acquisitions or investments, the issuance of which could be dilutive to
our existing stockholders.
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
20
<PAGE>
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.
Our success depends on acceptance of our products and services by network
operators and their subscribers.
From inception through December 31, 1999, 27% 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 services, including MyPhone, 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 successfully 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, 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. 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 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 accounted for approximately 14% of our total
revenues. For the six months ended December 31, 1999, DDI Corporation and AT&T
Wireless Services accounted for 24% and 12%, respectively, of our total
revenues. The foregoing calculations are based on revenues derived from direct
and indirect sales to these customers.
21
<PAGE>
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 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, and we have not realized
significant customer acceptance of the service. We offer MyPhone as an OEM
service to enable network operators to create branded mobile Internet portals
for their subscribers, and we do not currently intend to develop our own branded
portal site. We 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, such as
NTT, have introduced or may introduce services based on proprietary wireless
protocols that are not compliant with the WAP specifications.
22
<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 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. Furthermore, Nokia is marketing a WAP server to corporate
customers and content providers. This WAP server is designed to enable wireless
telephone subscribers to directly access applications and services provided by
these customers, rather than through gateways provided by network operators' WAP
servers. If Nokia's WAP server is widely adopted by corporate customers and
content providers, it could undermine the need for network operators to purchase
WAP servers. Many of our existing competitors, as well as potential competitors,
have substantially greater financial, technical, marketing and distribution
resources than we do.
As we enter new markets and introduce new services, such as the MyPhone
service, we will face additional competitors. In addition, a number of companies
have introduced products and services relating to WAP applications that compete
with our MyPhone service. These existing and potential competitors may include
telecommunications companies such as Lucent Technologies, traditional Internet
portals such as AOL, InfoSpace, Microsoft and Yahoo!, Internet infrastructure
software companies and several private mobile Internet portal companies.
Our software products may contain defects or errors, and shipments of our
software may be delayed.
The software we develop is complex and must meet the stringent technical
requirements of our customers. We must develop our products quickly to keep pace
with the rapidly changing Internet software and telecommunications markets.
Software products and services as complex as ours are likely to contain
undetected errors or defects, especially when first introduced or when new
versions are released. We have in the past experienced delays in releasing some
versions of our products until software problems were corrected. Our products
may not be free from errors or defects after commercial shipments have begun,
which could result in the rejection of our products and damage to our
reputation, as well as lost revenues, diverted development resources, and
increased service and warranty costs, any of which could harm our business.
We depend on recruiting and retaining key management and technical personnel
with telecommunications and Internet software experience.
Because of the technical nature of our products and the dynamic market in
which we compete, our performance depends on attracting and retaining key
employees. In particular, our future success depends in part on the continued
services of each of our current executive officers. We currently maintain key
person life insurance policies for Alain Rossmann, our Chief Executive Officer,
and Charles Parrish, our Executive Vice President. Competition for qualified
personnel in the telecommunications and Internet software industries is intense,
and finding qualified personnel with experience in both industries is even more
difficult. We believe that there are only a limited number of persons with the
requisite skills to serve in many key positions, and it is becoming increasingly
difficult to hire and retain these persons. Competitors and others have in the
past, and may in the future, attempt to recruit our employees.
We may fail to support our anticipated growth in operations.
23
<PAGE>
To succeed in the implementation of our business strategy, we must rapidly
execute our sales strategy and further develop products and expand service
capabilities, while managing anticipated growth by implementing effective
planning and operating processes. If we fail to manage our growth effectively,
our business could suffer materially. To manage anticipated growth, we must:
. continue to implement and improve our operational, financial and management
information systems; for example, we are currently in the process of
implementing Oracle financial software;
. hire, train and retain additional qualified personnel;
. continue to expand and upgrade core technologies; 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.
Our success, particularly in international markets, depends in part on our
ability to maintain and expand our distribution channels.
Our success depends in part on our ability to increase sales of our products
and services through value-added resellers and systems integrators and to expand
our indirect distribution channels. If we are unable to maintain the
relationships that we have with our existing distribution partners, increase
revenues derived from sales through our indirect distribution channels, or
increase the number of distribution partners with whom we have relationships,
then we may not be able to increase our revenues or achieve profitability.
