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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-25687
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PHONE.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3219054
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification No.)
</TABLE>
800 Chesapeake Drive
Redwood City, California 94063
(Address of principal executive offices, including zip code)
(650) 562-0200
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $4,668,325,287 as of June 30, 2000 based upon the
closing sale price on the Nasdaq National Market reported for such date.
Shares of Common Stock held by each officer and director have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 82,816,360 shares of the registrant's Common Stock issued and
outstanding as of June 30, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the Company's 2000 Annual Meeting of
Stockholders to be filed hereafter (incorporated into Part III hereof).
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PART I
Item 1. Business.
We are a leading provider of software, applications, and services that
enable the convergence of the Internet and wireless communications. Using our
software, network operators can provide Internet services to their wireless
subscribers, and wireless telephone manufacturers can turn their mass-market
wireless telephones into mobile Internet appliances. Wireless subscribers thus
have access to Internet- and corporate intranet-based services, including e-
mail, news, stocks, weather, travel and sports. In addition, subscribers have
access via their wireless telephones to network operators' intranet-based
telephony services, which may include over-the-air activation, call
management, billing history information, pricing plan subscription and voice
message management. Using our software, network operators may also provide
their subscribers with a unified mailbox for e-mail, voicemail, and facsimile.
Our software platform consists of the UP.Link Server, the Mobile Management
Server, and the MyPhone Application Suite which are designed to be installed
on network operators' systems. Our UP.Browser software is designed to be
embedded in wireless telephones. As of June 30, 2000, 77 network operators
have licensed our software and have commenced or announced commercial service
or are in market or laboratory trials. In addition, 35 wireless telephone
manufacturers have licensed our UP.Browser software, and UP.Browser has been
ported to approximately 80 phone models.
Recent Events
On August 8, 2000, we announced that we entered into an Agreement and Plan
of Merger with Software.com, Inc. to create a combined company that will
provide a broad range of carrier-class software to wireless and wireline
carriers, portals and Internet service providers. Software.com is a leading
supplier of carrier-scale Internet infrastructure software for communication
service providers worldwide.
Under the terms of the merger agreement, our stockholders and the
stockholders of Software.com will each own approximately 50 percent of the
combined company. Each Software.com stockholder will be entitled to receive
1.6105 shares of our common stock for each of their shares of Software.com
common stock. The merger is expected to be accounted for as a pooling of
interests and is intended to be tax free to the stockholders of both
companies. The board of directors of the combined company will consist of
three directors from Software.com and three directors from us. Donald J.
Listwin, formerly an Executive Vice President at Cisco Systems, Inc., will
serve as President and Chief Executive Officer of the combined company.
Management believes that the merged company will be a leading provider of
highly scalable infrastructure and application software enabling the delivery
of e-mail, voicemail, unified messaging, directory, and wireless Internet
access for IP-based networks. The combined company expects to benefit from
significant cross-sell and up-sell opportunities through its existing
relationships with more than 150 major communications service providers
worldwide.
The transaction is expected to close by calendar year-end 2000 subject to
approval of our stockholders and the stockholders of Software.com and
satisfaction of customary closing conditions including obtaining necessary
regulatory approvals. The name of the combined company will be announced at
that time. For further discussion regarding our merger with Software.com, see
MD&A, page 26, and Note 10 of our consolidated financial statements.
Industry Background
Growth of the Internet and Wireless Telecommunications
Worldwide use of the Internet and wireless telecommunications has grown
rapidly in the last few years. Current forecasts predict that rapid growth of
both industries will continue. International Data Corporation, or IDC,
estimates that there were approximately 261 million users of the Internet
worldwide at the end of 1999 and
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that the number of users will grow to 623 million by the end of 2003. EMC
estimates that there were approximately 395 million digital wireless
subscribers worldwide at the end of 1999 and the number of subscribers will
grow to approximately 1.3 billion by the end of 2003. We cannot assure you
that these estimates will be achieved.
The Convergence of the Internet and Mobile Telephony
As people have become increasingly dependent on e-mail services, remote
access to corporate intranets, and other Internet-based services, mass-market
wireless telephones that provide mobile access to these resources have become
increasingly useful tools. Phone.com was a pioneer in the convergence of the
Internet and mobile telephony. In 1995, Phone.com developed its initial
technology which enables the delivery of Internet-based services to wireless
telephones. In 1996, we introduced and deployed our first products based on
this technology.
To provide a worldwide open standard enabling the delivery of Internet-based
services to mass-market wireless telephones, Phone.com co-founded the Wireless
Application Protocol, or WAP, Forum. In 1998, the WAP Forum published
technical specifications for application and content development and product
interoperability based on Internet technology and standards. By complying with
WAP specifications, wireless telephone manufacturers, network operators,
content providers and application developers can provide Internet-based
products and services that are interoperable.
In 1998, the WAP Forum published the Wireless Markup Language, or WML. WML
is compliant with the Extensible Markup Language, or XML, specification
published by the World Wide Web Consortium, or W3C. XML is a programming
language that provides a means of describing and exchanging data in an open
format. Content providers and application developers use WML to optimize the
display of, and interaction with, Web-based data on wireless telephones. Based
substantially on technology that Phone.com contributed to the public domain,
WML is optimized for delivery of Internet content to mass-market wireless
telephones, which have numeric keypads instead of full keyboards, small
screens, and limited memory capacity, processing power, battery life and
bandwidth. In the same manner that the programming language known as Hypertext
Markup Language, or HTML, has provided an open standard that has fueled the
development of Internet applications and content for personal computers, WML
is designed to be an industry standard that will encourage the development of
Internet applications and content for wireless telephones.
The Market Opportunity
In response to an increasingly competitive environment, network operators
are seeking to deliver Internet-based services to their wireless subscribers
as a means to generate revenues from new sources, differentiate their service
offerings, reduce subscriber turnover and operating costs, and unify offerings
available to their wireless and wireline voice customers, and Internet portal
users. To do this, network operators require a scalable software and services
solution to deliver Internet-based services and content to their wireless and
wireline subscribers.
The proliferation of Internet-standards based networks is rapidly altering
the structure of the wireline and wireless network operator business.
Operators which own wireless, wireline, portal and Internet service provider
(ISP) businesses are finding that they can achieve greater economies of scale
by deploying common service platforms and applications across their various
networks. Our MyPhone application suite and unified messaging application
allow our customers such as British Telecom to offer common services across
their wireless, wireline, and ISP businesses, thereby improving their
efficiency and overall economics of scale.
The Phone.com Solution
We provide platforms, applications and services that enable the delivery of
Internet-based services to mass-market wireless telephones, personal computers
and other mobile devices. Using our scalable products, network
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operators can provide Internet-based content, applications and services to
their wireless subscribers and offer common services across their wireless,
wireline and ISP businesses. In addition, wireless telephone manufacturers can
turn their mass-market wireless telephones into mobile Internet appliances.
With our technology, wireless subscribers have access to advanced
communication services, Internet-based content and services and corporate
intranet-based services; in addition, subscribers have the ability to use a
single mailbox for wireless and wireline voice messages, e-mails and
facsimiles. Existing carrier deployments, built on our platform, include such
services as unified messaging, e-mail, news, stock trading, weather, travel,
sports, commerce, and calendaring.
Our solutions exhibit several characteristics valued by network and service
operators:
. Innovative--our products contain innovative features and functionality,
and enable the network operator to provide valuable new services to
their customers.
. Standards-based--our products are based on industry standards, including
those defined by WAP, W3C and the Internet Engineering Task Force, or
IETF.
. Reliability--our products are reliable, enabling the network operator to
provide a high quality of service to their customers.
. Scalability--our products have market-proven scalability into the
millions of users, with high performance and reliability.
. Maturity--our products are deployed in many networks, and have many
features that makes them desirable.
. Unity--our products enable network operators to offer common services
across their wireless, wireline and ISP businesses.
Our software platform consists of the UP.Link Server Suite, UP.Browser,
Mobile Management Server, MyPhone Application Suite and FoneSync data
synchronization software products.
UP.Link Server Suite
The UP.Link Server Suite includes:
. a means of exchanging data between the Internet and mass-market wireless
telephones, commonly referred to as a gateway; and
. a service platform that performs subscriber management and service
provisioning functions, and communicates with the network operator's
customer care and billing systems.
UP. Browser
The UP.Browser is a browser and messaging software product that is designed
and optimized for mass-market wireless telephones and other wireless devices.
It is also an enabler for other infrastructure-based products from Phone.com,
such as over-the-air provisioning. As of July 2000, approximately 110,000
third-party developers have registered to use our UP.SDK software development
kit, and a variety of third-party content or services are currently available
for wireless telephones equipped with UP.Browser, including:
<TABLE>
<S> <C> <C>
Amazon.com Yahoo TD Waterhouse
E*Trade eBay Bloomberg
DLJ Direct Vicinity Barnes & Noble
Citysearch/Ticketmaster Webraska Taito
Vignette Reuters Shared Medical Systems
</TABLE>
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Mobile Management Server
The Mobile Management Server, or MMS, is a network server that allows
network operators to remotely manage and alter specific settings within
wireless phones even after the phones have been deployed to a customer. Using
WAP and IP-based protocols, the MMS provides the network operator with a means
to provision and manage phone settings over the network, including such
settings as roaming lists, area code information and other data parameters.
MMS reduces network operator costs and provides more flexibility in managing
phone settings. Consequently, MMS provides a means for network operators to
differentiate their services and attract and retain subscribers.
Our infrastructure platform conforms to a wide variety of standards,
including WAP, W3C and IETF standards. Among other functions, the products
provide a WAP-compliant platform for the delivery of Internet-based content
and services. Our software supports all major digital wireless telephony
standards in use around the world, including:
<TABLE>
<S> <C>
. CDMA (Code Division Multiple Access) . GSM (Global System for Mobile Communication)
. TDMA (Time Division Multiple Access) . CDPD (Cellular Digital Packet Data)
. iDEN (Integrated Digital Enhanced
Network) . PDC (Personal Digital Cellular)
. PHS (Personal Handyphone System)
</TABLE>
MyPhone Application Suite
The MyPhone application suite comprises applications and services that
enable a network operator to rapidly deploy branded and customized portals for
their wireless subscribers and ISP customers. Users access MyPhone from a PC
Web browser, WAP-enabled wireless phone or voice phone. The core features of
MyPhone address mobile communications and portal infrastructure requirements,
including:
. Portal framework platform--application infrastructure enabling the
integration of Internet-access devices with a variety of applications
and services, as well as branding, subscriber management and other
services necessary for a comprehensive portal solution.
. Homepage--a personalized homepage, allowing each user to customize their
PC and phone browser experience.
. Directory services--enabling the network operator to promote services to
their user base.
. Unified Messaging--an Internet-based unified messaging application, with
integrated voicemail, e-mail and facsimile.
. Personal Information Manager--a PIM managing contact lists, calendar and
other personal information.
FoneSync
Our FoneSync Essentials software allows wireless phone users to transfer
names and phone numbers from their personal computer or PDA to their phones,
and keep them up-to-date. Having up-to-date and readily available phone
numbers makes it easier for wireless phone users to place calls and can lead
to increased call volume. FoneSync is compatible with the leading personal
information managers, or PIMs, such as Microsoft Outlook, ACT!, GoldMine,
Lotus Organizer and Lotus Notes, enabling wireless phone users to download
contact information to their phones. FoneSync Essentials supports over 20
phone manufacturers, including such leading vendors as Motorola, Phillips,
Nokia, Siemens, Ericsson, Panasonic and Sony.
Most of our products are delivered as packaged software, for deployment on
the premises of our customer. However, to support the rapid deployment of
network operator portals, large portions of the MyPhone product are available
in a hosted configuration. In addition, we offer extensive consulting services
to our customers to enable the rapid and successful deployment of Phone.com
products.
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Key benefits of our products and services for network operators include:
. Opportunity to generate incremental revenue. Network operators can
generate additional revenue by offering value-added Internet-based
services. They can also charge for the increased data and voice airtime
that such applications encourage. For example, users can access e-mail
messages via MyPhone and initiate voice calls to any phone number
appearing in the message with the press of one button.
. Ability to differentiate services and improve subscriber
retention. Using our products, network operators can improve their
competitive position by offering new Internet-based services to wireless
subscribers. By enabling wireless subscribers to store personal contact
information in their networks, and to personalize the selection and
presentation of Internet content, such as stock quotes, sports scores
and news, network operators can enhance subscriber retention. Finally,
network operators can offer unified offerings to wireline, wireless and
ISP customers which enhance subscriber retention.
. Opportunity to reduce operating costs. Our UP.Link Server Suite can also
be used by network operators to reduce operating costs. For example,
network operators' call centers are burdened by high rates of calls from
subscribers inquiring about billing, service availability, usage and
other service-related matters. Our software platform enables network
operators to leverage standards-based Internet technology to allow
subscribers to make certain of these inquiries using their wireless
telephones without assistance by customer care representatives. By
bypassing the call center infrastructure for certain of these
activities, network operators can reduce their operating costs.
. Ability to rapidly deploy a branded mobile Internet portal site. MyPhone
is designed to allow network operators to rapidly deploy a customized
and branded Internet portal to its wireless subscribers. We believe that
by aggregating content and applications optimized for mobile users in a
customized, branded portal service, network operators will be able to
increase subscriber loyalty and generate new revenue opportunities.
MyPhone's extensible architecture can facilitate new application
development, allowing network operators to continue to deliver new and
enhanced services to their subscribers.
The Phone.com Strategy
Our objective is to be the leading supplier to network operators of
software, applications, and services that enable the convergence of the
Internet, and mobile and wireline communications. Key elements of our strategy
include:
. Focus on Providing Products and Services to Network Operators. We focus
on providing comprehensive solutions that enable network operators to
deliver Internet-based services to their wireless and wireline
subscribers. Our close working relationships with network operators
provide us with a valuable understanding of our customers' technology
and operations, which we intend to leverage to accelerate time to market
of our products and identify new sales opportunities. In order to
generate revenues from our products and related services, we utilize
direct and indirect sales channels. Our direct sales force focuses on
selling products and consulting services and assists our indirect
channel partners in selling our products and services. Our indirect
sales channel partners currently include Alcatel, Itochu Techno-Science
Corporation, Motorola, Nortel, Saritel, Sema Group, Siemens and Unisys.
These partners are licensed to sell our products and services to network
operators primarily in international markets. We intend to add new
partners to our indirect sales channel to serve customers in key
markets.
. Continue to Invest in our Technology. Network operators have stringent
requirements for server software performance, scalability and
reliability. We also expect that network operators will demand regular
upgrades that include new functions and features. Consequently, we
intend to continue to invest heavily in research and product
development. We also intend to maintain our technology leadership by
leveraging our role in prominent industry standard-setting organizations
such as the WAP Forum and the World Wide Web Consortium.
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. Drive the Sale and Development of Internet-Based Communication
Applications and Services.
Network operators that offer Internet-based services by using our
UP.Link Server generally seek new value-added applications to offer to
their subscribers. We currently offer the following MyPhone
applications:
. Unified Messaging, which delivers e-mail, voicemail, and facsimile
to wireless and wireline telephones, as well as to PC's,
. Personal Information Manager, which provides a calendar, contacts
function, and to-do list with synchronization capabilities,
. Communication-centric Portal Framework, allowing our network
operator customers to create their own private-branded communication
portals leveraging third-party content relationships.
We are continuously enhancing our existing products and developing new
applications and services to provide additional functionality for network
operators and their subscribers. We believe that the adoption of our MyPhone
application suite by network operators will accelerate the adoption by
subscribers of Internet-based services using their wireless telephones, as
well as the development of new WAP-compatible information services and
applications.
. Propagate Widespread Use of UP.Browser in Mass-Market Wireless
Telephones. We believe that increasing the number of wireless telephone
manufacturers that incorporate UP.Browser into their mass-market
wireless telephones enhances the attractiveness of our UP.Link server
software to network operators. Therefore, in order to drive widespread
adoption, we generally license UP.Browser to wireless telephone
manufacturers, free of per-unit royalties. As of June 30, 2000, we have
licensed UP.Browser to over 35 wireless telephone manufacturers. In
addition, we estimate that total shipments of UP.Browser enabled phones
exceeded 12 million units as of June 30, 2000.
. Promote the Development of Internet-Based Services Over Mass-Market
Wireless Telephones. To encourage the growth of our business, we
actively encourage Internet content and application developers to create
WML applications.
Products and Services
Products
Our software products include:
. UP.Link Server--a product that network operators can use to connect
their subscribers' mass-market wireless telephones to Internet services,
. Mobile Management Server--a product that network operators can use to
provision subscribers in an operators network and to send voice and data
parameters to the subscriber's mobile phone,
. UP.Browser--a browser that is embedded in mass-market wireless devices
and enables wireless subscribers to access Internet services and other
data,
. UP.SDK--a software development kit that Internet content providers and
third-party developers use to create HDML and WML-compliant
applications,
. MyPhone Application Suite--a solution that enables a network operator to
rapidly deploy branded and customized portals for their wireless
subscribers and ISP customers, and
. FoneSync--a Windows application enabling phone list management and data
synchronization between contact management packages, Wireless Carrier
Portals, Internet resources, mobile phones and personal digital
assistants, or PDAs.
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UP.Link Server
UP.Link Server is a software solution that enables network operators to
offer Internet-based services to their wireless subscribers. UP.Link Server
connects data-enabled wireless telephones to applications and content hosted
by Web servers on the Internet or private intranets. UP.Link Server also
provides network operators with subscriber provisioning and network management
functions on a robust and scalable software platform. The UP.Link Server
consists of the following components:
<TABLE>
<CAPTION>
Components Description
---------- -----------
<C> <S>
Gateway......... UP.Link Gateway provides the network-layer functions of the
UP.Link Server, and connects Internet- and intranet-based
services to wireless networks and wireless telephones.
UP.Link Gateway connects the multiple protocols for wireless
data communications to the open standards of the Internet,
thereby enabling Web servers to recognize a wireless
telephone as an Internet standards-compliant client.
Administration.. The UP.Link administration component provides a Web-based
administration control system to keep the network operator's
Internet-based network components up and running, assess
system status and provision new subscribers.
The UP.Link Provisioning Application Programming Interface,
or PAPI, enables integration of UP.Link with the network
operator's existing customer care, help desk and billing
systems.
Services........ The services component provides an open application
programming framework with interfaces that standardize the
way that the services component interacts with applications.
These services include:
. Push Server--allows applications to push information to
wireless subscribers. For example, an e-mail application
can use the Push Server to notify a wireless subscriber of
new messages.
. Fax Server--enables the forwarding of e-mail attachments
and other data content to facsimile machines for printing.
. Identity Server--maintains a subscriber profile that
retains wireless subscribers' service settings and allows
network operators to track their subscribers' service
usage.
. Content Translation Framework--translation from one
content format or encoding to another.
</TABLE>
Mobile Management Server
The Mobile Management Server provides network operators with a solution for
provisioning network elements. In addition, it provides a method for
provisioning handset data and voice parameters over the air.
UP.Browser
The UP.Browser is a browser and messaging software product that is designed
and optimized for mass-market wireless telephones and other wireless devices.
It is also an enabler for other infrastructure-based products from Phone.com,
such as over-the-air, or OTA, provisioning. A variety of third-party content
is currently available for wireless telephones equipped with UP.Browser.
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Key features of UP.Browser include:
<TABLE>
<CAPTION>
Features Description
-------- -----------
<C> <S>
Browsing.. UP.Browser displays WML-designed pages from any Web or intranet
site. In addition, UP.Browser supports pen-based input and
integrates with a number of third-party input technologies.
Alerts.... UP.Browser notifies subscribers with a visual or audible
indication when a Web page or other data has been proactively
"pushed" to their wireless telephones. Examples include Web-
based content such as stock quotes, traffic alerts and flight
information.
Security.. UP.Browser employs the same encryption technology used by many
commercial Web sites. Consequently, interactions between the
wireless telephone and a Web site can be authenticated and
encrypted.
</TABLE>
UP.SDK
Our software development kit, known as UP.SDK, provides tools and
documentation for Internet content providers and developers to create and
maintain HDML and WML-based Internet services. UP.SDK consists of the
following components:
. The UP.Simulator, a Windows-based application that simulates the
behavior of UP.Browser-equipped wireless telephones, allowing developers
to more easily test HDML and WML services.
. Specialized functions and libraries that simplify the process of
generating HDML and WML applications.
. Tools for establishing secure communications between HDML and WML
applications and UP.Link servers.
. Sample HDML and WML files and application source code.
. Customized configurations allowing the UP.SDK browser simulator to mimic
the look and feel of multiple handsets.
MyPhone Application Suite
The MyPhone application suite enables a network operator to rapidly deploy
branded and customized portals for their wireless subscribers and ISP
customers. Our product provides a portal framework and a collection of
applications, to which the carrier may add additional applications of their
choice. Subscribers can access MyPhone through a variety of interfaces,
including a PC Web browser, WAP-enabled wireless phone or wireline telephone.
The core features of MyPhone address mobile communications and portal
infrastructure requirements, including:
. Portal framework platform--application infrastructure enabling the
integration of Internet-access devices with a variety of applications
and services, as well as branding, subscriber management and other
services necessary for a comprehensive portal solution.
. Homepage--a personalized homepage, allowing each user to customize their
PC and phone browser experience.
. Directory services--enabling the network operator to promote services to
their user base.
. Unified Messaging--an Internet-based unified messaging application and
service offering with integrated voicemail, e-mail and facsimile.
. Personal Information Manager--a PIM managing customer contact lists,
calendar and other personal information.
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FoneSync
FoneSync is a Windows application enabling phone list management and
synchronization between leading contact management packages, Wireless Carrier
Portals, Internet resources, mobile phones and personal digital assistants, or
PDAs. Synchronization allows users to keep all names and numbers, calendar
appointments and to-do lists current no matter where changes are made by
creating a backup of key data and providing a mechanism for migrating to new
handsets. Key features include:
<TABLE>
<CAPTION>
Features Description
-------- -----------
<C> <S>
One Button Multi-point Synchronization.. Click one button and FoneSync will
synchronize all connected devices
Support for Multiple Device Types....... Desktop PIMs, Internet PIMs, or
iPIMs, standard mobile phone
handsets, feature phones, PDAs
Personalization of Information ......... FoneSync has built-in drag and drop
capability, the user simply
highlights the contact information he
or she wants, then clicks and drags
the information onto the mobile
device, giving control to how contact
lists are updated. Information is
automatically formatted to a form
suitable for the specific device.
Intelligent Number Handling............. FoneSync's number handling technology
automatically amends and formats
country and international codes
appropriately for the location from
which the user is dialing.
</TABLE>
Services
We provide maintenance and engineering support services to wireless
telephone manufacturers who have ported our UP.Browser to their telephones. In
addition, we provide consulting services to wireless network operators who
have licensed our mobile Internet platform software and engage us to perform
integration services relating to the commercial launches of our technology. We
also offer certain components of MyPhone as a hosted service.
New Products and Services under Development
UP.Browser
We are continuously enhancing our existing products to provide additional
functionality for wireless telephone manufacturers. As we continue to upgrade
UP.Browser, UP.Browser software will be expanded to include additional support
for the server-based applications described elsewhere in this section,
including Instant Messaging, or IM, over-the-air synchronization, or
AirServer, and the Mobile Location Server, or MLS. Additionally, other new
features in development include:
. Upgrade of browser to support updated mark-up language as well as
improved security through support of Server Certificates and the
Wireless Identity Module, or WIM.
. Improved graphical user interface for use on devices with high quality
displays.
. In May 2000, we announced a collaborative effort with Conversa to
integrate device-based voice recognition technology with the UP.Browser
software.
Over-the-Air Synchronization
We are developing over-the-air synchronization, or AirServer, technology for
deployment by wireless carriers. Using this technology, customers will be able
to synchronize personal information such as names, numbers and calendar
information "over-the-air" to their enabled devices running an enhanced
version of the Phone.com browser.
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Mobile Location Server
In July 2000, we announced the availability of the Mobile Location Server,
or MLS. The MLS serves as the Internet interface to locate information
provided by the wireless network. This server will provide Internet and Web
applications with the ability to determine the location of a wireless phone,
thereby enabling an entirely new class of location-enabled applications. This
server will allow network operators to add or change location technologies as
needed without affecting the development of their portfolio of content and
application services.
Instant Messaging
We believe that mobile communication products are of high value to network
operators, and are developing enhancements to the MyPhone platform in the area
of instant messaging, or IM. We intend to optimize the instant messaging for
deployment by network operators and design it to interoperate with existing
third-party IM solutions. The instant messaging solution is expected to
include text-based messaging, presence and buddy list management, and will be
fully integrated with the unified messaging solution.
Third-Generation Networks
Third-generation, or 3G, networks are being planned and deployed by major
wireless network operators. All of these networks support Internet Protocol,
or IP, as a data transport protocol. Currently, all of our products support IP
transport and are expected to continue to function correctly on 3G networks.
We are engaged in ongoing testing of our products to ensure that they will
fully support 3G deployments in the future.
Customers
Network Operators
We sell our software products to network operators worldwide to enable them
to offer a variety of wireless Internet services to their subscribers. As of
June 30, 2000, 77 network operators have licensed our software and have
commenced or announced commercial service or are in market or laboratory
trials.
We also provide our network operator customers with consulting services that
enable them to rapidly adopt our technology and bring wireless Internet-based
services to market. Our consulting services focus on those areas where our
products interface with the network operators' internal systems such as
billing, provisioning and customer care. We also provide our network operator
customers with assistance in choosing the appropriate content and applications
for their subscribers.
Our agreements with network operators provide these customers with non-
exclusive licenses to use our mobile Internet platform software in connection
with providing Internet-based services to their subscribers. There are two
pricing models under which we sell our products. Pricing and payment terms for
licenses are negotiated with each network operator based on subscriber count
or transaction capacity. Under the first pricing model, licenses can be
purchased on an as-deployed basis or on a prepaid basis. Under the second
pricing model, each operator pays us a recurring fee either on a monthly or a
quarterly basis based on the active number of subscribers such operator has
for that period. While these agreements do not provide for a right of return,
we typically provide for a three-month warranty, limited indemnification
against intellectual property infringement claims and a source code escrow. In
addition, we typically provide fee-based maintenance and support services to
our customers, under which they receive error corrections and remote support.
They can also elect to receive new releases of our products for an additional
fee.
Wireless Telephone Manufacturers
We license our UP.Browser software to wireless telephone manufacturers, who
embed UP.Browser into their products. In order to encourage these
manufacturers to include UP.Browser in their wireless telephone models,
10
<PAGE>
generally no per-unit royalty is charged. In addition, we provide engineering
and support services to accelerate the introduction of new wireless telephone
models that contain UP.Browser. These services are provided to manufacturers
on an annual flat-fee basis per digital wireless telephony standard.
As of June 30, 2000, 35 wireless telephone manufacturers have licensed
UP.Browser, and the UP.Browser software has been ported to approximately 80
phone models. In addition, we are currently providing engineering support
services in connection with integration projects for over 150 phone models.
Our agreements with wireless telephone manufacturers generally provide these
customers with a non-exclusive, royalty-free license to include UP.Browser in
the wireless telephones that they sell. These agreements typically provide for
a 90-day warranty, indemnification against intellectual property infringement
claims and a source code escrow. In addition, customers can elect to receive
varying levels of maintenance and support services for a fee.
Research and Product Development
We continue to enhance the features and performance of our existing
products. In addition, we are continuing to develop new products to meet our
customers' expectations of ongoing innovation and enhancement within our
product family.
Our ability to meet our customer's expectation of innovation and enhancement
depends on a number of factors, including our ability to identify and respond
to emerging technological trends in our target markets, develop and maintain
competitive products, enhance our existing products by adding features and
functionality that differentiate them from those of our competitors and bring
products to market on a timely basis and at competitive prices. Consequently,
we have made, and we intend to continue to make, significant investments in
research and product development. Our research and development expenses were
$5.7 million, $13.1 million and $38.0 million for the years ended June 30,
1998, 1999 and 2000, respectively. As of June 30, 2000, we had 432 employees
engaged in research and product development activities. We are recruiting
additional skilled engineers for research and product development, and our
business could be adversely affected if we are unable to hire these engineers
on a timely basis.
Technology
Technology and technology innovation are core elements of our company's
value. Our technology has contributed significantly to the emergence of the
mobile Web as a viable and robust platform, and to innovative products such as
Internet-based unified messaging. We have also contributed to the development
of open standards for the delivery of wireless Internet-based services to
mass-market wireless telephones and to providing network operators and
wireless telephone manufacturers with software solutions that are robust and
scalable, and take into account the specific characteristics of wireless
telephony networks and telephones.
The following sections discuss standards domains that have a notable impact
on our products.
Wireless Application Protocol
We co-founded the WAP Forum in 1997, and published open standards-based
technical specifications for application and content development, as well as
product interoperability based on Internet technology and standards. Leading
network operators, telecommunications device and equipment manufacturers,
software and content companies worldwide have joined the WAP Forum, which has
grown to over 525 members as of July 2000. Wireless carriers have continued to
express strong demand for WAP-based technologies and to view WAP as a central
organization for standardizing wireless Internet technologies.
In order to implement interoperability with Internet-based content, the WAP
specifications use the open standards-based Internet model of interaction, in
which content and applications reside on Web servers that are
11
<PAGE>
physically distributed, and requests for the data on these servers are sent
via open-standard Internet addresses, commonly known as URLs.
On standard Internet Web servers, content typically resides in databases,
but is provided to users via a number of content formats, including HTML and
Java. WML and WML Script function as standard content formats, so Internet
content providers can add WML and WML Script access to their servers without
having to change the underlying data. WML and WML Script applications deliver
content in a format that is optimized for wireless telephone interfaces.
CDMA Developer Group
We have participated actively in the CDMA Developer Group, or CDG, towards
the development of a standard model for over-the-air, or OTA, provisioning and
OTA management of wireless devices. This work is based upon the Mobile
Management Command, or MMC, protocol, developed as part of the MMS product.
MMC allows a network server and wireless device to send and receive defined
provisioning and management information.
World Wide Web Consortium
We have also been very active in the World Wide Web Consortium, or W3C, and
in particular in the development of future standards in the areas of the
mobile Web. Our products have substantial dependencies on W3C technology,
including XML, HTML, HTTP, P3P and the overall WWW architecture. We are
working to ensure that future developments in the W3C are fully enabled for
wireless and mobile devices, and that we have substantive insight into the
motivation and design of these new technologies.
UP.Link Technology
Our UP.Link Server Suite is designed to be modular, expandable, flexible,
scalable and reliable. Using an architecture based on scalable, object-
oriented technology, the UP.Link Server Suite typically runs on a large,
distributed set of servers. The UP.Link Server Suite is designed to meet the
stringent performance, scalability and reliability requirements of network
operators.
UP.Browser Technology
Our UP.Browser software is designed for embedding in limited function
devices, such as wireless telephones and has minimum hardware resource
requirements. The UP.Browser supports a wide variety of Web content, including
markup languages (e.g., HDML, WML), scripting languages (WML Script), and
image formats (WBMP). In addition, the scripting engine in later versions of
UP.Browser allows for the creation of more interactive Web pages by providing
developers with additional functionality.
MyPhone Technology
The MyPhone products are designed for carrier-grade deployment, including
high reliability and scalability. MyPhone provides a suite of advanced
communication and portal services, running on a network of servers. MyPhone is
typically deployed on Unix servers. MyPhone components are all based upon a
common set of infrastructure, enabling quick and easy customization and
branding during deployment. This enables the deployment of MyPhone to be
optimized for the market and business needs of a network operator.
The MyPhone technology is built upon a three-tier platform, and supports WAP
and HDML browsers. This platform is comprised of HTTP application servers
primarily providing user interface, application logic and session state
caching, and scalable data storage. Communication between these tiers is
accomplished with a high-speed remote procedure call, or RPC, environment,
supporting a high degree of scalability and replication for increased
reliability. Access to the MyPhone front-end servers is directly from a
browser.
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<PAGE>
FoneSync Essentials Technology
FoneSync uses a powerful component-based architecture that enables easy
upgradeability and extensibility. FoneSync is designed to operate on the
Microsoft Windows platform, enabling the wireless phone user to synchronize
directly with his personal contact database. The components are true 32-bit
Windows modules, exposing a Component Object Model, or COM, interface for
maximum flexibility and re-usability. All components are optimized for
delivery via the Internet.
Sales and Marketing
We sell our products through both a direct sales force and third-party
resellers, currently Alcatel, Itochu Techno-Science Corporation, Sema Group,
Siemens, Nortel, Unisys and Motorola. As of June 30, 2000, we had 203 persons
in sales and marketing serving the United States market, and 103 persons in
sales and marketing outside the United States. We plan to significantly expand
this group over the next 12 months. In addition, our international offices
include London, Newbury, Belfast, Paris, Madrid, Rome, Copenhagen, Mexico
City, Hong Kong, Seoul and Tokyo. Our direct sales force focuses on selling
products and consulting services and assists our indirect channel partners in
selling our products and services. International sales of products and
services accounted for 48%, 68% and 73% of our total revenues for the years
ended June 30, 1998, 1999 and 2000, respectively. We expect international
revenues to continue to account for a significant portion of our revenues. Our
international sales strategy is to sell directly to large carriers and to
partner with leading distributors and systems integrators who have strong
industry backgrounds and market presence in their respective markets and
geographic regions.
We believe that customer service and ongoing technical support is an
essential part of the sales process in the wireless communications industry.
In order to provide high levels of customer service, senior management and
assigned account managers play a role in ongoing account management and
relationships. We believe these customer relationships enable us to improve
customer satisfaction and develop products to meet specific customer needs.
Our agreements with our network operator customers provide for support 24
hours per day and seven days per week.
We actively recruit content and application developers to our platform and
provide to them free of charge our software developer's kit, UP.SDK. We also
provide them with free membership in our Developer Program, free e-mail-based
support and the opportunity to participate in our Alliances Program. As of
July 2000, approximately 110,000 registered developers in our Developer
Program have downloaded UP.SDK, including:
<TABLE>
<S> <C>
. Amazon.com . Lotus
. biztravel.com . Mapquest.com
. BroadVision . NewsAlert
. CableData . Reuters
. Fidelity . Siebel Systems
. ESPN Sports . SmartServOnline
. Data Broadcasting Corporation . Sportsfeed.com
. eDispatch.com . StockTips
. Ameritrade . DLJ Direct
. Internet Travel Network . The Weather Channel
. KLELine . Webraska Mobile Technologies
. Lightbridge . Ticketmaster/CitySearch
</TABLE>
Our Alliances Program is comprised of a select group of our content and
application developers. We screen applications to our Alliances Program based
on the availability and quality of the content or applications produced by the
partner. We perform joint marketing activities with the partner, as well as
provide introductions between our wireless network operators and our Alliances
Program members.
13
<PAGE>
Competition
The market for our products and services continues to be competitive. The
widespread adoption of open industry standards such as the WAP specifications
may make it easier for new market entrants and existing competitors to
introduce products that compete with our software products. In addition, a
number of our competitors, including Nokia, have announced or are expected to
announce enhanced features and functionality as proprietary extensions to the
WAP protocol. Furthermore, some of our competitors have introduced or may
introduce services based on proprietary wireless protocols that are not
compliant with the WAP specifications.
We expect that we will compete primarily on the basis of price, time-to-
market, functionality, quality and breadth of product and service offerings.
Our current and potential competitors include the following:
. Wireless equipment manufacturers, such as Ericsson and Nokia, which are
developing and marketing competitive server, browser and application
software products. These companies already sell billions of dollars
worth of wireless telephones and other telecommunications products to
network operators which are our existing and potential customers.
. Microsoft, which has produced a wireless version of its Mobile Explorer
microbrowser to run on wireless handheld devices, including wireless
telephones. This system is currently featured on handsets being marketed
in the United Kingdom by Sony.
. Software companies, such as Oracle Corporation, which is marketing
portal platform software that is compliant with the specifications
promulgated by the WAP Forum. Oracle has additionally launched a
separate Oracle Mobile division which supplies consumers with mobile
information services.
. NTT DoCoMo, a customer of ours, is pursuing a strategy to become a
global wireless carrier. As part of that strategy, NTT DoCoMo, through
an agreement with its MID subsidiary, may seek to offer or sublicense
its iMode service to other wireless service providers in a manner that
would be competitive with our wireless Internet service offerings.
With the expansion of our MyPhone application suite to include such services
as unified messaging, electronic messaging, personal information management
software solutions and other advanced communications applications, we face
additional competitors. These competitors are varied as they individually
touch various aspects of our offerings. Competitors may include
telecommunications messaging providers such as Comverse.
Many of our existing competitors as well as potential competitors have
substantially greater financial, technical, marketing and distribution
resources than we do. Several of these companies also have greater name
recognition and better established relationships with our target customers.
Furthermore, these competitors may be able to adopt more aggressive pricing
policies and offer more attractive terms to customers than we can. We may face
increasing price pressure from our network operator customers. In addition,
current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to compete
more effectively. Finally, existing and potential competitors may develop
enhancements to, or future generations of, competitive products that will have
better performance features than our products.
Intellectual Property Rights
Our performance depends significantly on our ability to protect our
proprietary rights to the technologies used in our products. If we are not
adequately protected, our competitors could use the intellectual property that
we have developed to enhance their products and services, which could harm our
business. As of June 30, 2000, we had four issued United States patents. We
also had six other United States patent applications containing allowed
claims, and 79 pending United States patent applications. The company has also
filed corresponding foreign patent applications for approximately 50 of these
United States patents and applications.
14
<PAGE>
In addition, we rely on a combination of copyright, trademark, trade secret
laws, confidentiality provisions and other contractual provisions to protect
our proprietary rights, but these legal means afford only limited protection.
Despite any measures taken to protect our intellectual property, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information which we regard as proprietary. In addition, the laws of some
foreign countries may not protect our proprietary rights as fully as do the
laws of the United States. Thus, the measures we are taking to protect our
proprietary rights in the United States and abroad may not be adequate.
Finally, our competitors may independently develop similar technologies.
The telecommunications and Internet software industries are characterized by
the existence of a large number of patents and frequent litigation based on
allegations of patent infringement. As the number of entrants into our market
increases, the possibility of an infringement claim against us grows. For
example, we may be inadvertently infringing a patent of which we are unaware.
In addition, because patent applications can take many years to issue, there
may be a patent application now pending of which we are unaware, and which we
may be accused of infringing when it issues in the future. To address any
patent infringement claims, we may have to enter into royalty or licensing
agreements on disadvantageous commercial terms. We may also have to incur
significant legal expenses to ascertain the risk of infringing a patent and
the likelihood of that patent being valid. A successful claim of patent
infringement against us, and our failure to license the infringed or similar
technology, would harm our business. In addition, any infringement claims,
with or without merit, would be time-consuming and expensive to litigate or
settle and could divert management attention from administering our core
business.
We rely on a license of encryption technology from RSA Data Security, Inc.
The license from RSA is perpetual unless terminated by either party as the
result of a material breach or insolvency or, at our election, for
convenience.
As a member of several groups involved in setting standards for the
industry, the WAP Forum, for example, we have agreed to license our
intellectual property to other members of those groups on fair and reasonable
terms to the extent that the intellectual property is essential to
implementing the specifications promulgated by those groups. Each other member
of the groups has entered into a reciprocal agreement.
Employees
As of June 30, 2000, we had a total of 875 employees. None of our employees
is covered by any collective bargaining agreements. We believe that our
relations with our employees are good.
Item 2. Properties.
Our principal offices are located in Redwood City, California in four
buildings aggregating 115,000 square feet under leases expiring in March and
May of 2005. We have renewal options on two buildings for another five-year
term. Our Belfast, Ireland office totals 20,000 square feet under a lease
which expires in July 2014, with an option to terminate in 2009. We also lease
space for our offices in London, Newbury, Copenhagen, Paris, Madrid, Rome,
Mexico City, Hong Kong, Seoul and Tokyo.
In March 2000, the Company entered into a lease for approximately 280,000
square feet of office space in Redwood City, California, that is under
construction and is expected to be completed in the year 2001. The lease is
for a period of twelve years from the commencement date of the lease and has
two five-year renewal options.
Item 3. Legal Proceedings.
In April 2000, we filed a lawsuit against Geoworks Corporation in the U.S.
District Court in San Francisco California, alleging and seeking a court order
declaring that U.S. Patent No. 5,327,529, assigned to Geoworks is not
infringed by us and that the patent is also invalid and unenforceable. We took
this action in response to Geoworks attempt to require industry participants
to obtain licenses under the Geoworks patent. On
15
<PAGE>
June 15, 2000, Geoworks filed an answer to our complaint and asserted a
counterclaim against us alleging that we infringe the patent and seeking
various forms of relief. We deny Geoworks' allegations and while we intend to
pursue our position vigorously, the outcome of any litigation is uncertain,
and we may not prevail. Additionally, we may incur substantial expenses in
defending against this claim. Should we be found to infringe the Geoworks
patent, we may be liable for potential monetary damages, and could be required
to obtain a license from Geoworks. If we were unable to obtain a license on
commercially reasonable terms, we may not be able to proceed with development
and sale of some of our products.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Price Range of Common Stock
Our common stock has been listed for quotation on the Nasdaq National Market
under the symbol "PHCM" since our initial public offering on June 11, 1999.
The following table shows the high and low sales prices of our common stock as
reported by the Nasdaq National Market for the period indicated.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
1999
Period from June 11, 1999 to June 30, 1999............ $ 32.7813 $ 8.0000
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
2000
First Quarter......................................... $ 92.6562 $ 19.8125
Second Quarter........................................ $175.0000 $ 74.8125
Third Quarter......................................... $208.0000 $100.5000
Fourth Quarter........................................ $160.6250 $ 50.0000
</TABLE>
The closing sale price of the common stock as reported on the Nasdaq
National Market on July 31, 2000 was $79.875 per share. As of that date there
were 600 holders of record of the common stock. This does not include the
number of persons whose stock is in nominee or "street name" accounts through
brokers.
The market price of the common stock has been and may continue to be subject
to wide fluctuations in response to a number of events and factors, such as
quarterly variations in our operating results, announcements of technological
innovations or new products by us or competitors, changes in financial
estimates and recommendations by securities analysts, the operating and stock
performance of other companies that investors may deem comparable to us, and
news reports relating to trends in our markets. In addition, the stock market
in recent years has experienced extreme price and volume fluctuations that
have particularly affected the market prices of many high technology and
Internet-related companies that have often been unrelated or disproportionate
to the operating performance of companies. These fluctuations, as well as
general economic and market conditions, may adversely affect the market price
for the common stock.
Dividend Policy
The Company has never paid cash dividends on our common stock. We currently
intend to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends
in the foreseeable future. In addition, the terms of our current equipment
loan prohibit us from paying dividends without our lender's consent.
Changes in Securities and Use of Proceeds
On June 10, 1999, in connection with our 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
our common stock were offered and sold for our account at a price of $8.00 per
share, generating aggregate net proceeds of $66.8 million. The managing
underwriters were Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp Piper Jaffray Inc.
On November 16, 1999, in connection with our secondary offering, a
Registration Statement on Form S-1 (No. 333-89879) was declared effective by
the Securities and Exchange Commission, pursuant to
17
<PAGE>
which 3,041,500 shares of our common stock were offered and sold for our
account at a price of $135.00 per share, generating aggregate net proceeds of
$390.4 million. The managing underwriters were Credit Suisse First Boston
Corporation, Goldman, Sachs and Co., Hambrecht & Quist, BancBoston Robertson
Stephens Inc., U.S. Bancorp Piper Jaffray Inc., and Bank of America Securities
LLC.