We expect that 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.
We depend on others to provide content and develop applications for wireless
telephones.
In order to increase the value to customers of our product platform and
encourage subscriber demand for Internet-based services via wireless telephones,
we must successfully promote the development of Internet-based applications and
content for this market. If content providers and application developers fail to
create sufficient applications and content for Internet-based services via
wireless telephones, our business could suffer materially. Our success in
motivating content providers and application developers to create and support
content and applications that subscribers find useful and compelling will
depend, in part, on our ability to develop a customer base of network operators
and wireless telephone manufacturers large enough to justify significant and
continued investments in these endeavors.
If we are unable to integrate our products with third-party technology, such as
network operators' systems, our business may suffer.
Our products are integrated with network operators' systems and wireless
telephones. If we are unable to integrate our platform products with these
third-party technologies, our business could suffer materially. For example, if,
as a result of technology enhancements or upgrades of these systems or
telephones, we are unable to integrate our products with these systems or
telephones, we could be required to redesign our software products. Moreover,
many network operators use legacy, or custom-made, systems for their general
network management software. Legacy systems 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.
24
<PAGE>
An interruption in the supply of software that we license from third parties
could cause a decline in product sales.
We license technology that is incorporated into our products from third
parties, such as RSA Data Security, Inc. and other companies. Any significant
interruption in the supply of any licensed software could cause a decline in
product sales, unless and until we are able to replace the functionality
provided by this licensed software. We also depend on these third parties to
deliver and support reliable products, enhance their current products, develop
new products on a timely and cost-effective basis, and respond to emerging
industry standards and other technological changes. The failure of these third
parties to meet these criteria could materially harm our business.
We may be unable to adequately protect our proprietary rights.
Our success depends significantly on our ability to protect our proprietary
rights to the technologies used in our products. If we are not adequately
protected, our competitors could use the intellectual property that we have
developed to enhance their products and services, which could harm our business.
We rely on patent protection, as well as a combination of copyright and
trademark laws, trade secrets, confidentiality provisions and other contractual
provisions, to protect our proprietary rights, but these legal means afford only
limited protection.
We may be sued by third parties for infringement of their proprietary rights.
The telecommunications and Internet software industries are characterized by
the existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of entrants into our market increases, the possibility of
an intellectual property claim against us grows. Any intellectual property
claims, with or without merit, could be time-consuming and expensive to litigate
or settle and could divert management attention from administering our core
business.
International expansion is an important part of our strategy, and this expansion
carries specific risks.
International sales of products and services accounted for 67% and 69% of our
total revenues for the three and six month periods ended December 31, 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".
Uncorrected year 2000 problems could harm our business.
Even though the date is now past January 1, 2000 and we have not experienced
any immediate adverse impact from the transition to the Year 2000, we cannot
provide assurance that our suppliers and customers have not been affected in a
manner that is not yet apparent. In addition, certain computer programs that
were date sensitive to the Year 2000 may not process the Year 2000 as a leap
year and any negative consequential effects remain unknown. As a result, we will
continue to monitor our Year 2000 compliance and the Year 2000 compliance of our
suppliers and customers. 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
25
<PAGE>
. 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.
Since our initial public offering in June 1999, our stock price has
experienced significant volatility. We expect that the market price of our
common stock also will fluctuate in the future as a result of variations in our
quarterly operating results. These fluctuations may be exaggerated if the
trading volume of our common stock is low. In addition, due to the technology-
intensive and emerging nature of our business, the market price of our common
stock may rise and fall in response to:
. announcements 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 a significant portion of our outstanding common stock.
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.
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.
26
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Hedging Instruments
We transact business in various foreign currencies and, accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
To date, the effect of changes in foreign currency exchange rates on revenues
and operating expenses have not been material. Substantially all of our revenues
are earned in U.S. dollars. Operating expenses incurred by our European and
Japanese subsidiaries are denominated primarily in U.K. pounds sterling and
Japanese yen, respectively.