On October 26, 1999, in connection with our acquisition of APiON Telecom
Limited, or APiON, we issued 2,393,026 shares of our common stock to the
existing stockholders of APiON in exchange for all of the outstanding shares
of capital stock of APiON. The actual number of shares issued in connection
with the transaction is subject to downward adjustment to the extent that
claims are made against an escrow fund created at the time of the transaction.
The transaction did not involve any underwriters, underwriting discounts or
commissions, or any public offering, and we believe that it was exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), by virtue of Section 4(2) thereof. The recipients of the
securities represented their intentions to acquire the securities for
investment only, had access to all relevant material information regarding the
Company necessary to evaluate the investment and were either accredited
investors, had sufficient knowledge and experience to evaluate the investment,
or relied upon a purchaser representative.
On October 27, 1999, in connection with our acquisition of substantially all
of the assets of Angelica Wireless ApS, or Angelica, we issued 16,000 shares
of our common stock to existing employees of Angelica contingent upon their
continued employment with Phone.com. The actual number of shares issued in
connection with the transaction is subject to reduction to the extent that
certain key employees do not remain with us for a period of time from at least
one to three years. The transaction did not involve any underwriters,
underwriting discounts or commissions, or any public offering, and we believe
that it was exempt from the registration requirements of the Securities Act by
virtue of Section 4(2) thereof. We received reasonable assurances that the
investors acquired the securities for investment only. In addition, the
recipients of the securities had access to all relevant material information
regarding the Company necessary to evaluate the investment and were either
accredited investors, had sufficient knowledge and experience to evaluate the
investment, or relied upon a purchaser representative.
On February 8, 2000, in connection with our acquisition of AtMotion, Inc.,
or AtMotion, we issued 2,280,287 shares of our common stock to the existing
stockholders of AtMotion in exchange for all of the outstanding shares of
capital stock of AtMotion. The actual number of shares issued in connection
with the transaction is subject to downward adjustment to the extent that
claims are made against an escrow fund created at the time of the transaction.
The transaction did not involve any underwriters, underwriting discounts or
commissions, or any public offering. We believe that the transaction was
exempt from the registration requirements of the Securities Act by virtue of
Section 3(a)(10) because the California Department of Corporations held a
fairness hearing and granted a permit pursuant to Section 25121 of the
California Corporations Code to issue the securities.
On March 4, 2000, in connection with our acquisition of Paragon Software
(Holdings) Limited, or Paragon, we issued 3,051,016 shares of our common stock
to the existing stockholders of Paragon in exchange for all of the outstanding
shares of capital stock of Paragon. The actual number of shares issued in
connection with the transaction is subject to downward adjustment to the
extent that claims are made against an escrow fund created at the time of the
transaction. The transaction did not involve any underwriters, underwriting
discounts or commissions, or any public offering, and we believe that it was
exempt from the registration requirements of the Securities Act , by virtue of
Section 4(2) thereof. The recipients of the securities represented their
intentions to acquire the securities for investment only, had access to all
relevant material information regarding the Company necessary to evaluate the
investment and were either accredited investors, had sufficient knowledge and
experience to evaluate the investment, or relied upon a purchaser
representative.
On April 14, 2000, in connection with our acquisition of Onebox.com, Inc.,
or Onebox, we issued 6,207,865 shares of our common stock to the existing
stockholders of Onebox in exchange for all of the outstanding shares of
capital stock of Onebox. The actual number of shares issued in connection with
the transaction is subject to
18
<PAGE>
downward adjustment to the extent that claims are made against an escrow fund
created at the time of the transaction. The transaction did not involve any
underwriters, underwriting discounts or commissions, or any public offering.
We believe that the transaction was exempt from the registration requirements
of the Securities Act by virtue of Section 3(a)(10) because the California
Department of Corporations held a fairness hearing and granted a permit
pursuant to Section 25121 of the California Corporations Code to issue the
securities.
On May 4, 2000, in connection with our acquisition of Velos 2 S.r.l., or
Velos, we issued 18,000 shares of our common stock to the existing
stockholders of Velos in exchange for all of the outstanding shares of capital
stock of Velos. The actual number of shares issued in connection with the
transaction is subject to downward adjustment to the extent that claims are
made against an escrow fund created at the time of the transaction. The
transaction did not involve any underwriters, underwriting discounts or
commissions, or any public offering, and we believe that it was exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), by virtue of Section 4(2) thereof. We received reasonable
assurances that the investors were acquiring the securities for investment
only. In addition, the recipients of the securities had access to all relevant
material information regarding the Company necessary to evaluate the
investment and were either accredited investors, had sufficient knowledge and
experience to evaluate the investment, or relied upon a purchaser
representative.
On June 14, 2000, in connection with our acquisition of MyAble, Inc., or
MyAble, we issued 193,873 shares of our common stock to the existing
stockholders of MyAble in exchange for all of the outstanding shares of
capital stock of MyAble. The actual number of shares issued in connection with
the transaction is subject to downward adjustment to the extent that claims
are made against an escrow fund created at the time of the transaction. The
transaction did not involve any underwriters, underwriting discounts or
commissions, or any public offering, and we believe that it was exempt from
the registration requirements of the Securities Act, by virtue of Section 4(2)
thereof. The recipients of the securities of the securities represented their
intentions to acquire the securities for investment only, had access to all
relevant material information regarding the Company necessary to evaluate the
investment and were either accredited investors, had sufficient knowledge and
experience to evaluate the investment, or relied upon a purchaser
representative.
As of June 30, 2000, we have used part of the net proceeds from the initial
offering to fund capital expenditures of approximately $20 million, including
the acquisition of computer and communication systems, operating losses of
approximately $16 million, and costs of approximately $32 million relating to
our acquisitions during the year ended June 30, 2000.
19
<PAGE>
Item 6. Selected Consolidated Financial Data.
The tables that follow present portions of our consolidated financial
statements and are not complete. You should read the following selected
consolidated financial data in conjunction with our consolidated financial
statements and related notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Form 10-K. The consolidated statements of operations data for the
years ended June 30, 1998, 1999 and 2000, and the consolidated balance sheet
data as of June 30, 1999 and 2000 are derived from our consolidated financial
statements that have been audited by KPMG LLP, independent auditors, which are
included elsewhere in this Form 10-K. The consolidated statements of
operations data for the years ended June 30, 1996 and 1997 and the
consolidated balance sheet data as of June 30, 1996, 1997 and 1998 are derived
from audited consolidated financial statements that are not included in this
Form 10-K. The historical results presented below are not necessarily
indicative of the results to be expected for any future fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues:
License................... $ -- $ 80 $ 522 $ 5,229 $ 43,729
Maintenance and support
services................. -- 212 1,683 5,921 14,548
Consulting services....... -- -- -- 2,292 10,450
------- ------- -------- -------- ----------
Total revenues.......... -- 292 2,205 13,442 68,727
------- ------- -------- -------- ----------
Cost of revenues:
License................... -- 87 95 371 4,233
Maintenance and support
services................. -- 266 1,063 3,022 10,437
Consulting services....... -- -- -- 1,146 6,156
------- ------- -------- -------- ----------
Total cost of revenues.. -- 353 1,158 4,539 20,826
------- ------- -------- -------- ----------
Gross profit (loss)..... -- (61) 1,047 8,903 47,901
------- ------- -------- -------- ----------
Operating expenses:
Research and development.. 1,387 3,959 5,732 13,082 37,965
Sales and marketing....... 757 3,198 5,011 10,840 37,222
General and
administrative........... 522 1,237 1,801 4,432 13,492
Stock-based compensation.. -- -- 108 1,011 5,464
Amortization of goodwill
and other intangible
assets................... -- -- -- -- 214,401
In-process research and
development.............. -- -- -- -- 22,490
------- ------- -------- -------- ----------
Total operating
expenses............... 2,666 8,394 12,652 29,365 331,034
------- ------- -------- -------- ----------
Operating loss.......... (2,666) (8,455) (11,605) (20,462) (283,133)
Interest income, net........ 196 464 982 1,803 19,586
------- ------- -------- -------- ----------
Loss before income
taxes.................. (2,470) (7,991) (10,623) (18,659) (263,547)
Income taxes................ -- -- -- (2,104) (1,597)
------- ------- -------- -------- ----------
Net loss................ $(2,470) $(7,991) $(10,623) $(20,763) $ (265,144)
======= ======= ======== ======== ==========
Basic and diluted net loss
per share.................. $ (0.26) $ (0.84) $ (1.02) $ (1.49) $ (3.81)
======= ======= ======== ======== ==========
Shares used in computing
basic and diluted net loss
per share.................. 9,408 9,552 10,442 13,932 69,650
======= ======= ======== ======== ==========
<CAPTION>
As of June 30,
------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash, cash equivalents and
short-term investments..... $ 5,848 $ 8,014 $ 33,464 $113,086 $ 435,588
Total assets................ 6,767 9,759 39,144 138,933 2,158,833
Equipment loan and capital
lease obligations, less
current portion............ -- -- 915 498 3,291
Total stockholders' equity.. 6,464 8,125 28,393 92,292 2,020,757
</TABLE>
20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This section of this Form 10-K includes a number of forward-looking
statements that reflect our current views with respect to future events and
financial performance. We use words such as "anticipates," "believes,"
"expects," "future," and "intends," and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-K.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from historical results or our
predictions. These risks are described in "Risk Factors" and elsewhere in this
Form 10-K.
Overview
We were incorporated in December 1994 and, from inception until June 1996,
our operations consisted primarily of various start-up activities, including
development of technologies central to our business, recruiting personnel and
raising capital. In 1995, we developed our initial technology, which enables
the delivery of Internet-based services to wireless telephones. In 1996, we
introduced and deployed our first products based on this technology. We first
recognized license revenues in August 1996, and generated license revenues of
approximately $522,000, $5.2 million and $43.7 million for the fiscal years
ended June 30, 1998, 1999 and 2000, respectively. We incurred net losses of
approximately $10.6 million, $20.8 million and $265.1 million for the fiscal
years ended June 30, 1998, 1999 and 2000, respectively. Excluding amortization
of goodwill and other intangibles, deferred stock compensation and charges for
in-process research and development, we incurred net losses of approximately
$10.5 million, $19.8 million and $22.8 million for the fiscal years ended June
30, 1998, 1999 and 2000, respectively. As of June 30, 2000, we had an
accumulated deficit of approximately $307.1 million.
To provide a worldwide standard for the delivery of Internet-based services
over mass-market wireless telephones, we co-founded the WAP Forum in 1997. In
February 1998, the WAP Forum published technical specifications for
application development and product interoperability based substantially on
our technology and on Internet standards. Leading network operators,
telecommunications device and equipment manufacturers and software companies
worldwide have sanctioned the specifications promulgated by the WAP Forum. In
addition to the standard-setting process developed by the WAP Forum, we are
also currently involved in development of a standard model for over-the-air
provisioning and management of wireless devices through the CDG and also with
the W3C for the development of future standards in the mobile web. We
anticipate that the standards developed through these initiatives will
continue to increase the acceptance of Internet-based services over wireless
telephones.
We generate revenues from licenses, maintenance and support services and
consulting services. We receive license revenues from licensing our software
platform directly to network operators and indirectly through value-added
resellers. Currently, our software platform consists of the UP.Link Server,
the Mobile Management Server and the MyPhone Application Suite. As of June 30,
2000, 77 network operators have licensed our software and have commenced or
announced commercial service or are in market or laboratory trials. Those
customers serve over 240 million voice subscribers. Maintenance and support
services revenues are from engineering and support services provided to
wireless telephone manufacturers and wireless network operators. Consulting
services revenues are derived from consulting services provided to network
operator customers either directly by us or indirectly through resellers.
Our future success depends on our ability to increase revenues from sales of
products and services to new and existing network operator customers. If the
market for Internet-based services via wireless telephones fails to develop or
develops more slowly than expected, then our business would be materially and
adversely affected. In addition, because there is a relatively small number of
network operators worldwide, any failure to sell our products to network
operator customers successfully could result in a shortfall in revenues that
could not be readily offset by other revenue sources.
21
<PAGE>
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 generally license our
UP.Browser software to wireless telephone manufacturers free of per-unit
royalties and other license fees and provide maintenance and support services
for an annual flat fee. As of June 30, 2000, we had licensed UP.Browser to 35
wireless telephone manufacturers.
Effective July 1, 1998, we adopted SOP 97-2, Software Revenue Recognition,
as amended by SOP 98-4 and SOP 98-9. SOP 97-2, as amended, generally requires
revenue earned on software arrangements involving multiple elements to be
allocated to each element based on the relative fair value of the elements.
We license our UP.Link Server Suite and related server-based software
products to network operators through our direct sales force and indirectly
through our channel partners. 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 under a perpetual
license model either on an as-deployed or on a prepaid basis, or
alternatively, under a monthly or quarterly time-based license model under
which no perpetual license is acquired. For licenses purchased on an as-
deployed basis, license revenue is generally recognized quarterly as
subscribers are activated to use the services that are based on our UP.Link
Server Suite and related server-based software products. For licenses
purchased on a prepaid basis, prepaid license fees are recognized ratably over
the period that maintenance and support services are expected to be provided
unless we commit to provide the customer with future unspecified products
under a subscription arrangement. Under a subscription arrangement, prepaid
license fees are recognized ratably over the contractual term of the prepaid
arrangement (i.e., the date the prepaid licenses expire if not used),
generally 12 to 30 months, commencing at the beginning of the month delivery
and acceptance occur by the network operator. We recognize revenue from other
prepaid licenses, including the related maintenance and support services
provided to network operators, ratably over the lesser of the estimated life
of the software or the contractual term of the arrangement, generally 12 to 30
months, commencing at the beginning of the month delivery and acceptance occur
by the network operator. For customers that license our products under the
time-based license model, revenues are recognized over the respective period
based on the number of the subscribers using the services that are based on
our products. Revenues from consulting services provided to network operators
are recognized as the services are performed.
We recognize revenues from UP.Browser agreements with wireless telephone
manufacturers ratably over the period during which the services are performed,
generally one year. We provide our wireless telephone manufacturer customers
with support associated with their efforts to port our UP.Browser software to
their wireless telephones, software error corrections, and new releases as
they become commercially available.
Deferred revenue increased from $36.8 million as of June 30, 1999 to $77.3
million as of June 30, 2000. Deferred revenue as of June 30, 2000, was
comprised of $72.9 million in prepaid fees charged to wireless network
operators and $4.4 million in prepaid maintenance and other service fees
charged to wireless telephone manufacturers. Despite the year over year
increase in deferred revenue, 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
June 30, 2000, in the amount of approximately $68.8 million will be recognized
over the next fifteen months. The remainder of deferred revenues relating to
wireless network operators will generally be recognized over the next 12 to 30
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
22
<PAGE>
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 48%, 68% and 73%
of our total revenues in the years ended June 30, 1998, 1999 and 2000,
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.
Acquisitions
On October 26, 1999, we completed our acquisition of APiON, a company based
in Belfast, Northern Ireland, in exchange for 2,393,026 shares of our common
stock. In addition, we also agreed to issue cash and common stock with an
aggregate value of up to approximately $14.1 million to the then current and
former employees of APiON. APiON was a provider of WAP software products to
GSM network operators in Europe and had expertise in GSM Intelligent Networks,
wireless data and WAP technology. Former employees of APiON received
consideration totaling approximately $2.2 million in cash with the remaining
$4.3 million payable in our common stock on the one-year anniversary of the
closing of the acquisition of APiON subject to forfeiture upon the occurrence
of certain events. Current employees of APiON received approximately $2.5
million in cash with the remaining $5.1 million payable in our common stock on
each of the first two anniversaries of the closing of the acquisition of APiON
contingent upon continued employment. The actual number of our shares to be
issued to the then current and former employees of APiON will depend upon the
fair value of our common stock on the distribution date. The total purchase
price for the transaction including direct acquisition costs was approximately
$246.8 million.
23
<PAGE>
Common stock issued to former shareholders and cash paid to current and
former employees of APiON at the closing of the acquisition was included in
the purchase price. Contingent common stock issuable in the future to former
employees of APiON has been treated as contingent consideration. The common
stock that is issued to the former employees of APiON upon the satisfaction of
certain future events will be added to goodwill and amortized over the
remaining useful life, which may increase our losses in future periods. Common
stock issuable in the future to current employees of APiON has been recorded
as deferred stock-based compensation.
We accounted for the acquisition of APiON as a purchase with APiON's results
of operations included from the acquisition date. The excess of the purchase
price over the fair value of tangible net assets acquired amounted to
approximately $244.5 million, with $242.5 million attributable to goodwill,
$1.7 million attributable to assembled workforce, $170,000 attributable to
developed technology and $110,000 attributable to in-process research and
development. These assets are being amortized on a straight-line basis over a
period of three years with the exception of the in-process research and
development, which was expensed on the acquisition date. In connection with
the acquisition, we recorded deferred stock-based compensation in the amount
of approximately $5.1 million, to be amortized over a two-year period.
On October 27, 1999, we acquired substantially all of the assets of
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 our MyPhone application
suite software. Total consideration paid, including direct acquisition costs,
was approximately $2.0 million. In addition, we also agreed to issue
approximately 16,000 shares of our common stock to employees of Angelica with
an aggregate value of approximately $1.7 million, subject to certain
forfeiture conditions dependent on continued employment. We accounted for the
acquisition as a purchase with Angelica's results of operations included from
the acquisition date. Approximately $2.0 million was allocated to goodwill,
which is being amortized on a straight line basis over a period of three
years. In addition, we recorded deferred stock-based compensation in the
amount of approximately $1.7 million, which is being amortized on an
accelerated basis over the vesting period of 36 months.
On February 8, 2000, we acquired all of the outstanding common and
redeemable convertible preferred stock of AtMotion, in exchange for 2,280,287
shares of our common stock. We also assumed all of the outstanding options and
warrants of AtMotion. AtMotion is a provider of Voice Portal technology. Total
consideration paid was approximately $287.2 million. The acquisition was
accounted for as a purchase with AtMotion's results of operations included
from the acquisition date. The excess of the purchase price over the fair
value of tangible net assets acquired amounted to approximately $286.1
million, with $242.9 million attributable to goodwill, $655,000 attributable
to assembled workforce and $42.5 million attributable to developed technology.
These assets are being amortized on a straight-line basis over a period of
three years. In addition, 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 March 4, 2000, we acquired all of the oustanding common and convertible
preferred stock of Paragon, a company incorporated in England and Wales, in
exchange for 3,051,016 shares of our common stock. We also assumed all of the
outstanding options of Paragon. Paragon is a provider of data 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 user's needs for simpler synchronization
of information between the mobile phone, PC applications, and Internet
information services, whether or not the phone users are on-line. Total
consideration paid was approximately $453.7 million in our common stock in
addition to a cash payment of $3.6 million. Additional cash payments of
approximately $3.9 million will be allocated among certain employees of
Paragon within one year of the acquisition. There were also transaction costs
in connection with the purchase of approximately $11.6 million. The
acquisition was
24
<PAGE>
accounted for as a purchase with Paragon's results of operations included from
the date of acquisition. The excess of the purchase price over the fair value
of tangible net assets acquired amounted to approximately $483.7 million, with
$455.1 million attributable to goodwill, $980,000 attributable to assembled
workforce, $7.2 million attributable to developed technology, $2.3 million
attributable to non-compete agreements and $18.1 million attributable to in-
process research and development. These assets are being amortized on a
straight-line basis over a period of three years, except for the in-process
research and development, which was expensed on the acquisition date. In
addition, 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. On August 11, 2000, we
accelerated a cash payment of $17.0 million to a former shareholder of Paragon
that was originally due one year from the original purchase date of March 4,
2000 (see Note 5 and Note 10 to the Consolidated Financial Statements). The
payment was accelerated in conjunction with the former shareholder's
separation from our Company.
On April 14, 2000, we acquired all of the outstanding common and preferred
stock of Onebox, a wireless communications application service provider
offering users unified e-mail, voicemail and facsimile, in exchange for
6,207,865 shares of our common stock. We also assumed all of the outstanding
options of Onebox, which is based in San Mateo, California. Total
consideration paid was approximately $814.7 million, including estimated
transaction costs of approximately $16.8 million. The acquisition was
accounted for as a purchase with Onebox's results of operations included from
the date of acquisition. The excess of the purchase price over the fair value
of tangible net assets acquired amounted to approximately $814.1 million, with
$789.7 million attributable to goodwill, $590,000 attributable to assembled
workforce, $14.7 million attributable to developed technology, $4.8 million
attributable to non-compete agreements and $4.3 million attributable to in-
process research and development. These assets are being amortized on a
straight-line basis over a period of three years, except for the amount
recorded for in-process research and development, which was expensed on the
acquisition date. In addition, while the technology that we acquired as a
result of our Onebox acquisition now forms a part of our MyPhone application
suite, we expect to continue to incur significant sales and marketing expenses
in advance of generating significant revenues and cannot be assured that the
incorporation of the Onebox technology will result in significant revenues or
profitability.
On May 4, 2000, we acquired all of the outstanding common stock of Velos, a
company based in Milan, Italy, in exchange for 8,134 shares of our common
stock valued at approximately $579,000 plus a cash payment and direct
transaction costs totaling approximately $350,000. The acquisition was
accounted for as a purchase with Velos' results of operations included from
the date of acquisition. Approximately $929,000 was allocated to goodwill,
which is being amortized on a straight-line basis over a period of three
years. In addition, we issued an additional 9,866 shares of common stock
contingent on future employment, which resulted in deferred stock-based
compensation in the amount of approximately $1.2 million, to be amortized over
a three-year period.
On June 14, 2000, we acquired all of the outstanding common stock of MyAble,
a company based in Palo Alto, California, in exchange for 193,873 shares of
our common stock. We also assumed all of the outstanding options of MyAble.
MyAble is a provider of hosted personalization services for wireline and
wireless web technologies. Total consideration paid was approximately $18.4
million. The acquisition was accounted for as a purchase with MyAble's results
of operations included from the date of acquisition. Approximately $18.4
million was allocated to goodwill, which is being amortized on a straight-line
basis over a period of three years.
The amount expensed to purchased research and development in the fiscal year
ended June 30, 2000 arose from the purchase acquisitions of Paragon and Onebox
(see Note 5 to the Consolidated Financial Statements).
25
<PAGE>
At the time of the acquisitions, the estimated aggregate fair value of
Paragon's and Onebox's research and development efforts that had not reached
technological feasibility as of the acquisition date and, as of that date, had
no alternative future uses was estimated to be approximately $18.1 million and
$4.3 million, respectively, and was expensed at the date of acquisition. This
allocation represented the estimated fair value based on risk-adjusted cash
flows related to incomplete research and development projects. Paragon and
Onebox each had one project considered to be in-process technology at the time
of the acquisitions.
These projects were for Paragon's over-the-air synchronization product,
which would allow a user to synchronize information between their PIM,
cellular phone and PDA devices at the touch of a button without requiring the
use of a cord or other linking device, and Onebox's productization of
integrated messaging services for wireless and wireline telecommunications
providers, ISP's and Web-based businesses. The products of Paragon and Onebox
are due for completion in our fiscal 2001 period.
The percentage completion of these projects at the time of acquisition were
as follows:
<TABLE>
<S> <C>
Over-the-air synchronization product................................... 40%
Productization of integrated messaging service......................... 77%
</TABLE>
The fair value assigned to purchased in-process technology was determined by
estimating the completion percentage of research and development efforts at
the acquisition date, forecasting risk-adjusted revenues considering the
completion percentage, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The
completion percentages were estimated based on cost incurred to date,
importance of completed development tasks and the elapsed portion of the total
project time.
The revenue projection used to value the in-process research and development
is based on units sales forecasts for worldwide sales territories and adjusted
to consider only the revenue related to development achievements completed at
the acquisition date. Projected annual revenues for the in-process development
projects were assumed to increase from product release through 2003 and
decline significantly in 2004.
Gross profit for the over-the-air synchronization project was assumed to be
84% in 2001 and between 81% and 85% from 2002 through 2004. Gross profit for
the productization of the integrated messaging service project was assumed to
be 68% in 2000 and between 87% and 89% from 2001 through 2002. These
projections were based on previous experience with similar products.
Estimated operating expenses, income taxes and capital charges to provide a
return on other acquired assets were deducted from gross profit to arrive at
net operating income for the in-process development projects. Operating
expenses were estimated as a percentage of revenue and included sales and
marketing expenses, administrative expenses, and development costs to maintain
the technology once it has achieved technological feasibility. In addition,
net cash flows estimates were adjusted to allow for fair return on working
capital and fixed assets. For Paragon, a 25% discount rate was used to
discount the net cash flows back to their present value. For Onebox, a 22%
discount rate was used to discount the net cash flows back to their present
value. If these projects are not successfully developed, we may not realize
the value assigned to the in-process research and development projects. Total
estimated costs to complete Paragon's project as of the acquisition date was
approximately $395,000. Total estimated costs to complete Onebox's project as
of the acquisition date was approximately $1.1 million.
On August 9, 2000, we announced our intention to merge with Software.com
(see Note 10 to the Consolidated Financial Statements). Software.com is a
leading provider of platforms, applications and services that enable the
delivery of Internet-based services to mass-market wireline devices. If
completed, we expect that the combined company will be a leading provider of
highly scalable infrastructure and application software enabling the delivery
of e-mail, voicemail, unified messaging, directory and wireless Internet
access for IP-based networks. We further expect that the combined company will
benefit from cross-sell and up-sell opportunities through the combined
existing relationships with major communications service providers worldwide.
If
26
<PAGE>
completed, the merger with Software.com will result in new business risks and
integration challenges common in all mergers. For example, our ability to
successfully integrate the two companies will depend in part on our ability to
retain key personnel who are knowledgeable about our businesses. In addition,
our ability to continue to adequately operate and grow our existing businesses
will depend on our ability to retain existing customers and attract new
customers to the combined company's products. If we are unable to do so, it
could have a negative impact on our consolidated results.
Fiscal Years Ended June 30, 1998, 1999 and 2000
License Revenues
License revenues increased from $522,000 in the fiscal year ended June 30,
1998 to $5.2 million in the fiscal year ended June 30, 1999, and $43.7 million
in the fiscal year ended June 30, 2000. The increase in license revenues was
due primarily to the launch of wireless Internet-based services by an
increasing number of network operators. The increase in license revenues in
fiscal 2000 was due primarily to the launch by Omnitel, Sprint and other
wireless network operators in the United States, as well as the ongoing
satisfaction of our deployment obligations related to AT&T. In total, we
recognized license revenues from approximately 50 wireless network operator
customers in North America, Europe, Asia and other parts of the world.
Maintenance and Support Services Revenues
Maintenance and support services revenues increased from $1.7 million in the
fiscal year ended June 30, 1998 to $5.9 million in the fiscal year ended June
30, 1999, and $14.5 million in the fiscal year ended June 30, 2000. The
increase in maintenance and support services revenues reflects an increase in
services provided to wireless telephone manufacturers and increased
installation and support fees from network operators. Of the increase from
fiscal 1999 to fiscal 2000, approximately $6.6 million was attributable
primarily to increased demand for maintenance and engineering support services
by wireless telephone manufacturers, and approximately $2.0 million was
attributable to maintenance and support services provided to wireless network
operators.
Consulting Services Revenues
Consulting services revenues increased from $2.3 million for the fiscal year
ended June 30, 1999 to $10.5 million for the fiscal year ended June 30, 2000.
The increase in consulting services revenues 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. No consulting services revenues were
earned in the fiscal year ended June 30, 1998.
Cost of License Revenues
Cost of license revenues consists primarily of third-party license and
support fees. Cost of license revenues increased from $95,000 in the fiscal
year ended June 30, 1998 to $371,000 in the fiscal year ended June 30, 1999,
and $4.2 million in the fiscal year ended June 30, 2000. As a percentage of
license revenues, cost of license revenues in the fiscal years ended June 30,
1998, 1999 and 2000 was 18%, 7% and 10%, respectively. The decrease as a
percentage of license revenues for fiscal 1999 was attributable primarily to
higher license revenues for fiscal 1999 and to the amortization of fixed
maintenance fees relating to third party software licenses. The cost of
license revenues increased for the fiscal year ended June 30, 2000 as a
percentage of license revenues due to the acquisition of Onebox and the
inclusion of its costs associated with the operation of its data center in
cost of license revenues under the ASP model. Under an ASP model, certain
costs such as the depreciation costs associated with operating a data center
are charged to cost of license revenues. We expect that cost of license
revenues will continue to vary as a percentage of license revenues from period
to period.
Cost of Maintenance and Support Services Revenues
Cost of maintenance and support services revenues consists of compensation
and related overhead costs for personnel engaged in the delivery of
installation, training and support services to network operators and
27
<PAGE>
engineering and support services to wireless telephone manufacturers. The
engineering and support services performed for wireless telephone
manufacturers include assistance relating to integrating our UP.Browser
software into the manufacturers' wireless telephones. Cost of maintenance and
support services revenues increased from $1.1 million in the fiscal year ended
June 30, 1998 to $3.0 million in the fiscal year ended June 30, 1999, and
$10.4 million in the fiscal year ended June 30, 2000. As a percentage of
maintenance and support services revenues, cost of maintenance and support
services revenues in the fiscal years ended June 30, 1998, 1999 and 2000 was
63%, 51% and 72%, respectively. The margin decrease associated with the growth
in cost of maintenance and support services revenues from the fiscal year
ended June 30, 1999 to the fiscal year ended June 30, 2000, was attributable
primarily to an increase in personnel dedicated to support a larger number of
wireless telephone manufacturer customers and to increased staffing in
anticipation of growth in the number of network operator customers. Gross
profit on maintenance and support services increased from fiscal 1998 to
fiscal 1999 due to the increase in the number of browser integration
assignments for wireless telephone manufacturers, which had the effect of
spreading our costs over a greater revenue base. In addition, the number of
trials in progress by network operators increased during this period. We
anticipate that the cost of maintenance and support services revenues will
increase in absolute dollars in future operating periods.
Cost of Consulting Services Revenues
Cost of consulting services revenues consists of compensation and
independent consultant costs for personnel engaged in our consulting services
operations and related overhead. Cost of consulting services revenues
increased from $1.1 million in the fiscal year ended June 30, 1999 to $6.2
million in the fiscal year ended June 30, 2000. No consulting services were
performed in fiscal year 1998. As a percentage of consulting services
revenues, cost of consulting services revenues in the fiscal years ended June
30, 1999 and 2000 were 50% and 59%, respectively. The decrease in gross
margins associated with consulting services revenues was due to a higher mix
of consulting services performed on a time and materials basis compared to the
services we perform under fixed contractual arrangements. Gross profit on
consulting services revenues is impacted by the mix of company personnel and
independent consultants assigned to projects. The gross profit we achieve is
also impacted by the contractual terms of the consulting assignments we
undertake, and the gross profit on fixed price contracts typically is more
susceptible to fluctuation than contracts performed on a time-and-materials
basis. We anticipate that the cost of consulting services revenues will
increase in absolute dollars as we continue to invest in the growth of our
consulting 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 128% from $5.7 million in the fiscal year ended June 30,
1998 to $13.1 million in the fiscal year ended June 30, 1999 and increased
190% to $38.0 million in the fiscal year ended June 30, 2000. The increases in
research and development expenses 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 and development expenses
will increase in absolute dollars. We further anticipate that research and
development expenses will increase substantially due to product development
efforts associated with all of our initiatives, including Unified Messaging.
We have also added a significant number of engineering personnel through our
acquisitions of APiON, Angelica, AtMotion, Paragon, Onebox and MyAble.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of compensation and related
costs for sales and marketing personnel, sales commissions, marketing
programs, public relations, promotional materials, travel expenses and trade
show exhibit expenses. Sales and marketing expenses increased 116% from $5.0
million in the fiscal year ended June 30, 1998 to $10.8 million in the fiscal
year ended June 30, 1999 and increased 243% to
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$37.2 million in the fiscal year ended June 30, 2000. 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, Paragon, Onebox, Velos and MyAble.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and
related expenses, accounting, legal and administrative expenses, professional
service fees and other general corporate expenses. General and administrative
expenses increased 146% from $1.8 million in the fiscal year ended June 30,
1998 to $4.4 million in the fiscal year ended June 30, 1999 and increased 204%
to $13.5 million in the fiscal year ended June 30, 2000. The 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 $108,000, $1.0 million and $5.5
million for the fiscal years ended June 30, 1998, 1999 and 2000, respectively.
All stock-based compensation is being amortized in a manner consistent with
Financial Accounting Standards Board Interpretation No. 28. Some stock options
granted and restricted stock issued during the fiscal years ended June 30,
1998, 1999 and 2000, resulted in the recognition of deferred stock-based
compensation. Total deferred stock-based compensation associated with these
equity arrangements amounted to $2.4 million related to stock options granted
and restricted stock issued from October 1997 through June 1999. Of the total
deferred stock-based compensation recorded through June 1999, $108,000, $1.0
million, and $696,000 was amortized in the fiscal years ended June 30, 1998,
1999 and 2000, respectively. In November, 1999, a stock option award was made
to a new employee at a price discounted from the then-current fair market
value of our stock, giving rise to deferred stock-based compensation in the
amount of $2.8 million. For the year ended June 30, 2000, we recognized stock-
based compensation expense related to this award in the amount of $1.3
million. We expect amortization of approximately $1.3 million, $0.6 million
and $0.3 million in the fiscal years ending June 30, 2001, 2002 and 2003,
respectively, relating to the amortization of the deferred stock-based
compensation associated with stock options granted and restricted stock issued
from October 1997 through June 2000.
In connection with our acquisition of APiON in October 1999, we recorded
additional deferred stock-based compensation of approximately $5.1 million.
For the year ended June 30, 2000, we recognized stock-based compensation
expense related to APiON in the amount of $2.6 million, and we expect
amortization of approximately $2.1 million and $0.4 million the fiscal years
ending June 30, 2001 and 2002, respectively. In connection with our
acquisition of Angelica in October 1999, we recorded additional deferred
stock-based compensation of approximately $1.7 million. For the year ended
June 30, 2000, we recognized stock-based compensation expense related to
Angelica in the amount of $818,000, and we expect amortization of
approximately $0.7 million and $0.2 million in the fiscal years ending June
30, 2001 and 2002, respectively. In connection with our acquisition of Velos
in June 2000, we recorded additional deferred stock-based compensation of
approximately $1.2 million. For the year ended June 30, 2000, we recognized
stock-based compensation expense related to Velos in the amount of $145,000,
and we expect amortization of approximately $0.8 million and $0.3 million in
the fiscal years ending June 30, 2001 and 2002, respectively. We may in the
future issue stock options with exercise prices below the then fair market
value, which would increase deferred stock-based compensation.
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Amortization of Goodwill and Other Intangible Assets and In-Process Research
and Development
Amortization of goodwill and intangible assets relating to our October 1999
acquisitions of APiON and Anglica and our acquisitions of AtMotion in February
2000, Paragon in March 2000, Onebox in April 2000, Velos in May 2000 and
MyAble in June 2000 aggregated $214.4 million for the year ended June 30,
2000. In connection with the APiON acquisition, we recorded goodwill and other
intangible assets of approximately $244.4 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 approximately $2.0 million, which is
being amortized on a straight-line basis over a three-year period. In
connection with the AtMotion acquisition, we recorded goodwill and other
intangible assets of approximately $286.1 million, which is being amortized on
a straight-line basis over a three-year period. In connection with the Paragon
acquisition, we recorded goodwill and other intangible assets of approximately
$465.6 million, which is being amortized on a straight-line basis over a
three-year period. We also recorded an immediate expense of $18.1 million
relating to in-process research and development in connection with the Paragon
acquisition. In connection with the Onebox acquisition, we recorded goodwill
and other intangible assets of approximately $809.8 million, which is being
amortized on a straight-line basis over a three-year period. We also recorded
an immediate expense of $4.3 million relating to in-process research and
development in connection with the Onebox acquisition. In connection with the
Velos acquisition, we recorded goodwill of approximately $929,000, which is
being amortized on a straight-line basis over a three-year period. In
connection with the MyAble acquisition, we recorded goodwill of approximately
$18.4 million, which is being amortized on straight-line basis over a three-
year period. We expect amortization of approximately $609.1 million, $609.1
million and $394.8 million in the fiscal years ending June 30, 2001, 2002 and
2003, respectively, relating to the amortization of goodwill and other
intangible assets. In addition, we may have additional acquisitions in future
periods which could give rise to additional goodwill or other intangible
assets being acquired. If we acquire additional goodwill or other intangible
assets, our acquisition-related amortization may increase in future periods.
Interest Income, Net
Net interest income was $982,000, $1.8 million and $19.6 million in the
fiscal years ended June 30, 1998, 1999 and 2000, respectively. The year-to-
year increases resulted primarily from earnings on rising cash, cash
equivalent and short-term investment balances as a result of our private
placement financings in February 1998 and March 1999, our initial public
offering in June 1999 and our secondary public offering in November 1999,
partially offset in the fiscal years ended June 30, 1998, 1999 and 2000 by
interest expense related to obligations under capital leases and our equipment
loan.
Income Taxes
Income tax expense of $2.1 million and $1.6 million for the fiscal years
ended June 30, 1999 and 2000, consisted of foreign withholding taxes. Since
inception, we have incurred net losses for federal and state tax purposes and
have not recognized any tax provision or benefit. As of June 30, 2000, the
Company had net operating loss carryforwards for federal and California income
tax purposes of approximately $192 million and $96 million, respectively. In
addition, the Company has federal and California research and development
credit carryforwards of approximately $4.9 million and $3.9 million,
respectively. The federal net operating loss carryforwards and research and
development credit carryforwards will expire from 2011 through 2020 if not
utilized. The California net operating loss carryforwards will expire from
2004 through 2006 if not utilized. The California research and development
credit carryforwards can be carried forward indefinitely. Federal and
California tax laws impose significant restrictions on the utilization of net
operating loss carryforwards in the event of a change in our ownership that
constitutes an "ownership change," as defined in Section 382 of the Internal
Revenue Code. If we have an ownership change, the ability to utilize the
stated carryforwards could be significantly reduced. See Note 7 of Notes to
the Consolidated Financial Statements.
As of June 30, 2000, we had net deferred tax assets of $63.9 million, which
were fully offset by a valuation allowance. Deferred tax assets consist
principally of the federal and state net operating loss carryforwards, start-
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up expenditures capitalized for tax purposes, accruals and reserves not
currently deductible for tax purposes, research and development credits and
foreign tax credit carryforwards. Deferred tax liabilities resulted from our
acquisitions during the year ended June 30, 2000, due to a difference in the
financial statement and tax basis of net assets acquired. In addition, we have
provided a valuation allowance due to the uncertainty of generating future
profits that would allow for the realization of these deferred tax assets.
Accordingly, no tax benefit was recorded in the accompanying consolidated
statements of operations.
Approximately $49.2 million of the valuation allowance for deferred tax
assets relating to net operating loss carryforwards is attributable to
employee stock option deductions, the benefit from which will be allocated to
additional paid-in capital when and if subsequently realized. The benefit from
approximately $5.8 million of the total $7.5 million valuation allowance for
the deferred tax asset related to research and development credit
carryforwards will be allocated to additional paid-in capital when and if
subsequently realized.
Liquidity and Capital Resources
Since inception, we have financed our operations through private sales of
convertible preferred stock which totaled $66.0 million in aggregate net
proceeds through March 31, 1999, through our initial public offering in June
1999, which generated net proceeds of approximately $66.8 million, and through
our secondary public offering in November 1999, which generated net proceeds
of approximately $390.4 million. As of June 30, 2000, we had $435.6 million of
cash, cash equivalents and short-term investments and working capital of
$356.8 million.
Net cash used for operating activities was $5.1 million, $917,000 and $1.4
million for the fiscal years ended June 30, 1998, 1999 and 2000, respectively.
For each of the fiscal years ended June 30, 1998, 1999 and 2000, cash used for
operating activities was attributable primarily to net losses and an increase
in accounts receivable offset in part by non-cash expenses such as
acquisition-related amortization charges and depreciation, increases in
accounts payable and accrued liabilities, and increases in deferred revenue.
For the fiscal year ended June 30, 2000, accounts receivable increased by
approximately $22.3 million. This increase was due to increased sales to both
wireless telephone manufacturers and network operators. Accrued liabilities
increased by approximately $8.7 million for the fiscal year ended June 30,
2000, excluding acquisition-related accruals. Deferred revenue increased by
approximately $38.5 million for the fiscal year ended June 30, 2000, primarily
as a result of increased deferred license prepayments by network operators.
Net cash used for investing activities was $18.0 million, $15.2 million and
$396.2 million for the fiscal years ended June 30, 1998, 1999 and 2000,
respectively. For the fiscal year ended June 30, 2000, our primary use of cash
was for increased purchases of short-term and restricted investments in the
amount of $544.6 million, partially offset by the sale of short-term
investments in the amount of $200.1 million. We also continued to make
investments in property and equipment in the amount of $20.1 million and used
$31.6 million of cash as part of the cost of acquiring APiON, Angelica,
AtMotion, Paragon, Onebox, Velos and MyAble.
Net cash provided by financing activities was $31.7 million, $83.2 million
and $396.9 million for the fiscal years ended June 30, 1998, 1999 and 2000,
respectively. Cash provided by financing activities in fiscal years 1998 and
1999 was primarily attributable to proceeds from the issuance of preferred
stock. In addition, in June 1999, we completed an initial public offering of
9,200,000 shares of our common stock at a public offering price of $8.00 per
share, which resulted in net proceeds to us of approximately $66.8 million. In
November 1999, we completed a secondary public offering of 3,041,500 shares of
our common stock at a public offering price of $135.00 per share, which
resulted in net proceeds to us of approximately $390.4 million. All of the
outstanding shares of convertible preferred stock were automatically converted
into shares of common stock upon the closing of the initial public offering in
June 1999.
As of June 30, 2000, our principal commitments consisted of obligations
outstanding under operating leases and our equipment loans and capital lease
obligations. On March 30, 2000, we entered into a lease for
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approximately 280,000 square feet of office space in Redwood City, California,
that is under construction and is expected to be completed in the year 2001.
Lease terms require a base rent of $3.25 per square foot per month as provided
by the lease agreement and will increase by 3.5% annually on the anniversary
of the initial month of the commencement of the lease. The lease term is for a
period of twelve years from the commencement date of the lease. The agreement
required that we provide a letter of credit in the amount of $16.5 million. As
of June 30, 2000, we have guaranteed the letter of credit and have pledged
approximately $20.7 million, or 125% of the letter of credit, as required, of
cash equivalents and investments to be held in trust as security for the
letter of credit. The restricted cash and investments held in trust under this
agreement are earning approximately 6.7% interest and the resulting income
earned is not subject to any restrictions. The lease further requires that we
pay leasehold improvements which are expected to be at least $15 million over
the next year. Although we have no material other commitments for capital
expenditures, we expect to increase capital expenditures and lease commitments
consistent with our anticipated growth in operations, infrastructure and
personnel. See Note 6 of Notes to the Consolidated Financial Statements.