We currently do not use financial instruments to hedge operating expenses in
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.
27
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable.
Item 2. Changes in Securities and Use of Proceeds.
In June 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 9,200,000 shares of the
Company's Common Stock were offered and sold for the account of the Company at a
price of $8.00 per share, generating gross offering 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 $5.2 million in underwriting
discounts and $1.4 million in other related expenses, the net proceeds of the
offering were approximately $67 million.
In November 1999, in connection with the Company's secondary public offering,
a Registration Statement on Form S-1 (No. 333-89879) was declared effective by
the Securities and Exchange Commission, pursuant to which 3,041,500 shares of
the Company's Common Stock were offered and sold for the account of the Company
at a price of $135.00 per share, generating gross offering proceeds of
$410,602,500. The managing underwriters were Credit Suisse First Boston
Corporation, Goldman, Sachs & Co., Hambrecht & Quist, BancBoston Robertson
Stephens Inc., U.S. Bancorp Piper Jaffray Inc., and Bank of America Securities
LLC. After deducting approximately $19.2 million in underwriting discounts and
$974,000 in other related expenses, the net proceeds of the offering were
approximately $390 million.
The Company has not yet used the funds from the initial or secondary public
offerings, and the net proceeds have been invested in investment grade, interest
bearing securities. The Company intends to use such remaining proceeds for
capital expenditures, including the acquisition of computer and communication
systems, and for general corporate purposes, including working capital to fund
increased accounts receivable and inventory levels.
Item 3. Defaults Upon Senior Securities - Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On December 17, 1999 the Company held its annual meeting of stockholders. At
the annual meeting, the Company's stockholders approved the following matters by
the following votes:
1. Election of the following directors of the Company
<TABLE>
<CAPTION>
Nominees For Against Abstentions Broker Nonvotes
- -------- -- ------- ----------- ---------------
<S> <C> <C> <C> <C>
Alain Rossmann 41,233,164 0 30,846 0
Charles Parrish 41,209,280 0 54,370 0
Roger Evans 41,233,164 0 30,846 0
Reed Hundt 41,209,280 0 54,370 0
David Kronfeld 41,233,164 0 30,846 0
Andrew Verhalen 41,233,164 0 30,846 0
</TABLE>
2. Amendment to the Company's Certificate of Incorporation to increase the
number of authorized shares of Common Stock from 100,000,000 to 250,000,000.
<TABLE>
<CAPTION>
For Against Abstentions Broker Nonvotes
--- ------- ----------- ---------------
<S> <C> <C> <C>
41,054,534 145,102 64,014 0
</TABLE>
3. Ratification of appointment of KPMG LLP as the Company's independent
auditors for the fiscal year ending June 30, 2000.
<TABLE>
<CAPTION>
For Against Abstentions Broker Nonvotes
--- ------- ----------- ---------------
<S> <C> <C> <C>
41,003,110 220,384 40,156 0
</TABLE>
28
<PAGE>
Item 5. Other Information - Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Ex-27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
29
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Phone.com, Inc.
By: /s/ ALAN BLACK
--------------------------------------------
Alan Black
Vice President of Finance and
Administration, Chief Financial Officer and
Treasurer (Principal Financial and
Accounting Officer)
Date: February 14, 2000
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 276,976
<SECURITIES> 228,543
<RECEIVABLES> 11,564
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 519,786
<PP&E> 13,571
<DEPRECIATION> 3,899
<TOTAL-ASSETS> 763,099
<CURRENT-LIABILITIES> 66,991
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 695,768
<TOTAL-LIABILITY-AND-EQUITY> 763,099
<SALES> 0
<TOTAL-REVENUES> 21,329
<CGS> 0
<TOTAL-COSTS> 6,512
<OTHER-EXPENSES> 44,425
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51
<INCOME-PRETAX> (24,016)
<INCOME-TAX> 925
<INCOME-CONTINUING> (24,941)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,941)
<EPS-BASIC> (.39)
<EPS-DILUTED> (.39)
</TABLE>