We believe that our current cash, cash equivalents and short-term
investments, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next twelve months. If cash
generated from operations is insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt securities or to
obtain a credit facility. If additional funds are raised through the issuance
of debt securities, these securities could have rights, preferences and
privileges senior to holders of common stock, and the terms of any debt could
impose restrictions on our operations. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders, and additional financing may not be available in amounts or on
terms acceptable to us, if at all. If we are unable to obtain this additional
financing, we may be required to reduce the scope of our planned product
development and marketing efforts, which could harm our business, financial
condition and operating results.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standars Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company adopted SFAS No. 133 effective
July 1, 2000. Management does not believe the adoption of SFAS No. 133 will
have a material effect on the Company's consolidated financial position or
results of operations.
In December 1999, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in
Financial Statements, as amended by SAB 101A and SAB 101B, which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. In June 2000, the SEC issued SAB 101B
that delayed the implementation of SAB 101. We must adopt SAB 101 no later
than the fourth quarter of fiscal 2001. The SEC has recently indicated it
intends to issue further guidance with respect to the adoption of specific
issues addressed by SAB 101. Until such time as this additional guidance is
issued, we are unable to assess the impact, if any, it may have on our
financial position or results of operations.
In March 2000, the Emerging Issues Task Force, or EITF, published their
consensus on EITF Issue No. 00-2, Accounting for Web Site Development Costs,
which requires that costs incurred during the development of web site
applications and infrastructure, involving developing software to operate the
web site, including graphics that affect the "look and feel" of the web page
and all costs relating to software used to operate a web site should be
accounted for under Statement of Position 98-1, Accounting for the Costs of
Computer Software
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Developed or Obtained for Internal Use. However, if a plan exists or is being
developed to market the software externally, the costs relating to the
software should be accounted for pursuant to FASB Statement No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.
We will be required to adopt EITF Issue No. 00-2 in our first fiscal quarter,
beginning after June 30, 2000. We are in the process of assessing any impact
that the adoption of EITF Issue No. 00-2 will have on our consolidated
financial position or results of operations.
In March 2000, the EITF published their consensus on EITF Issue No. 00-3,
Application of AICPA Statement of Position 97-2, Software Revenue Recognition,
to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware. EITF Issue No. 00-3 states that a software element covered
by SOP 97-2 is only present in a hosting arrangement if the customer has the
contractual right to take possession of the software at any time during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on its own hardware or contract with another party
unrelated to the vendor to host the software. We will be required to adopt
EITF Issue No. 00-2 in our first fiscal quarter, beginning after June 30,
2000. Management does not believe the adoption of EITF Issue No. 00-3 will
have a material effect on our consolidated financial position or results of
operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, an
interpretation of Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees. FIN 44 addresses inconsistencies in
accounting for stock-based compensation that arise from implementation of APB
Opinion No. 25. We do not anticipate that the adoption of FIN 44 will have a
significant impact on our consolidated financial position or results of
operations. We adopted FIN 44 effective July 1, 2000.
Year 2000 Readiness Disclosure
With the changeover to the year 2000, we did not experience any disruption
to our 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.
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. In addition, until our
1999 fiscal year, we have had less than $2.25 million in annual revenue, which
represents a small percentage of our future anticipated annual revenues.
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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;
. delays in developing and introducing new products and services;
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. 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.
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 acquired companies into our
business or achieve the expected benefits of the acquisitions.
Our acquisitions of AtMotion and Paragon, which were completed in February
2000 and March 2000, respectively, our acquisition of Onebox, which was
completed in April 2000, and our pending merger with Software.com, our largest
business combination to date, which was announced in August 2000, will require
integrating the products, business and operations of these companies with our
company. We may not be able to successfully assimilate the personnel,
operations and customers of these companies into our business. Additionally,
we may fail to achieve the anticipated synergies from the acquisitions,
including product integration, marketing, product development, distribution
and other 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
If we fail to complete the merger with Software.com or if we do not
successfully integrate the combined companies, the market price of our common
stock may decline.
The merger of Software.com with us is subject to certain contingencies. If
the merger is not completed for any reason, the market price of our common
stock may decline to the extent that the current market price of our shares
reflect a market assumption that the merger will be completed. Additionally,
if we do not successfully integrate the combined companies, the market price
of our common stock may decline.
Any future merger or acquisition of companies or technologies may result in
disruptions to our business and/or the distraction of our management.
In addition to our pending merger with Software.com, we may acquire
technologies or companies in the future. Entering into any business
combination entails many risks, any of which could materially harm our
business, including:
. diversion of management's attention from other business concerns;
. failure to assimilate the combined companies with pre-existing
businesses;
. potential loss of key employees from either our pre-existing business or
the merged or acquired business;
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. dilution of our existing stockholders as a result of issuing equity
securities; and
. assumption of liabilities of the merged or acquired company.
To date, we have completed acquisitions of seven companies or their assets,
consisting of APiON, Angelica Wireless, AtMotion, Paragon, Onebox, Velos and
MyAble and have pending our merger with Software.com. We may merge with or
acquire other complementary businesses and technologies in the future. We may
not be able to identify other future suitable merger or acquisition
candidates, and even if we do identify suitable candidates, we may not be able
to make these transactions on commercially acceptable terms, or at all. If we
do merge with or acquire other companies, we may not be able to realize the
benefits we expected to achieve at the time of entering into the transaction.
In any future merger or acquisition, we will likely face the same risks as
discussed above. Further, we may have to incur debt or issue equity securities
to pay for any future merger or acquisition, the issuance of which could be
dilutive to our existing stockholders.
We may not be successful in making strategic investments.
In the future we may make strategic investments in other companies. Some of
these investments may be made in immature businesses with unproven track
records and technologies, and may have a high degree of risk, with the
possibility that we may lose the total amount of our investments. We may not
be able to identify suitable investment candidates, and even if we do, we may
not be able to make those investments on acceptable terms, or at all. In
addition, even if we make investments, we may not gain strategic benefits from
those investments.
Our sales cycle is long, and our stock price could decline if sales are
delayed or cancelled.
Quarterly fluctuations in our operating performance are exacerbated by our
sales cycle, which is lengthy, typically between six and twelve months, and
unpredictable. Many factors outside our control add to the lengthy education
and customer approval process for our products. For example, many of our
prospective customers have neither budgeted expenses for the provision of
Internet-based services to wireless subscribers nor specifically dedicated
personnel for the procurement and implementation of our products and services.
As a result, we spend a substantial amount of time educating customers
regarding the use and benefits 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. Further, the emerging
and evolving nature of the market for Internet-based services via wireless
telephones may lead prospective customers to postpone their purchasing
decisions. Any delay in sales of our products could cause our quarterly
operating results to vary significantly from projected results, which could
cause our stock price to decline.
Our success depends on acceptance of our products and services by network
operators and their subscribers.
From inception through June 30, 2000, we have generated a significant
portion of our total cumulative revenues from fees paid to us by wireless
telephone manufacturers that embed our browser in their wireless telephones.
However, our future success depends on our ability to increase revenues from
sales of our UP.Link Server Suite and related server-based software and
services to new and existing network operator customers and on market
acceptance of new products and services, including our MyPhone wireless
Internet portal framework and related server-based communications applications
software products, and we may not be able to achieve widespread adoption of
these products and services by these customers. This dependence is exacerbated
by the relatively small number of network operators worldwide. To date, only a
limited number of network operators have implemented and deployed services
based on our products. We cannot assure you that network operators will widely
deploy or successfully market services based on our products, or that large
numbers of subscribers will use these services.
The market for the delivery of Internet-based services through wireless
telephones is rapidly evolving, and we may not be able to adequately address
this market.
The market for the delivery of Internet-based services through wireless
telephones is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced or developed, or are in the
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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, 1999, AT&T Wireless Services accounted for approximately 17% of our total
revenues, and DDI Corporation accounted for approximately 14% of our total
revenues. For the year ended June 30, 2000 AT&T Wireless Services and DDI
Corporation accounted for 6% and 18%, respectively, of our total revenues. The
foregoing calculations are based on revenues derived from direct and indirect
sales to these customers.
If wireless telephones are not widely adopted for mobile delivery of Internet-
based services, our business could suffer.
We have focused our efforts on mass-market wireless telephones as the
principal means of delivery of Internet-based services using our products. If
wireless telephones are not widely adopted for mobile delivery of Internet-
based services, our business would suffer materially. Mobile individuals
currently use many competing products, such as portable computers, to remotely
access the Internet and e-mail. These products generally are designed for the
visual presentation of data, while wireless telephones historically have been
limited in this regard. In addition, the development and proliferation of many
types of competing products capable of the mobile delivery of Internet-based
services in a rapidly evolving industry represents a significant risk to a
dominant product emerging. If mobile individuals do not adopt wireless
telephones as a means of accessing Internet-based services, our business would
suffer. 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 and related server-based software
offers enhanced features and functionality that are not currently covered by
the specifications promulgated by the WAP Forum, subscribers currently must
use UP.Browser-enabled wireless telephones in order to fully utilize these
features and functionality. Additionally, we expect that future versions of
our UP.Link Server Suite and related server-based software will offer features
and functionality that are compatible with the specifications promulgated by
the
37
<PAGE>
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. 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 business model is subject to uncertainties, and
we may not be able to generate sufficient revenues to achieve profitability.
In September 1999, we announced our MyPhone service. We offer MyPhone as an
OEM service to enable network operators to create branded mobile Internet
portals for their subscribers, and we do not currently intend to develop our
own branded portal site. We also offer MyPhone as software products that
network operators can license from us and host themselves. We have limited
experience in developing mobile Internet portals, and we may not be successful
in executing our business strategy for the MyPhone service and products. The
success of MyPhone will depend on a number of factors, including the
successful transition from offering MyPhone as a hosted service to also
offering MyPhone products, the adoption of MyPhone by network operators, our
ability to provide compelling applications and services through MyPhone, and
the acceptance by end users of the Myphone service from network operators.
Developing these capabilities and commercializing the product offering 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 the services and products. Furthermore, our
business model for MyPhone is new and evolving. Even if we are successful in
executing this strategy, we cannot be certain that our business model for the
MyPhone service and products will result in sufficient revenue to achieve
profitability.
The market for our products and services is highly competitive.
The market for our products and services is becoming increasingly
competitive. The widespread adoption of open industry standards such as the
WAP specifications may make it easier for new market entrants and existing
competitors to introduce products that compete with our software products. In
addition, a number of our competitors, including Nokia, have announced or are
expected to announce enhanced features and functionality as proprietary
extensions to the WAP protocol. Furthermore, some of our competitors, such as
NTT, have introduced or may introduce services based on proprietary wireless
protocols that are not compliant with the WAP specifications.
We expect that we will compete primarily on the basis of price, time to
market, functionality, quality and breadth of product and service offerings.
Our current and potential competitors include the following:
. Wireless equipment manufacturers, such as Ericsson and Nokia;
. Microsoft;
. Wireless Knowledge, a joint venture of Microsoft and Qualcomm, as well
as a similar European joint venture of Microsoft and Ericsson;
. Systems integrators, such as CMG plc, and software companies, such as
Oracle Corporation and iPlanet, a Sun/Netscape alliance;
. Wireless network operators, such as NTT DoCoMo;
. Providers of Internet software applications and content, electronic
messaging applications and personal information management software
solutions; and
. Providers of unified messaging products and services, such as Comverse
and Critical Path.
38
<PAGE>
In particular, Microsoft Corporation has announced its intention to
introduce products and services that may compete directly with our UP.Link,
UP.Browser and UP.Application products. In addition, Microsoft has announced
that it intends to enable its Windows CE operating system to run on wireless
handheld devices, including wireless telephones. Microsoft has announced its
own browser, called Mobile Explorer, for these devices. Furthermore, Nokia is
marketing a WAP server to corporate customers and content providers. This WAP
server is designed to enable wireless telephone subscribers to directly access
applications and services provided by these customers, rather than through
gateways provided by network operators' WAP servers. If Nokia's WAP server is
widely adopted by corporate customers and content providers, it could
undermine the need for network operators to purchase WAP servers. Many of our
existing competitors, as well as potential competitors, have substantially
greater financial, technical, marketing and distribution resources than we do.
As we enter new markets and introduce new services, such as the MyPhone
products and services, we will face additional competitors. As we enter the
unified messaging market, we will face competition from established voicemail
providers such as Comverse, and Internet-based unified messaging providers
such as Critical Path. In the Portal Framework market, a number of companies
have introduced products and services relating to mobile portals that compete
with our MyPhone products and services. These existing and potential
competitors may include telecommunications companies such as Lucent
Technologies, traditional Internet portals such as AOL, InfoSpace, Microsoft
and Yahoo!, Internet infrastructure software companies and several private
mobile Internet portal companies. Our FoneSync synchronization product will
face competition from Motorola's TrueSync product, and product from Puma, as
well as from emerging synchronization companies such as Fusion One.
Our software products may contain defects or errors, and shipments of our
software may be delayed.
The software we develop is complex and must meet the stringent technical
requirements of our customers. We must develop our products quickly to keep
pace with the rapidly changing 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. Competition for qualified
personnel in the telecommunications and Internet software industries is
intense, and finding qualified personnel with experience in both industries is
even more difficult. We believe that there are only a limited number of
persons with the requisite skills to serve in many key positions, and it is
becoming increasingly difficult to hire and retain these persons. Competitors
and others have in the past, and may in the future, attempt to recruit our
employees.
We may fail to support our anticipated growth in operations.
To succeed in the implementation of our business strategy, we must rapidly
execute our sales strategy and further develop products and expand service
capabilities, while managing anticipated growth by implementing effective
planning and operating processes. If we fail to manage our growth effectively,
our business could suffer materially. To manage anticipated growth, we must:
. continue to implement and improve our operational, financial and
management information systems; for example, we are currently in the
process of implementing Oracle financial software;
. hire, train and retain additional qualified personnel;
39
<PAGE>
. continue to expand and upgrade core technologies;
. effectively manage multiple relationships with various network
operators, wireless telephone manufacturers, content providers,
applications developers and other third parties; and
. successfully integrate the businesses of our acquired companies.
Our systems, procedures and controls may not be adequate to support our
operations, and our management may not be able to achieve the rapid execution
necessary to exploit the market for our products and services.
Our success, particularly in international markets, depends in part on our
ability to maintain and expand our distribution channels.
Our success depends in part on our ability to increase sales of our products
and services through value-added resellers and systems integrators and to
expand our indirect distribution channels. If we are unable to maintain the
relationships that we have with our existing distribution partners, increase
revenues derived from sales through our indirect distribution channels, or
increase the number of distribution partners with whom we have relationships,
then we may not be able to increase our revenues or achieve profitability.
We expect that many network operators in international markets will require
that our products and support services be supplied through value-added
resellers and systems integrators. Thus, we expect that a significant portion
of international sales will be made through value-added resellers and systems
integrators, and the success of our international operations will depend on
our ability to maintain productive relationships with value-added resellers
and systems integrators.
In addition, our agreements with our distribution partners generally do not
restrict the sale by them of products and services that are competitive with
our products and services, and each of our partners generally can cease
marketing our products and services at their option and, in some
circumstances, with little notice and with little or no penalty.
We depend on others to provide content and develop applications for wireless
telephones.
In order to increase the value to customers of our product platform and
encourage subscriber demand for Internet-based services via wireless
telephones, we must successfully promote the development of Internet-based
applications and content for this market. If content providers and application
developers fail to create sufficient applications and content for Internet-
based services via wireless telephones, our business could suffer materially.
Our success in motivating content providers and application developers to
create and support content and applications that subscribers find useful and
compelling will depend, in part, on our ability to develop a customer base of
network operators and wireless telephone manufacturers large enough to justify
significant and continued investments in these endeavors.
If we are unable to integrate our products with third-party technology, such
as network operators' systems, our business may suffer.
Our products are integrated with network operators' systems and wireless
telephones. If we are unable to integrate our platform products with these
third-party technologies, our business could suffer materially. For example,
if, as a result of technology enhancements or upgrades of these systems or
telephones, we are unable to integrate our products with these systems or
telephones, we could be required to redesign our software products. Moreover,
many network operators use legacy, or custom-made, systems for their general
network management software. Legacy systems and certain custom-made systems
are typically very difficult to integrate with new server software such as our
UP.Link Server Suite. We may not be able to redesign our products or develop
redesigned products that achieve market acceptance.
40
<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.
In April 2000, we filed a lawsuit against Geoworks Corporation in the U.S.
District Court in San Francisco, California, alleging, and seeking a court
order declaring, that U.S. Patent No. 5,327,529, assigned to Geoworks is not
infringed by Phone.com and that the patent is also invalid and unenforceable.
We took this action in response to Geoworks' attempt to require industry
participants to obtain licenses under the Geoworks patent. On June 15, 2000,
Geoworks filed an answer to our complaint and asserted a counterclaim against
us, alleging that we infringed the patent and seeking various forms of relief.
We deny Geoworks' allegations and while we intend to pursue our position
vigorously, the outcome of any litigation is uncertain, and we may not
prevail. Additionally, we may incur substantial expenses in defending against
this claim. Should we be found to infringe the Geoworks patent, we may be
liable for potential monetary damages, and could be required to obtain a
license from Geoworks. If we were unable to obtain a license on commercially
reasonable terms, we may not be able to proceed with development and sale of
some of our products.
International sales of products is an important part of our strategy, and this
expansion carries specific risks.
International sales of products and services accounted for 73% of our total
revenues for the year ended June 30, 2000. 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,
economic, political and legal risks. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview."
Undetected Year 2000 problems could potentially harm our business.
Although the date is now past January 1, 2000 and we have not experienced
any material adverse impact from the transition to the Year 2000, we cannot
provide assurance that our suppliers and customers have not been affected in
manner that is not yet apparent. In addition, certain computer programs that
were date sensitive to the Year 2000 may experience difficulties with future
dates even though they have not experienced difficulties to date.
41
<PAGE>
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.
Additionally, the market price of Software.com is subject to many of the
same risks listed above. Because of our pending merger with Software.com,
fluctuations in their stock price can increase the volatility in the market
price of our common stock.
Our stock price may be volatile, exposing us to expensive and time-consuming
securities class action litigation.
The stock market in general, and the stock prices of Internet-related
companies in particular, have recently experienced extreme volatility, which
has often been unrelated to the operating performance of any particular
company or companies. If market or industry-based fluctuations continue, our
stock price could decline below current levels or the initial public offering
price regardless of our actual operating performance. Furthermore, the
historical trading volume of our stock is not indicative of any future trading
volume because a substantial portion of shares were not eligible for sale
until recently. Therefore, if a large number of shares of our stock are sold
in a short period of time, our stock price will decline. In the past,
securities class action litigation has often been brought against companies
following periods of volatility in their stock prices. We may in the future be
the target of similar litigation. Securities litigation could result in
substantial costs and divert management's time and resources, which could harm
our business, financial condition, and operating results.
Our certificate of incorporation, bylaws, rights agreement and Delaware law
contain provisions that could discourage a takeover.
On August 8, 2000, in connection with our pending merger with Software.com,
our board of directors declared a dividend distribution of one right for each
share of our common stock outstanding on August 18, 2000. The rights are
exercisable for a series of our preferred stock under certain circumstances as
specified in our rights agreement dated August 8, 2000. The potential exercise
of rights under the rights agreement could discourage, delay or prevent a
merger or acquisition that a stockholder may consider favorable. Additionally,
provisions of our certificate of incorporation and bylaws and Delaware law may
discourage, delay or prevent a merger or acquisition. These provisions include
the following:
. establishing a classified board in which only a portion of the total
board members will be elected at each annual meeting;
. authorizing the board to issue preferred stock;
. 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
42
<PAGE>
. establishing advance notice requirements for nominations for election of
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Hedging Instruments
We transact business in various foreign currencies and, accordingly, we are
subject to exposure from adverse movements in foreign currency exchange rates.
To date, the effect of changes in foreign currency exchange rates on revenues
and operating expenses have not been material. Substantially all of our
revenues are earned in U.S. dollars. Operating expenses incurred by our
European and Japanese subsidiaries are denominated primarily in U.K. pounds
sterling and Japanese yen, respectively.
We currently do not use financial instruments to hedge operating expenses in
foreign currencies. We intend to assess the need to utilize financial
instruments to hedge currency exposures on an ongoing basis.
We do not use derivative financial instruments for speculative trading
purposes, nor do we currently hedge our foreign currency exposure to offset
the effects of changes in foreign exchange rates.
Fixed Income Investments
Our exposure to market risks for changes in interest rates relates primarily
to corporate debt securities, U.S. Treasury Notes and certificates of deposit.
We place our investments with high credit quality issuers and, by policy,
limit the amount of the credit exposure to any one issuer.
Our general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. All highly liquid
investments with a maturity of less than three months at the date of purchase
are considered to be cash equivalents; all investments with maturities of
three months or greater are classified as available-for-sale and considered to
be short-term investments. As of June 30, 2000, our interest rate risk was
further limited by the fact that all investments in our short-term investment
portfolio had a maturity of less than one year.
Principal amounts of short-term investments by expected maturity:
<TABLE>
<CAPTION>
Fair
Expected maturity date Value
----------------------------- June 30,
2001 2002 2003 2004 2005 Total 2000
-------- ---- ---- ---- ---- -------- --------
(in thousands, except interest rates)
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate bonds........... $126,917 -- -- -- -- $126,917 $126,666
Commercial paper.......... 123,877 -- -- -- -- 123,877 123,840
Certificates of deposit... 70,823 -- -- -- -- 70,823 70,845
Federal agencies.......... 37,464 -- -- -- -- 37,464 37,370
-------- ---- ---- ---- ---- -------- --------
Total................... $359,081 -- -- -- -- $359,081 $358,721
======== ==== ==== ==== ==== ======== ========
Weighted-average
interest rate.......... 6.50% 6.50%
======== ========
</TABLE>
Item 8. Financial Statements and Supplementary Data.
See Part IV, Item 14 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
43
<PAGE>
PART III
The Company's Proxy Statement for its 2000 Annual Meeting of Stockholders,
which, when filed pursuant to Regulation 14A under the Securities Exchange Act
of 1934, will be incorporated by reference in this Annual Report on Form 10-K
pursuant to General Instruction G(3) of Form 10-K and will provide the
information required under Part III (Items 10, 11, 12 and 13).
44
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements and Report of KPMG LLP, which are set
forth in the Index to Consolidated Financial Statements at page F-1.
(2) Financial Statement Schedule, which is set forth in the Index to
Consolidated Financial Statements at F-1.
(3) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of August 8, 2000, by and among
the Registrant, Silver Merger Sub Inc. and Software.com, Inc.
(incorporated by reference to Exhibit 2.1 to the Registrant's current
report on Form 8-K dated August 17, 2000).
2.2 Agreement and Plan of Merger, dated as of February 13, 2000, by and
among the Registrant, Onyx Acquisition Corp., Onebox and Timothy
Haley as agent of the former stockholders of Onebox.com, Inc.
together with exhibits thereto (incorporated by reference to Exhibit
2.1 to the Registrant's current report on Form 8-K dated May 15,
2000).
2.3+ Sale and Purchase Agreement dated February 8, 2000, by and among the
Registrant, Paragon Software (Holdings) Limited and the several
vendors named therein (incorporated by reference to Exhibit 2.1 to
the Registrant's current report on Form 8-K dated March 17, 2000).
2.4 Separation Agreement, dated August 1, 2000 by and among the
Registrant, Phone.com (Newbury) Limited, Colin Calder and The Stanley
Trustee Company Limited.
2.5 Agreement and Plan of Merger and Reorganization, dated as of December
21, 1999, by and among the Registrant, Mercedes Acquisition Corp.,
AtMotion Inc. and Dixon R. Doll as agent of the former shareholders
of AtMotion Inc. together with exhibits thereto (incorporated by
reference to Exhibit 2.1 to the Registrant's current report on Form
8-K dated February 24, 2000).
2.6 Agreement dated October 11, 1999, between the Registrant and each of
the shareholders of APiON (incorporated by reference to Exhibit 2.1
to the Registrant's current report on Form 8-K dated November 3,
1999).
2.7 Supplemental Agreement dated October 26, 1999, between the Registrant
and each of the shareholders of APiON (incorporated by reference to
Exhibit 2.2 to the Registrant's current report on Form 8-K dated
November 3, 1999).
3.3* Amended and Restated Bylaws of the Registrant.
3.5* Amended and Restated Certificate of Incorporation of Registrant.
4.1* Form of the Registrant's Common Stock Certificate.
10.1* Form of Indemnification Agreement.
10.2* 1995 Stock Plan, as amended, and form of stock option agreement and
restricted stock purchase agreement.
10.3* 1996 Stock Plan and form of stock option agreement and restricted
stock purchase agreement.
10.4* 1999 Employee Stock Purchase Plan and form of subscription agreement.
10.5* 1999 Directors' Stock Option Plan and form of stock option agreement.
10.6* Fourth Amended and Restated Investor Rights Agreement dated March 12,
1999.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.7* Voting Agreement dated January 23, 1998 and amendment thereto.
10.8* Lease Agreement dated March 10, 1998 for offices at 800 Chesapeake by
and between Registrant and Seaport Centre Associates, LLC.
10.9* Form of Change of Control Severance Agreement between the Registrant
and the Registrant's Named Executive Officers.
10.10* Relocation Agreement dated December 23, 1996 between the Registrant
and Charles Parrish.
10.11* Warrant Agreements to Purchase Series C Preferred Stock dated May 29,
1997 and July 17, 1997 by and between the Registrant and Comdisco,
Inc.
10.12* Letter Agreement dated August 18, 1997 with Malcolm Bird.
10.13* Incentive Compensation Plan for Malcolm Bird dated January 27, 1999.
10.14*+ OEM Master License Agreement with RSA Data Security dated December 2,
1996.
10.15* Incentive Compensation Plan for Maurice Jeffery dated March 19, 1999.
10.16*+ Software License and Support Agreement dated as of May 1, 1996, with
AT&T Wireless Services, Inc., as amended.
10.17*+ Client License Agreement dated as of January 1, 1999, with Matsushita
Communication Industrial Co., Ltd.
10.18 First Amendment to Lease Agreement dated June 17, 1999 by and between
Registrant and Seaport Centre Associates, LLC.
10.19 Employment Agreement, dated October 4, 1999 by and between the
Registrant and Mike Mulica.
10.20 Amendment of Offer Letter dated July 24, 2000 by and between the
Registrant and Mike Mulica.
10.21 Lease Agreement dated January 21, 2000 for offices at 101 Saginaw and
595 Penobscot by and between the Registrant and Metropolitan Life
Insurance Company.
21 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, independent auditors.
24.1 Power of Attorney (see page 47).
27.1 Financial Data Schedule.
</TABLE>
--------
* Incorporated herein by reference to the exhibit filed with the Company's
Registration Statement on Form S-1 (Commission File No. 333-75219).
+ Confidential treatment has been granted by the Securities and Exchange
Commission with respect to certain information in these exhibits.
(b) Reports on Form 8-K
1. On November 3, 1999, the Company filed a Form 8-K with respect to the
Company's acquisition of the outstanding shares of capital stock of APiON
Telecoms Ltd., a telecommunications software company registered in Northern
Ireland.
2. On February 24, 2000, Phone.com, Inc. filed a Form 8-K to report that it
had consummated its acquisition of AtMotion, Inc.
3. On March 17, 2000, Phone.com, Inc. filed a Form 8-K to report that it had
consummated its acquisition of Paragon Software (Holdings) Limited, a
private limited company incorporated in England and Wales.
4. On April 24, 2000, Phone.com, Inc. filed a report on Form 8-K/A to provide
certain financial information required in conjunction with its acquisition
of AtMotion, Inc.
5. On May 12, 2000, Phone.com, Inc. filed a report on Form 8-K/A to provide
certain financial information required in conjunction with its acquisition
of Paragon Software (Holdings) Limited.
6. On May 15, 2000, Phone.com, Inc. filed a report on Form 8-K to report that
it had consummated its acquisition of Onebox.com, Inc.
7. On June 28, 2000, Phone.com, Inc. filed a report on Form 8-K/A to provide
certain financial information required in conjunction with its acquisition
of Onebox.com, Inc.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: August 30, 2000
Phone.com, inc.
/s/ Alan Black
By:__________________________________
Alan Black
Vice President, Finance and
Administration,
Chief Financial Officer and
Treasurer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Alain Rossmann and Alan Black, jointly and
severally, his or her attorneys-in-fact, each with the power of substitution,
for him or her in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or
his or her substitute or substitutes may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Alain Rossmann Chairman and Chief Executive August 30, 2000
____________________________________ Officer (Principal
Alain Rossmann Executive Officer)
/s/ Alan Black Vice President, Finance and August 30, 2000
____________________________________ Administration, Chief
Alan Black Financial Officer and
Treasurer (Principal
Financial and Accounting
Officer)
/s/ Roger Evans Director August 30, 2000
____________________________________
Roger Evans
/s/ Charles Parrish Executive Vice President and August 30, 2000
____________________________________ Director
Charles Parrish
/s/ Reed Hundt Director August 30, 2000
____________________________________
Reed Hundt
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David Kronfeld Director August 30, 2000
____________________________________
David Kronfeld
/s/ Andrew Verhalen Director August 30, 2000
____________________________________
Andrew Verhalen
</TABLE>
48
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of KPMG LLP, independent auditors.................................. F-2
Consolidated Balance Sheets as of June 30, 1999 and 2000.................. F-3
Consolidated Statements of Operations for the years ended June 30, 1998,
1999, and 2000........................................................... F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for
the years ended June 30, 1998, 1999, and 2000............................ F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1998,
1999, and 2000........................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
Schedule II--Valuation and Qualifying Accounts............................ S-1
</TABLE>
F-1
<PAGE>
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors
Phone.com, Inc.:
We have audited the accompanying consolidated balance sheets of Phone.com,
Inc. and subsidiaries as of June 30, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity and comprehensive
loss, and cash flows for each of the years in the three-year period ended June
30, 2000. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed in
the index on page F-1. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Phone.com,
Inc. and subsidiaries as of June 30, 1999 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
Mountain View, California
July 19, 2000, except as to Note 10,
which is as of August 11, 2000
F-2
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30,
--------------------
1999 2000
-------- ----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.............................. $ 79,803 $ 78,873
Short-term investments................................. 33,283 356,715
Accounts receivable (net of allowances of $0 and $1,050
as of June 30, 1999 and 2000, respectively)........... 20,474 46,939
Prepaid expenses and other current assets.............. 865 9,033
-------- ----------
Total current assets................................. 134,425 491,560
Property and equipment, net.............................. 3,014 25,188
Restricted cash and investments.......................... -- 20,700
Deposits and other assets................................ 1,494 8,508
Goodwill and other intangible assets..................... -- 1,612,877
-------- ----------
$138,933 $2,158,833
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of equipment loan and capital lease
obligations........................................... $ 424 $ 2,882
Accounts payable....................................... 1,749 9,062
Accrued liabilities.................................... 7,173 45,497
Deferred revenue....................................... 36,797 77,344
-------- ----------
Total current liabilities............................ 46,143 134,785
Equipment loan and capital lease obligations, less
current portion......................................... 498 3,291
-------- ----------
Total liabilities.................................... 46,641 138,076
-------- ----------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.001 par value;
5,000,000 shares authorized; no shares issued and
outstanding as of June 30, 1999 and 2000.............. -- --
Common stock, $0.001 par value; 100,000,000 and
250,000,000 shares authorized as of June 30, 1999 and
2000, respectively; 62,426,188 and 82,816,360 shares
issued and outstanding as of June 30, 1999 and 2000,
respectively.......................................... 62 83
Additional paid-in capital............................. 135,982 2,335,683
Deferred stock-based compensation...................... (1,318) (6,659)
Notes receivable from stockholders..................... (484) (724)
Accumulated other comprehensive loss................... -- (532)
Accumulated deficit.................................... (41,950) (307,094)
-------- ----------
Total stockholders' equity........................... 92,292 2,020,757
-------- ----------
$138,933 $2,158,833
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------
1998 1999 2000
-------- -------- ---------
<S> <C> <C> <C>
Revenues:
License...................................... $ 522 $ 5,229 $ 43,729
Maintenance and support services............. 1,683 5,921 14,548
Consulting services.......................... -- 2,292 10,450
-------- -------- ---------
Total revenues............................. 2,205 13,442 68,727
-------- -------- ---------
Cost of revenues:
License...................................... 95 371 4,233
Maintenance and support services............. 1,063 3,022 10,437
Consulting services.......................... -- 1,146 6,156
-------- -------- ---------
Total cost of revenues..................... 1,158 4,539 20,826
-------- -------- ---------
Gross profit............................... 1,047 8,903 47,901
-------- -------- ---------
Operating expenses:
Research and development..................... 5,732 13,082 37,965
Sales and marketing.......................... 5,011 10,840 37,222
General and administrative................... 1,801 4,432 13,492
Stock-based compensation..................... 108 1,011 5,464
Amortization of goodwill and other intangible
assets...................................... -- -- 214,401
In-process research and development.......... -- -- 22,490
-------- -------- ---------
Total operating expenses................... 12,652 29,365 331,034
-------- -------- ---------
Operating loss............................. (11,605) (20,462) (283,133)
Interest income, net........................... 982 1,803 19,586
-------- -------- ---------
Loss before income taxes................... (10,623) (18,659) (263,547)
Income taxes................................... -- (2,104) (1,597)
-------- -------- ---------
Net loss................................... $(10,623) $(20,763) $(265,144)
======== ======== =========
Basic and diluted net loss per share........... $ (1.02) $ (1.49) $ (3.81)
======== ======== =========
Shares used in computing basic and diluted net
loss per share................................ 10,442 13,932 69,650
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Year ended June 30, 1998, 1999, and 2000
(In thousands, except share data)
<TABLE>
<CAPTION>
Convertible Accumulated Notes
preferred stock Common stock Additional Deferred other receivable
------------------- ------------------ paid-in stock-based Treasury comprehensive from
Shares Amount Shares Amount capital compensation stock loss stockholders
----------- ------ ---------- ------ ---------- ------------ -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of June
30, 1997........... 22,541,500 $ 22 11,424,500 $11 $ 18,849 $ -- $ (46) $ -- $(147)
Issuance of common
stock to officers
and employees for
notes receivable.. -- -- 453,334 -- 88 -- -- -- (88)
Repayment of notes
receivable from
stockholders...... -- -- -- -- -- -- -- -- 12
Stock options
exercised......... -- -- 806,962 1 14 -- 72 -- --
Issuance of Series
D convertible
preferred stock,
net of $2,056
issuance costs.... 12,889,754 13 -- -- 30,671 -- -- -- --
Repurchase of
common stock in
settlement of
notes receivable
from
stockholders...... -- -- (300,000) -- -- -- (26) -- 26
Deferred
compensation
related to stock
option grants..... -- -- -- -- 1,894 (1,894) -- -- --
Amortization of
deferred stock-
based
compensation...... -- -- -- -- -- 108 -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- -- --
----------- ---- ---------- --- -------- ------ ----- ----- -----
Balances as of June
30, 1998........... 35,431,254 35 12,384,796 12 51,516 (1,786) -- -- (197)
Issuance of common
stock to officers
and employees for
notes receivable.. -- -- 213,334 -- 422 -- -- -- (422)
Stock options
exercised......... -- -- 488,052 -- 7 -- 124 -- --
Issuance of Series
E convertible
preferred stock,
net of $1,100
issuance costs.... 4,917,086 5 -- -- 16,695 -- -- -- --
Issuance of common
stock in initial
public offering,
net of offering
costs of $6,791... -- -- 9,200,000 10 66,799 -- -- -- --
Conversion of
convertible
preferred stock
into common
stock............. (40,348,340) (40) 40,348,340 40 -- -- -- -- --
Repurchase of
common stock in
settlement of
notes receivable
from
stockholders...... -- -- (208,334) -- -- -- (124) -- 124
Repayment of notes
receivable from
stockholders...... -- -- -- -- -- -- -- -- 11
Deferred
compensation
related to stock
option grants..... -- -- -- -- 543 (543) -- -- --
Amortization of
deferred stock-
based
compensation...... -- -- -- -- -- 1,011 -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- -- --
----------- ---- ---------- --- -------- ------ ----- ----- -----
Balances as of June
30, 1999........... -- -- 62,426,188 62 135,982 (1,318) -- -- (484)
<CAPTION>
Total Compre-
Accumulated stockholders' hensive
deficit equity loss
----------- ------------- ---------
<S> <C> <C> <C>
Balances as of June
30, 1997........... $(10,564) $ 8,125
Issuance of common
stock to officers
and employees for
notes receivable.. -- --
Repayment of notes
receivable from
stockholders...... -- 12
Stock options
exercised......... -- 87
Issuance of Series
D convertible
preferred stock,
net of $2,056
issuance costs.... -- 30,684
Repurchase of
common stock in
settlement of
notes receivable
from
stockholders...... -- --
Deferred
compensation
related to stock
option grants..... -- --
Amortization of
deferred stock-
based
compensation...... -- 108
Net loss and
comprehensive
loss............ (10,623) (10,623) $(10,623)
----------- ------------- =========
Balances as of June
30, 1998........... (21,187) 28,393
Issuance of common
stock to officers
and employees for
notes receivable.. -- --
Stock options
exercised......... -- 131
Issuance of Series
E convertible
preferred stock,
net of $1,100
issuance costs.... -- 16,700
Issuance of common
stock in initial
public offering,
net of offering
costs of $6,791... -- 66,809
Conversion of
convertible
preferred stock
into common
stock............. -- --
Repurchase of
common stock in
settlement of
notes receivable
from
stockholders...... -- --
Repayment of notes
receivable from
stockholders...... -- 11
Deferred
compensation
related to stock
option grants..... -- --
Amortization of
deferred stock-
based
compensation...... -- 1,011
Net loss and
comprehensive
loss............ (20,763) (20,763) $(20,763)
----------- ------------- =========
Balances as of June
30, 1999........... (41,950) 92,292
</TABLE>
(continued)
F-5
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS--
(Continued)
Years ended June 30, 1998, 1999, and 2000
(In thousands, except share data)
<TABLE>
<CAPTION>
Convertible
preferred Accumulated Notes
stock Common stock Additional Deferred other receivable
------------- ----------------- paid-in stock-based Treasury comprehensive from Accumulated
Shares Amount Shares Amount capital compensation stock loss stockholders deficit
------ ------ ---------- ------ ---------- ------------ -------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock options
exercised......... -- -- 2,726,830 3 3,339 -- -- -- -- --
Issuance of common
stock in secondary
public offering,
net of offering
costs of $20,201.. -- -- 3,041,500 3 390,402 -- -- -- -- --
Issuance of common
stock and stock
options and notes
receivable from
stockholders
assumed in
acquisitions:
APiON Telecom
Limited.......... -- -- 2,393,026 2 235,759 -- -- -- -- --
AtMotion,
Inc. ............ -- -- 2,280,287 2 285,157 -- -- -- (353) --
Paragon Software
(Holdings)
Limited.......... -- -- 3,051,016 3 453,723 -- -- -- -- --
Onebox.com,
Inc. ............ -- -- 6,207,865 7 797,848 -- -- -- (122) --
Velos 2
S.r.l. .......... -- -- 8,134 -- 579 -- -- -- -- --
MyAble, Inc...... -- -- 193,873 -- 18,240 -- -- -- -- --
Deferred stock
compensation
related to
acquisitions:
APiON Telecom
Limited.......... -- -- -- -- 5,095 (5,095) -- -- -- --
Angelica
Wireless ApS..... -- -- 16,000 -- 1,732 (1,732) -- -- -- --
Velos 2 S.r.l.... -- -- 9,866 -- 1,155 (1,155) -- -- -- --
Deferred
compensation
related to stock
option grants..... -- -- -- -- 2,823 (2,823) -- -- -- --
Amortization of
deferred stock-
based
compensation...... -- -- -- -- -- 5,464 -- -- -- --
Repayment of notes
receivable from
stockholders...... -- -- -- -- -- -- -- -- 235 --
Issuance of common
stock pursuant to
Employee Stock
Purchase Plan .... -- -- 461,775 1 3,849 -- -- -- -- --
Net loss and
comprehensive
loss:
Foreign currency
translation
adjustments...... -- -- -- -- -- -- -- (172) -- --
Unrealized loss
on short-term
investments...... -- -- -- -- -- -- -- (360) -- --
Net loss......... -- -- -- -- -- -- -- -- -- (265,144)
Total
comprehensive
loss............
--- --- ---------- --- ---------- ------- ---- ----- ----- ---------
Balances as of June
30, 2000........... -- $-- 82,816,360 $83 $2,335,683 $(6,659) $-- $(532) $(724) $(307,094)
=== === ========== === ========== ======= ==== ===== ===== =========
<CAPTION>
Total Compre-
stockholders' hensive
equity loss
------------- ----------
<S> <C> <C>
Stock options
exercised......... 3,342
Issuance of common
stock in secondary
public offering,
net of offering
costs of $20,201.. 390,405
Issuance of common
stock and stock
options and notes
receivable from
stockholders
assumed in
acquisitions:
APiON Telecom
Limited.......... 235,761
AtMotion,
Inc. ............ 284,806
Paragon Software
(Holdings)
Limited.......... 453,726
Onebox.com,
Inc. ............ 797,733
Velos 2
S.r.l. .......... 579
MyAble, Inc...... 18,240
Deferred stock
compensation
related to
acquisitions:
APiON Telecom
Limited.......... --
Angelica
Wireless ApS..... --
Velos 2 S.r.l.... --
Deferred
compensation
related to stock
option grants..... --
Amortization of
deferred stock-
based
compensation...... 5,464
Repayment of notes
receivable from
stockholders...... 235
Issuance of common
stock pursuant to
Employee Stock
Purchase Plan .... 3,850
Net loss and
comprehensive
loss:
Foreign currency
translation
adjustments...... (172) $ (172)
Unrealized loss
on short-term
investments...... (360) (360)
Net loss......... (265,144) (265,144)
----------
Total
comprehensive
loss............ $(265,676)
------------- ==========
Balances as of June
30, 2000........... $2,020,757
=============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------
1998 1999 2000
-------- -------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(10,623) $(20,763) $ (265,144)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization............... 630 1,017 219,884
Amortization of deferred stock-based
compensation............................... 108 1,011 5,464
Allowance for accounts receivable........... -- -- 1,050
In-process research and development......... -- -- 22,490
Changes in operating assets and
liabilities:
Accounts receivable....................... (2,598) (17,750) (22,345)
Prepaid expenses and other assets......... (427) (739) (8,409)
Accounts payable.......................... 319 1,217 (1,667)
Accrued liabilities....................... 1,312 5,296 8,742
Deferred revenue.......................... 6,147 29,794 38,532
-------- -------- ----------
Net cash used for operating activities.. (5,132) (917) (1,403)
-------- -------- ----------
Cash flows from investing activities:
Purchases of property and equipment, net..... (367) (2,695) (20,098)
Restricted cash and short term investments... -- -- (20,700)
Purchases of short-term investments.......... (32,338) (54,125) (523,852)
Proceeds from sales and maturities of short-
term investments............................ 15,475 41,629 200,060
Acquisitions, net of cash acquired........... -- -- (31,640)
Other assets................................. (800) -- --
-------- -------- ----------
Net cash used for investing activities.. (18,030) (15,191) (396,230)
-------- -------- ----------
Cash flows from financing activities:
Net proceeds from sale of convertible
preferred stock............................. 30,684 16,700 --
Issuance of common stock..................... 87 66,940 397,597
Repayment of notes receivable from
stockholders................................ 12 11 235
Proceeds from equipment loan................. 1,300 -- --
Repayment of equipment loan and capital lease
obligations................................. (334) (417) (957)
-------- -------- ----------
Net cash provided by financing
activities............................. 31,749 83,234 396,875
-------- -------- ----------
Effect of exchange rates on cash and cash
equivalents................................... -- -- (172)
-------- -------- ----------
Net increase (decrease) in cash and cash
equivalents................................... 8,587 67,126 (930)
-------- -------- ----------
Cash and cash equivalents at beginning of
year.......................................... 4,090 12,677 79,803
-------- -------- ----------
Cash and cash equivalents at end of year....... $ 12,677 $ 79,803 $ 78,873
======== ======== ==========
Supplemental disclosures of cash flow
information:
Cash paid for taxes.......................... $ -- $ 2,104 $ 1,597
======== ======== ==========
Noncash investing and financing activities:
Common stock issued to officers and
employees for notes receivable.............. $ 88 $ 422 $ --
======== ======== ==========
Property and equipment acquired under
capital lease obligations................... $ 373 $ -- $ --
======== ======== ==========
Repurchase of common stock in settlement of
notes receivable from stockholders.......... $ 26 $ 124 $ --
======== ======== ==========
Deferred stock-based compensation............ $ 1,894 $ 543 $ 10,805
======== ======== ==========
Conversion of convertible preferred stock
into common stock........................... $ -- $ 40 $ --
======== ======== ==========
Acquisition--related accrued liabilities..... $ -- $ -- $ 20,788
======== ======== ==========
Common stock issued and options assumed in
acquisitions................................ $ -- $ -- $1,791,320
======== ======== ==========
Notes receivable from stockholders assumed
in acquisitions............................. $ -- $ -- $ 475
======== ======== ==========
Unrealized loss on short-term investments.... $ -- $ -- $ (360)
======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998, 1999, and 2000
1. Organization and Significant Accounting Policies
(a) Organization
Phone.com, Inc. (the Company) was incorporated in Delaware in 1994 to
develop and market software that enables the delivery of Internet-based
services to mass-market wireless telephones. The Company was formerly known as
Unwired Planet, Inc., but changed its name to Phone.com, Inc. effective April
1999.
(b) Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(c) 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 and related server-based
software products to network operators through its direct sales force and
indirectly through its channel partners. The Company's license agreements do
not provide for a right of return. Allowances for future estimated warranty
costs are provided at the time revenue is recognized. Licenses can be
purchased under a perpetual license model either on an as-deployed or on a
prepaid basis, or alternatively, under a monthly or quarterly time-based
license model under which no perpetual license is acquired. For licenses
purchased on an as-deployed basis, license revenue is generally recognized
quarterly as subscribers are activated to use the services that are based on
the Company's UP.Link Server Suite and related server-based software products.
For licenses purchased on a prepaid basis, prepaid license fees are recognized
ratably over the period that maintenance and support services are expected to
be provided unless the Company committed to provide the customer with future
unspecified products under a subscription arrangement. Under a subscription
arrangement, prepaid license fees are recognized ratably over the contractual
term of the prepaid arrangement (i.e., the date the prepaid licenses expire if
not used), generally 12 to 30 months, commencing at the beginning of the month
delivery and acceptance occur by the network operator. The Company recognizes
revenue from its other prepaid licenses, including the related maintenance and
support services provided to network operators, ratably over the lesser of the
estimated life of the software or the contractual term of the arrangement,
generally 12 to 30 months, commencing at the beginning of the month delivery
and acceptance occur by the network operator. For customers that license the
Company's products under the time-based license model, revenues are recognized
over the respective period based on the number of the customer's subscribers
using the services that are based on the Company's products. Revenues from
consulting services provided to network operators are recognized as the
services are performed.
The Company recognizes revenues from UP.Browser agreements with wireless
telephone manufacturers ratably over the period during which the services are
performed, generally one year. The Company provides its wireless telephone
manufacturer customers with support associated with their efforts to port its
UP.Browser software to their wireless telephones, software error corrections,
and new releases as they become commercially available.
F-8
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
remaining maturities of less than 90 days at the date of purchase. The Company
is exposed to credit risk in the event of default by the financial
institutions or the issuers of these investments to the extent of the amounts
recorded on the balance sheet in excess of amounts that are insured by the
FDIC. As of June 30, 1999 and 2000, cash equivalents consisted principally of
money market funds and commercial paper.
(e) Accounting for Certain Investments in Debt and Equity Securities
The Company classifies its investments in debt and equity securities as
available-for-sale. Available-for-sale securities are carried at fair value,
with unrealized gains and losses recorded in accumulated other comprehensive
income (loss) until realized.
(f) Financial Instruments and Concentration of Credit Risk
The carrying value of the Company's financial instruments, including cash
and cash equivalents, short-term investments, accounts receivable, and
equipment loans approximates fair value. Financial instruments that subject
the Company to concentrations of credit risk consist primarily of cash and
cash equivalents and trade accounts receivable.
The Company sells its products and services principally to leading wireless
network operators and prominent wireless telephone manufacturers. Credit risk
is concentrated in North America, Europe and Japan. The Company performs
ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. The Company maintains
allowances for estimated credit losses based on management's assessment of the
likelihood of collection.
(g) Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method
over the estimated useful lives of the respective assets, generally three to
five years. Leasehold improvements are amortized over the shorter of the
estimated useful lives of the assets or the lease term.
(h) Capitalized License Fees
The Company routinely enters into software license agreements which allow
the Company to integrate software into its products up to a specified number
of users. These licenses are amortized to cost of goods sold as products are
sold up to a maximum period of 36 months, which is generally considered to be
the maximum useful life of the software purchased.
(i) Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of any asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
F-9
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(j) Goodwill and Other Intangible Assets
The Company records goodwill when the cost of net identifiable assets it
acquires exceeds their fair value. Goodwill and the cost of identified
intangible assets are amortized on a straight-line basis over 3 years. The
Company regularly performs reviews to determine if the carrying value of
assets is impaired. The purpose for the review is to identify any facts or
circumstances, either internal or external, which indicate that the carrying
value of the asset cannot be recovered. No such impairment has been indicated
to date. If, in the future, management determines the existence of impairment
indicators, the Company would use undiscounted cash flows to initially
determine whether impairment should be recognized. If necessary, the Company
would perform a subsequent calculation to measure the amount of the impairment
loss based on the excess of the carrying value over the fair value of the
impaired assets. If quoted market prices for the assets are not available, the
fair value would be calculated using the present value of estimated expected
future cash flows. The cash flow calculation would be based on management's
best estimates, using appropriate assumptions and projections at the time.
(k) Research and Development
Research and development costs are expensed as incurred until technological
feasibility has been established. To date, the Company's software has been
available for general release concurrent with the establishment of
technological feasibility and, accordingly, no development costs have been
capitalized.
(l) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(m) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be recovered.
(n) Accounting for Stock-Based Compensation Plans
The Company uses the intrinsic-value method to account for all of its
employee stock-based compensation plans. Expense associated with stock-based
compensation is being amortized on an accelerated basis over the vesting
period of the individual award consistent with the method described in
Financial Accounting Standards Board (FASB) Interpretation No. 28 (FIN 28).
(o) Foreign Currency Transactions
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated at year-end exchange rates, and
statements of operations are translated at the average exchange rates during
the
F-10
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
year. Exchange gains or losses arising from translation of such foreign entity
financial statements are included as a component of other comprehensive income
(loss).
For foreign operations with the U.S. dollar as the functional currency,
monetary assets and liabilities are remeasured at the year-end exchange rates
as appropriate and non-monetary assets and liabilities are remeasured at
historical exchange rates. Statements of operations are remeasured at the
average exchange rates during the year. Foreign currency transaction gains and
losses are included in other income (expense), net, and to date, have not been
material for any period presented.
(p) Comprehensive Income (Loss)
As of July 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for the reporting and display of comprehensive net
income (loss) and its components. However, it has no impact on the Company's
net income as presented in the accompanying consolidated financial statements.
The only items of comprehensive income (loss) that the Company currently
reports are unrealized gains (losses) on marketable securities and foreign
currency translation adjustments.
(q) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock excluding shares of restricted stock
subject to repurchase summarized below. Diluted net loss per share is computed
using the weighted-average number of shares of common stock outstanding and,
when dilutive, potential shares of restricted common stock subject to
repurchase, common stock from options, and warrants to purchase common stock
using the treasury stock method and from convertible securities using the "as
if converted" basis. The following potential shares of common stock have been
excluded from the computation of diluted net loss per share for all periods
presented because the effect would have been antidilutive (in thousands):
<TABLE>
<CAPTION>
Years ended June
30,
-------------------
1998 1999 2000
------ ----- ------
<S> <C> <C> <C>
Shares issuable under stock options.................... 5,754 9,502 13,664
Shares of restricted stock subject to repurchase....... 1,340 706 766
Shares issuable pursuant to warrants to purchase common
stock................................................. 62 62 10
Shares of convertible preferred stock on an "as if
converted" basis...................................... 35,431 -- --
</TABLE>
The weighted-average exercise price of stock options outstanding was $0.50,
$3.18, and $42.47 as of June 30, 1998, 1999, and 2000, respectively. The
weighted-average purchase price of restricted stock was $0.15, $0.30, and
$0.48 as of June 30, 1998, 1999, and 2000, respectively. The weighted-average
exercise price of warrants was $1.91, $1.91, and $8.43 as of June 30, 1998,
1999, and 2000, respectively. In June 1999, all outstanding shares of the
Company's convertible preferred stock were automatically converted into common
stock upon completion of the Company's initial public offering (see Note 4a).
(r) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 137. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the
F-11
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
period of change. The Company adopted SFAS No. 133 effective July 1, 2000.
Management does not believe the adoption of SFAS No. 133 will have a material
effect on the Company's consolidated financial position or results of
operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended by SAB 101A and SAB 101B, which provides guidance on
the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must
be met to recognize revenue and provides guidance for disclosure related to
revenue recognition policies. In June 2000, the SEC issued SAB 101B that
delayed the implementation of SAB 101. The Company must adopt SAB 101 no later
than the fourth quarter of fiscal 2001. The SEC has recently indicated it
intends to issue further guidance with respect to the adoption of specific
issues addressed by SAB 101. Until such time as this additional guidance is
issued, the Company is unable to assess the impact, if any, it may have on its
financial position or results of operations.
In March 2000, the Emerging Issues Task Force (EITF) published their
consensus on EITF Issue No. 00-2, Accounting for Web Site Development Costs,
which requires that costs incurred during the development of web site
applications and infrastructure, involving developing software to operate the
web site, including graphics that affect the "look and feel" of the web page
and all costs relating to software used to operate a web site should be
accounted for under Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. However, if a plan
exists or is being developed to market the software externally, the costs
relating to the software should be accounted for pursuant to FASB Statement
No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed. The Company will be required to adopt EITF Issue No. 00-2
in its first fiscal quarter, beginning after June 30, 2000. The Company is in
the process of assessing any impact that the adoption of EITF Issue No. 00-2
will have on its consolidated financial position or results of operations.
In March 2000, the EITF published their consensus on EITF Issue No. 00-3,
Application of AICPA Statement of Position 97-2, Software Revenue Recognition,
to Arrangements That Include the Right to Use Software Stored on Another
Entity's Hardware. EITF Issue No. 00-3 states that a software element covered
by SOP 97-2 is only present in a hosting arrangement if the customer has the
contractual right to take possession of the software at any time during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on its own hardware or contract with another party
unrelated to the vendor to host the software. The Company will be required to
adopt EITF Issue No. 00-2 in its first fiscal quarter, beginning after June
30, 2000. Management does not believe the adoption of EITF Issue No. 00-3 will
have a material effect on the Company's consolidated financial position or
results of operations.
In March 2000, the FASB issued FIN 44, an interpretation of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. FIN 44 addresses inconsistencies in accounting for stock-based
compensation that arise from implementation of APB Opinion No. 25. The Company
does not anticipate that the adoption of FIN 44 will have a material effect on
the Company's consolidated financial position or results of operations. The
Company adopted FIN 44 effective July 1, 2000.
F-12
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Balance Sheet Components
(a) Cash, Cash Equivalents and Short-Term Investments
The following summarizes our cash, cash equivalents, and short-term
investments (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------
1999 2000
------- --------
<S> <C> <C>
Cash and cash equivalents:
Cash..................................................... $ 3,671 $ 3,151
Money market funds....................................... 71,134 48,961
Commercial paper......................................... 4,998 45,455
Less: restricted cash equivalents........................ -- (18,694)
------- --------
$79,803 $ 78,873
======= ========
</TABLE>
<TABLE>
<CAPTION>
Available-for sale
securities
---------------------------------------
Gross Gross Estimated
unrealized unrealized fair
June 30, 1999: Cost gains losses value
-------------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Corporate bonds...................... $30,299 $ -- $ -- $30,299
Commercial paper..................... 2,984 -- -- 2,984
------- ---- ---- -------
$33,283 $ -- $ -- $33,283
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
Available-for sale
securities
-----------------------------------------
Gross Gross Estimated
unrealized unrealized fair
June 30, 2000: Cost gains losses value
-------------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Corporate bonds.................. $126,917 $ -- $(251) $126,666
Commercial paper................. 123,877 -- (37) 123,840
Certificates of deposit.......... 70,823 22 -- 70,845
Federal agencies................. 37,464 -- (94) 37,370
Less: restricted investments..... (2,006) -- -- (2,006)
-------- ---- ----- --------
$357,075 $ 22 $(382) $356,715
======== ==== ===== ========
</TABLE>
All short-term investments as of June 30, 2000, contractually mature within
one year and are classified as current assets. See Note 6 for information
about the Company's restricted investments. Realized gains and losses from
sales of each type of security were immaterial for all periods presented.
F-13
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30,
----------------
1999 2000
------- -------
<S> <C> <C>
Computer equipment and software............................ $ 4,785 $24,924
Furniture and equipment.................................... 314 6,153
Leasehold improvements..................................... 118 1,797
------- -------
5,217 32,874
Accumulated depreciation and amortization.................. (2,203) (7,686)
------- -------
$ 3,014 $25,188
======= =======
</TABLE>
Equipment under capital leases aggregated $373,000 and $1.8 million as of
June 30, 1999 and 2000, respectively. Accumulated amortization on the assets
under capital leases aggregated $167,000 and $437,000 as of June 30, 1999 and
2000, respectively.
(c) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consisted of the following (in
thousands):
<TABLE>
<S> <C>
June 30, 2000
-------------
Goodwill...................................................... $ 1,751,571
Developed and core technology................................. 64,652
Covenants not to compete...................................... 7,100
Assembled workforce........................................... 3,955
-------------
1,827,278
Accumulated amortization...................................... (214,401)
-------------
$ 1,612,877
=============
</TABLE>
(d) Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<S> <C> <C>
June 30,
--------------
<CAPTION>
1999 2000
------ -------
<S> <C> <C>
Accrued salaries, benefits and commissions................... $2,226 $ 7,988
Acquisition related liabilities.............................. -- 20,788
Other accruals............................................... $4,947 16,721
------ -------
$7,173 $45,497
====== =======
</TABLE>
3. Equipment Loans
During the year ended June 30, 2000, the Company assumed seven separate
secured promissory notes with a commercial lender in connection with its
acquisitions. Under the terms of the acquisitions, the Company assumed
approximately $1.6 million, of which approximately $1.4 million was
outstanding as of June 30, 2000. The notes bear interest at an effective rate
of 13.6% and expire in March 2003. The notes are secured by a Senior
F-14
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loan and Security agreement with the commercial lender which grants the
commercial lender a first security interest in the property and equipment that
was purchased with the proceeds.
The loans mature over the next three years ending June 30, as follows :
2001--$388,000; 2002--$483,000; 2003--$555,000.
4. Stockholders' Equity
(a) Initial Public Offering
On June 11, 1999, the Company completed an initial public offering (IPO) of
9,200,000 shares of its common stock at a price of $8.00 per share and
received net proceeds of approximately $66.8 million. At the IPO date, all
outstanding shares of the Company's convertible preferred stock were
automatically converted into common stock on a one-for-one basis.
(b) Secondary Offering
On November 16, 1999, the Company completed a secondary offering of
3,041,500 shares of its common stock at a price of $135.00 per share and
received net proceeds of approximately $390.4 million.
(c) Reverse Stock Split
On June 7, 1999, the Company effected a two-for-three reverse stock split of
its convertible preferred stock and common stock. The accompanying
consolidated financial statements have been retroactively restated to give
effect to this reverse stock split.
(d) Stock Split
On October 29, 1999, the Company effected a two-for-one stock split of its
common stock. The accompanying consolidated financial statements have been
retroactively restated to give effect to this stock split.
(e) Stock Plans
The Company is authorized to issue up to 18,767,774 shares of common stock
in connection with its 1995 and 1996 stock option plans (the Plans) to
directors, employees, and consultants. The Plans provide for the issuance of
stock purchase rights, incentive stock options, or nonstatutory stock options.
The stock purchase rights are subject to a restricted stock purchase
agreement whereby the Company has the right to repurchase the stock upon the
voluntary or involuntary termination of the purchaser's employment with the
Company at the original issuance cost. The Company's repurchase right lapses
at a rate determined by the stock plan administrator, but at a minimum rate of
20% per year. Through June 30, 2000, the Company has issued 3,956,506 shares
under restricted stock purchase agreements, of which 908,334 shares have been
repurchased and 765,598 are subject to repurchase at a weighted-average price
of $0.48 per share. Certain of these restricted shares were issued to officers
of the Company for full recourse promissory notes with interest rates ranging
from 5.49% to 6.48% and terms of four to five years.
Under the Plans, the exercise price for incentive stock options is at least
100% of the stock's fair value on the date of grant for employees owning less
than 10% of the voting power of all classes of stock, and at least
F-15
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
110% of the fair value on the date of grant for employees owning more than 10%
of the voting power of all classes of stock. For nonstatutory stock options,
the exercise price is also at least 110% of the fair value on the date of
grant for employees owning more than 10% of the voting power of all classes of
stock and no less than 85% for employees owning less than 10% of the voting
power of all classes of stock.
Under the Plans, options generally expire in 10 years. However, the term of
the options may be limited to 5 years if the optionee owns stock representing
more than 10% of the voting power of all classes of stock. Vesting periods are
determined by the Company's Board of Directors and generally provide for
shares to vest ratably over a 4- to 5-year period. As of June 30, 2000, there
were -0- and 968,987 additional shares available for grant under the 1995 and
1996 stock option plans, respectively.
On March 26, 1999, the Company adopted the 1999 Employee Stock Purchase Plan
(the Purchase Plan) and reserved a total of 1,200,000 shares of the Company's
common stock for issuance thereunder plus an automatic annual increase for
fiscal 2000 through 2004 equal to the lesser of 1,000,000 shares or 1% of the
Company's outstanding common stock on the last day of the immediately
preceding fiscal year. The Purchase Plan permits eligible employees to
purchase common stock through payroll deductions at a purchase price of 85% of
the lower of the fair value of the common stock at the beginning or end of
each offering period, generally 24 months in length.
On March 26, 1999, the Company adopted the 1999 Directors Stock Option Plan
(the Directors Plan) and reserved a total of 1,200,000 shares of the Company's
common stock for issuance thereunder. Each nonemployee director who becomes a
member of the Board of Directors will initially be granted an option for
66,666 shares of the Company's common stock and, thereafter, an option to
purchase an additional 5,000 shares of the Company's common stock quarterly
commencing in the fiscal quarter ending September 30, 2000. Options granted
under the Directors Plan vest immediately. The exercise price of the options
granted under the Directors Plan is equal to the fair value of the Company's
common stock on the date of grant.
On May 3, 2000, the Company adopted the 2000 Non-Executive Stock Option Plan
(the Non-Executive Plan) and reserved a total of 2,000,000 shares of the
Company's common stock for issuance thereunder. The plan provides for the
issuance of nonstatutory stock options. Under the Non-Executive Plan, options
expire in 10 years from the date of grant, and the options are available for
issuance only to employees and consultants of the Company. Vesting periods are
determined by the Company's Board of Directors and generally provide for
shares to vest ratably over a 4-year period. As of June 30, 2000, there were
753,223 additional shares available for grant under the Non-Executive Plan.
In conjunction with the Company's acquisitions of AtMotion, Paragon Software
(Holdings) Limited (Paragon), Onebox and MyAble, Inc. (MyAble) during the year
ended June 30, 2000, the Company registered and adopted the existing stock
option plans of each company, resulting in the registration of 704,070 shares
of the Company's common stock subject to stock options. The options generally
expire over a 10-year period and the vesting periods vary with a maximum
period of 4 years. As of June 30, 2000, there were no additional shares
available for grant under the respective plans.
(f) Stock-Based Compensation
The Company uses the intrinsic-value method in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for any of its stock options granted or restricted stock sold
because the exercise price of each option or purchase price of each share of
restricted stock equaled or exceeded the fair value of the underlying common
stock as of the grant date for each stock option or purchase date of each
restricted stock share, except for stock options granted and restricted stock
sold from October 1997
F-16
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
through March 1999. With respect to the stock options granted and restricted
stock sold from October 1997 to March 1999, the Company recorded deferred
stock compensation of approximately $2.4 million for the difference at the
grant or issuance date between the exercise price of each stock option granted
or purchase price of each restricted share sold and the fair value of the
underlying common stock. This amount is being amortized on an accelerated
basis over the vesting period, generally four to five years, consistent with
the method described in FIN 28. During the year ended June 30, 2000, the
Company recorded additional deferred stock compensation of approximately $8.0
million in conjunction with its acquisitions of APiON, Angelica and Velos (see
Note 5). During the year ended June 30, 2000, the Company also recorded
deferred stock-based compensation in the amount of $2.8 million for stock
issued to an employee at below fair market value at the time of the grant,
which is being amortized over the vesting period of 48 months consistent with
the method described in FIN 28. Had compensation costs been determined in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation, for all
of the Company's stock-based compensation plans, net loss and basic and
diluted net loss per share would have been as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------
1998 1999 2000
-------- -------- ---------
<S> <C> <C> <C>
Net loss:
As reported................................ $(10,623) $(20,763) $(265,144)
Pro forma.................................. $(10,656) $(22,139) $(348,460)
Basic and diluted net loss per share:
As reported................................ $ (1.02) $ (1.49) $ (3.81)
Pro forma.................................. $ (1.02) $ (1.59) $ (5.00)
</TABLE>
The fair value of each option was estimated on the date of grant using the
minimum value method prior to the IPO and the Black-Scholes option pricing
model after the IPO, with no expected dividends and the following weighted-
average assumptions:
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Expected life 3.23 years 3.17 years 3.56 years
Risk-free interest rate.................. 5.55% 5.38% 6.20%
Volatility............................... -- 54% 110%
</TABLE>
The fair value of purchase rights granted under the Purchase Plan is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for grants in the years ended
June 30, 1999 and 2000: no expected dividends; expected volatilities of 80%
and 110%, respectively; risk-free interest rates of 5.26% and 5.59%,
respectively; and expected lives of 1.25 years and 1.25 years, respectively.
The weighted-average fair values of purchase rights granted under the Purchase
Plan during 1999 and 2000 were $3.12 and $53.46 per share, respectively.
F-17
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's options under its stock option
plans is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Years ended June 30,
-----------------------------------------------------
1998 1999 2000
----------------- ----------------- -----------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year...................... 4,142 $0.14 5,754 $0.50 9,502 $ 3.18
Granted.................... 2,844 0.87 4,676 5.95 6,485 87.69
Assumed under
acquisitions.............. -- -- -- -- 732 2.62
Forfeited.................. (426) 0.15 (440) 0.86 (328) 52.38
Exercised.................. (806) 0.11 (488) 0.58 (2,727) 1.23
----- ----- ------
Outstanding at end of
year...................... 5,754 0.50 9,502 3.18 13,664 42.47
===== ===== ======
Options exercisable at end
of year................... 770 0.14 2,018 0.79 1,741 5.79
===== ===== ======
Weighted-average fair value
of options granted during
the year with exercise
prices equal to fair value
at date of grant.......... 0.03 3.89 64.85
Weighted-average fair value
of options granted during
the year with exercise
prices less than fair
value at date of grant.... 0.91 0.16 84.92
</TABLE>
As of June 30, 2000, the range of exercise prices and weighted-average
remaining contractual life of outstanding options were as follows (number of
options in thousands):
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------- ---------------------
Weighted-
average
remaining Weighted- Weighted-
contractual average Number of average
Number life exercise shares exercise
Range of exercise prices outstanding (years) price exercisable price
------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.03-3.62............ 4,367 7.86 $ 1.10 1,251 $ 0.90
6.00-8.00............ 2,950 8.93 7.70 431 7.42
26.25-38.75........... 442 9.12 30.86 7 38.41
55.16-84.38........... 3,503 9.80 71.65 -- --
99.88-120.50.......... 1,617 9.39 108.59 51 103.78
136.00-163.13.......... 785 9.59 143.33 1 144.25
------ -----
13,664 8.91 42.47 1,741 5.79
====== =====
</TABLE>
5. Acquisitions
On October 26, 1999, the Company completed its acquisition of APiON Telecom
Limited (APiON), a company based in Belfast, Northern Ireland, in exchange for
2,393,026 shares of its common stock. In addition, the Company also agreed to
issue cash and common stock with an aggregate value of up to approximately
$14.1 million to the then current and former employees of APiON. APiON was a
provider of WAP software products to GSM network operators in Europe and had
expertise in GSM Intelligent Networks, wireless data and WAP technology.
Former employees of APiON received consideration totaling approximately $2.2
million in cash with the remaining $4.3 million payable in common stock of the
Company on the one-year anniversary of
F-18
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the closing of the acquisition of APiON subject to forfeiture upon the
occurrence of certain events. Current employees of APiON received
approximately $2.5 million in cash with the remaining $5.1 million payable in
common stock of the Company on each of the first two anniversaries of the
closing of the acquisition of APiON contingent upon continued employment. The
actual number of Phone.com shares to be issued to the then current and former
employees of APiON will depend upon the fair value of Phone.com common stock
on the distribution date. The total purchase price for the transaction
including direct acquisition costs was approximately $246.8 million.
Common stock issued to former shareholders and cash paid to current and
former employees of APiON at the closing of the acquisition was included in
the purchase price. Contingent common stock issuable in the future to former
employees of APiON has been treated as contingent consideration. The common
stock that is issued to the former employees of APiON upon the satisfaction of
certain future events will be added to goodwill and amortized over the
remaining useful life. Common stock issuable in the future to current
employees of APiON has been recorded as deferred stock-based compensation.
The Company accounted for the acquisition of APiON as a purchase with
APiON's results of operations included from the acquisition date. The excess
of the purchase price over the fair value of tangible net assets acquired
amounted to approximately $244.5 million, with $242.5 million attributable to
goodwill, $1.7 million attributable to assembled workforce, $170,000
attributable to developed technology and $110,000 attributable to in-process
research and development. These assets are being amortized on a straight-line
basis over a period of three years with the exception of the in-process
research and development, which was expensed on the acquisition date. In
connection with the acquisition, the Company recorded deferred stock-based
compensation in the amount of approximately $5.1 million, which is being
amortized on an accelerated basis over the vesting period of 24 months,
consistent with the method described in FIN 28.
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 application suite software. Total
consideration paid, including direct acquisition costs, was approximately $2.0
million. In addition, the Company also agreed to issue approximately 16,000
shares of its stock to employees of Angelica with an aggregate value of
approximately $1.7 million, subject to certain forfeiture conditions dependent
on continued employment. The Company accounted for the acquisition as a
purchase with Angelica's results of operations included from the acquisition
date. Approximately $2.0 million was allocated to goodwill, which is being
amortized on a straight line basis over a period of three years. In addition,
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 FIN 28.
On February 8, 2000, the Company acquired all of the oustanding common and
redeemable convertible preferred stock of AtMotion, in exchange for 2,280,287
shares of its common stock. The Company also assumed all of the outstanding
options and warrants of AtMotion. AtMotion is a provider of Voice Portal
technology. Total consideration given aggregated approximately $287.2 million.
The acquisition was accounted for as a purchase with AtMotion's results of
operations included from the acquisition date. The excess of the purchase
price over the fair value of tangible net assets acquired amounted to
approximately $286.1 million, with $242.9 million attributable to goodwill,
$655,000 attributable to assembled workforce and $42.5 million attributable to
developed technology. These assets are being amortized on a straight-line
basis over a period of three years. At the time of the acquisition, 12.1% of
the shares issued by the Company were placed in escrow with most of the escrow
shares to remain in escrow for a period of at least one year from the date of
the acquisition to be released upon the occurrence of certain events.
F-19
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On March 4, 2000, the Company acquired all of the oustanding common and
convertible preferred stock of Paragon, a company incorporated in England and
Wales, in exchange for 3,051,016 shares of its common stock. The Company also
assumed all of the outstanding options of Paragon. Paragon is a provider of
syncronization technology allowing PC-based personal information to be easily
transferred to mobile devices. Total consideration aggregated approximately
$453.7 million in common stock of the Company in addition to a cash payment of
$3.6 million. An additional $17.0 million will be paid within one year,
payable in approximately 143,000 common shares of the Company's common stock
at the election of the shareholder or in cash with the consent of the Company
as well as additional cash payments of approximately $3.9 million to be
allocated certain employees of Paragon. There were also transaction costs in
connection with the purchase of approximately $11.6 million. The acquisition
was accounted for as a purchase with Paragon's results of operations included
from the date of acquisition. The excess of the purchase price over the fair
value of tangible net assets acquired amounted to approximately $483.7
million, with $455.1 million attributable to goodwill, $980,000 attributable
to assembled workforce, $7.2 million attributable to developed technology,
$2.3 million attributable to non-compete agreements and $18.1 million
attributable to in-process research and development. These assets are being
amortized on a straight-line basis over a period of three years, except for
the in-process research and development, which was expensed on the acquisition
date.
On April 14, 2000, the Company acquired all of the outstanding common and
preferred stock of Onebox, a company based in San Mateo, California, in
exchange for 6,207,865 shares of its common stock. The Company also assumed
all of the outstanding options of Onebox. Onebox is a communications
application service provider offering users unified e-mail, voicemail,
facsimile, and wireless-enabled communication applications. Total
consideration aggregated approximately $814.7 million including estimated
transaction costs of approximately $16.8 million. The acquisition was
accounted for as a purchase with Onebox's results of operations included from
the date of acquisition. The excess of the purchase price over the fair value
of tangible net assets acquired amounted to approximately $814.1 million, with
$789.7 million attributable to goodwill, $590,000 attributable to assembled
workforce, $14.7 million attributable to developed technology, $4.8 million
attributable to non-compete agreements and $4.3 million attributable to in-
process research and development. These assets are being amortized on a
straight-line basis over a period of three years, except for the amount
recorded for in-process research and development, which was expensed on the
acquisition date.
On May 4, 2000, the Company acquired all of the outstanding common stock of
Velos 2 S.r.l. (Velos), a company based in Milan, Italy, in exchange for 8,134
shares of its common stock valued at approximately $579,000 plus a cash
payment and direct acquisition costs totaling approximately $350,000. The
acquisition was accounted for as a purchase with Velos' results of operations
included from the date of acquisition. Approximately $929,000 was allocated to
goodwill, which is being amortized on a straight-line basis over a period of
three years. In addition, the Company issued an additional 9,866 shares of
common stock contingent on future employment which resulted in deferred stock-
based compensation in the amount of approximately $1.2 million, which is being
amortized on an accelerated basis over the vesting period of 36 months,
consistent with the method described in FIN 28.
On June 14, 2000, the Company acquired all of the outstanding common stock
of MyAble, a company based in Palo Alto, California, in exchange for 193,873
shares of its common stock. The Company also assumed all of the outstanding
options of MyAble. MyAble is a provider of hosted personalization services for
wireline and wireless web technologies. Total consideration aggregated
approximately $18.4 million. The acquisition was accounted for as a purchase
with MyAble's results of operations included from the date of acquisition.
Approximately $18.4 million was allocated to goodwill, which is being
amortized on a straight-line basis over a period of three years.
For each acquisition, the Company determined the allocation between
developed and in-process research and development. This allocation was based
on whether or not technological feasibility has been achieved and
F-20
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
whether there is an alternative future use for the technology. SFAS No. 86
sets guidelines for establishing technological feasibility. Technological
feasibility can be achieved through the existence of either a detailed program
design or a completed working model. As of the respective dates of the
acquisitions of APiON, Paragon and Onebox discussed above, the Company
concluded that the purchased in-process research and development had no
alternative future use and expensed it according to the provisions of FASB
Interpretation No. 4, Applicability of SFAS No. 2 to Business Combinations
Accounted for by the Purchase Method.
The following table shows unaudited pro forma revenue, net loss and basic
and diluted net loss per share of Phone.com, including APiON, AtMotion,
Paragon, Onebox, and Myable as if each company had been acquired as of July 1,
1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
Years ended June
30,
--------------------
1999 2000
--------- ---------
<S> <C> <C>
Revenue............................................... $ 15,627 $ 71,255
Net loss.............................................. $(645,797) $(682,067)
Basic and diluted net loss per share.................. $ (23.23) $ (8.66)
</TABLE>
In computing the pro forma net loss, the charge taken during the year ended
June 30, 2000 for in-process research and development has been excluded from
the calculation. The pro forma results are not necessarily indicative of what
would have occurred if the acquisitions had been in effect for the periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
6. Leases
In March 2000, the Company entered into a lease for approximately 280,000
square feet of office space in Redwood City, California, that is under
construction and is expected to be completed in the year 2001. Lease terms
require a base rent of $3.25 per square foot per month as provided by the
lease agreement and will increase by 3.5% annually on the anniversary of the
initial month of the commencement of the lease. The lease is for a period of
twelve years from the commencement date of the lease. The agreement required
that the Company provide a letter of credit in the amount of $16.5 million. As
of June 30, 2000, the Company has guaranteed the letter of credit and has
pledged approximately $20.7 million, or 125% of the letter of credit, of cash
equivalents and investments to be held in trust as security for the letter of
credit. The restricted cash and investments held in trust under this agreement
are earning approximately 6.7% interest and the resulting income earned is not
subject to any restrictions. The lease further requires that the Company will
pay the leasehold improvements which are expected to be at least $15 million
over the next year.
The Company also entered into additional facility leases during the fiscal
year ended June 30, 2000. One of the leases, which will expire on January
2003, was subsequently subleased through January 2001.
In fiscal 1998, the Company entered into a noncancelable operating lease for
its facilities expiring in June 2005. The Company had an additional
noncancelable operating lease for its previous facility, which expires in
April 2001. However, the Company has entered into a sublease for this
facility, which also expires in April 2001. In June 1999, the Company entered
into an amendment to its noncancelable operating lease for its facilities to
add additional facilities and extend the expiration date to May 2005.
The Company also has various capital lease agreements.
F-21
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Annual minimum commitments for the noncancelable operating and capital
leases as of June 30, 2000, net of sublease payments, are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Year ending June 30, Leases Leases
-------------------- ------- ---------
<S> <C> <C>
2001....................................................... $2,855 $ 9,489
2002....................................................... 2,107 18,208
2003....................................................... 690 17,319
2004....................................................... -- 16,916
2005....................................................... -- 16,464
Thereafter................................................. -- 111,142
------ --------
Total minimum lease and principal payments................. 5,652 $189,538
========
Amount representing imputed interest....................... 905
------
Present value of future lease payments..................... 4,747
Current portion of capital lease obligations............... 2,494
------
Noncurrent portion of capital lease obligations............ $2,253
======
</TABLE>
Future minimum lease payments under the operating leases have been reduced
for sublease rental income of approximately $768,000 for the year ending June
30, 2001. Rent expense for the years ended June 30, 1998, 1999, and 2000, was
approximately $307,000, $1,212,000, and $4,244,000, respectively, net of
sublease income of $827,000 for the year ended June 30, 2000.
7. Income Taxes
Income tax expense for the years ended June 30, 1999 and 2000, relates to
foreign withholding taxes. The following reconciles the expected corporate
federal income tax expense (computed by multiplying the Company's loss before
income taxes by 34%) to the Company's income tax expense (in thousands):
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------
1998 1999 2000
------- ------- --------
<S> <C> <C> <C>
Expected income tax benefit..................... $(3,612) $(6,344) $(89,606)
Net operating losses not benefited.............. 3,589 5,956 12,503
Foreign tax rate differential................... -- 2,104 1,597
Goodwill amortization........................... -- -- 69,596
In-process research and development............. -- -- 7,647
Other........................................... 23 388 (140)
------- ------- --------
Actual income tax expense....................... $ -- $ 2,104 $ 1,597
======= ======= ========
</TABLE>
F-22
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
------------------
1999 2000
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 17,609 $ 73,466
Accruals and reserves not deductible for tax
purposes............................................ 497 7,476
Property and equipment............................... 103 214
Start-up expenditures capitalized for tax purposes... 274 129
Research and development credit carryforwards........ 702 7,486
-------- --------
Total deferred tax assets.......................... 19,185 88,771
Less: valuation allowance.............................. (19,185) (63,856)
-------- --------
Net deferred tax assets............................ -- 24,915
Deferred tax liabilities--other intangible assets...... -- (24,915)
-------- --------
$ -- $ --
======== ========
</TABLE>
The Company's deferred tax liabilities resulted from its acquisitions during
the year ended June 30, 2000, due to a difference in the financial statement
and tax basis of net assets acquired.
In light of the Company's recent history of operating losses, the Company
has recorded a valuation allowance for all of its deferred tax assets, except
to the extent of deferred tax liabilities, as it is presently unable to
conclude that it is more likely than not that the deferred tax assets in
excess of deferred tax liabilities will be realized.
Approximately $49.2 million of the valuation allowance for deferred tax
assets relating to net operating loss carryforwards is attributable to
employee stock option deductions, the benefit from which will be allocated to
additional paid-in capital when and if subsequently realized. The benefit from
approximately $5.8 million of the total $7.5 million valuation allowance for
the deferred tax asset related to research and development credit
carryforwards will be allocated to additional paid-in capital when and if
subsequently realized.
As of June 30, 2000, the Company had net operating loss carryforwards for
federal and California income tax purposes of approximately $192 million and
$96 million, respectively. In addition, the Company has federal and California
research and development credit carryforwards of approximately $4.9 million
and $3.9 million, respectively. The federal net operating loss carryforwards
and research and development credit carryforwards will expire from 2011
through 2020 if not utilized. The California net operating loss carryforwards
will expire from 2004 through 2006 if not utilized. The California research
and development credit carryforwards can be carried forward indefinitely.
8. Geographic, Segment, Significant Customer Information and Enterprise Wide
Reporting
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,
country-specific information 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.
F-23
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer (CEO). The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information
about revenues by geographic region and by product for purposes of making
operating decisions and assessing financial performance. Therefore, the
Company operates in a single operating segment: software that enables the
delivery of Internet-based services to mass-market wireless telephones and
related services. The disaggregated information reviewed on a product basis by
the CEO is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended June 30,
----------------------
1998 1999 2000
------ ------- -------
<S> <C> <C> <C>
Revenue:
UP.Link Server Suite................................ $1,335 $ 6,636 $46,484
UP.Browser.......................................... 870 4,514 11,793
Consulting services................................. -- 2,292 10,450
------ ------- -------
$2,205 $13,442 $68,727
====== ======= =======
</TABLE>
The Company markets its products primarily from its operations in the United
States. International sales are primarily to customers in Asia Pacific and
Europe. Information regarding the Company's revenues in different geographic
regions is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended June 30,
----------------------
1998 1999 2000
------ ------- -------
<S> <C> <C> <C>
North America......................................... $1,220 $ 4,515 $19,083
Europe................................................ 513 4,317 16,984
Asia Pacific.......................................... 472 4,610 32,660
------ ------- -------
$2,205 $13,442 $68,727
====== ======= =======
</TABLE>
Information regarding the Company's revenues in different countries is as
follows (in thousands):
<TABLE>
<CAPTION>
Years ended June 30,
----------------------
1998 1999 2000
------ ------- -------
<S> <C> <C> <C>
United States........................................ $1,141 $ 4,294 $18,796
Japan................................................ 414 4,097 21,136
Other foreign countries.............................. 650 5,051 28,795
------ ------- -------
$2,205 $13,442 $68,727
====== ======= =======
</TABLE>
The Company's long lived assets residing in countries other than in the
United States are insignificant and thus have not been disclosed.
Significant customer information is as follows:
<TABLE>
<CAPTION>
Percent of
total revenue
---------------- Percent
Years ended of total
June 30, accounts
---------------- receivable at
1998 1999 2000 June 30, 2000
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Customer A...................................... 22% 17% 6% 4%
Customer B...................................... 18% 6% 1% --
Customer C...................................... 2% 10% 2% --
</TABLE>
F-24
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues aggregating 37%, 43%, and 15% of total revenues for the years ended
June 30, 1998, 1999, and 2000, respectively, were generated from customers who
are also stockholders of the Company.
9. Litigation
In April 2000, the Company filed a lawsuit against Geoworks Corporation in
the U.S. District Court in San Francisco, California, alleging and seeking a
court order declaring that U.S. Patent No. 5,327,529, assigned to Geoworks, is
not infringed by the Company and that the patent is also invalid and
unenforceable. The Company took this action in response to Geoworks attempt to
require industry participants to obtain licenses under the Geoworks patent. On
June 15, 2000, Geoworks filed an answer to the Company's complaint and
asserted a counterclaim against the Company alleging that the Company
infringed the patent and seeking various forms of relief. The Company denies
Geoworks' allegations and while it intends to pursue its position vigorously,
the outcome of any litigation is uncertain, and the Company may not prevail.
Additionally, the Company may incur substantial expenses in defending against
this claim. Should the Company be found to infringe the Geoworks patent, it
may be liable for potential monetary damages, and could be required to obtain
a license from Geoworks. If the Company is unable to obtain a license on
commercially reasonable terms it may not be able to proceed with development
and sale of some of its products.
10. Subsequent Events
On August 8, 2000, the Company entered into an agreement to merge with
Software.com, Inc. ("Software") in a transaction to be accounted for as a
pooling of interests. Under the terms of the agreement, each issued and
outstanding share of Software common stock will be exchanged for 1.6105 shares
of Phone.com common stock. In addition, all outstanding stock options and
warrants of Software will be exchanged for Phone.com stock options and
warrants based on the exchange ratio. In connection with the merger, the
Company and Software.com expect to incur one-time expenses of approximately
$100.0 million.
On August 8, 2000, the Company adopted a Stockholder Rights Agreement ("the
Rights Agreement"). The Rights Agreement is designed to protect the long-term
value of the Company for its stockholders during any future unsolicited
acquisition attempt. In connection with the Rights Agreement, the Company
declared a dividend of one right for each share of the Company's common stock
outstanding on August 18, 2000 ("Record Date").
On August 11, 2000, the Company made a cash payment of $17.0 million to a
former shareholder of Paragon that was originally due one year from the
original purchase date of March 4, 2000 (See Note 5). The payment was made in
conjunction with the former shareholder's separation from the Company.
F-25
<PAGE>
PHONE.COM, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance
beginning of year Additions Deductions at end of year
----------------- --------- ---------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended June 30,
1998................. $ -- $ -- $ -- $ --
Year ended June 30,
1999................. $ -- $ -- $ -- $ --
Year ended June 30,
2000................. $ -- $ 300 $ -- $ 300
Allowance for sales
returns and credits:
Year ended June 30,
1998................. $ -- $ -- $ -- $ --
Year ended June 30,
1999................. $ -- $ -- $ -- $ --
Year ended June 30,
2000................. $ -- $ 750 $ -- $ 750
</TABLE>
S-1
